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EX-31.1 - DAHUA INC | v179170_ex31-1.htm |
EX-32.2 - DAHUA INC | v179170_ex32-2.htm |
EX-32.1 - DAHUA INC | v179170_ex32-1.htm |
EX-31.2 - DAHUA INC | v179170_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the
fiscal year ended December 31, 2009
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period from __________ to __________
Commission
file number: 0-49852
DAHUA
INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
04-3616479
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
8th Floor,
Officer Tower 3, Henderson Center, 18# Jianguomennei Street
Dongcheng
District, Beijing, China 100005
(Address
of principal executive offices)
86-10-6480-1527
Registrant’s
telephone number, including area code
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, Par
Value $0.001 Per Share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
Indicate
by check mark 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check
One): Large accelerated filer£, Accelerated
filer£,
Non-accelerated filer£, (Do not check
if a smaller reporting company) Smaller reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity as of a specified
date within the past 60 days: Since there is no trading market for Registrant's
securities, no estimate as to the market value can be given.
The
number of shares outstanding of Registrant's common stock as of March 31, 2010
was 25,015,000.
DAHUA
INC.
FORM
10-K
For the
Year Ended December 31, 2009
PART
I
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Item
1. Description of Business
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3
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Item
2. Description of Property
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10
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Item
3. Legal Proceedings
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11
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Item
4. Submission of Matters to a Vote of Security
Holders
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11
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PART
II
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Item
5. Market for Common Equity and Related Stockholder
Matters
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12
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Item
6. Management's Discussion and Analysis or Plan of
Operation…
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13
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Item
7. Financial Statements
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23
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Item
8. Changes In and Disagreements with Accountants on Accounting and
Financial
Disclosure
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38
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Item
9A(T). Controls and Procedures
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38
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Item
9B. Other Information
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40
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PART
III
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Item
10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with
Section 16(a) of the Exchange Act
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40
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Item
11. Executive Compensation
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42
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Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related
Stockholder Matters
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43
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Item
13 Certain Relationships and Related Transactions
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45
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Item
14. Exhibits
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46
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Item
15 Principal Accountant Fees and Services
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48
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Signatures
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49
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Item
1. Description of Business
Background
Dahua
Inc. (the “Company”) was incorporated on March 8, 2002, in the State of Delaware
under the name of Norton Industries Corp. ("Norton") as a blank check company
for the purpose of either merging with or acquiring an operating company with
operating history and assets. In June 2002, the Company filed a registration
statement on Form 10-SB with the Securities and Exchange Commission ("SEC") in
order to become a Section 12(g) registered company under the Securities Exchange
Act of 1934, as amended. The registration statement became effective on or about
August 10, 2002.
From
March 8, 2002, to January 30, 2005, Norton conducted virtually no business other
than organizational matters and filings of periodic reports with the SEC
pursuant to the reporting requirements of Securities Exchange Act of 1934, as
amended. The promoters, control persons and affiliates of Norton were Mr.
Jianjun Zhang, Waywood Investments Ltd. ("Waywood"), Comp Hotel International
Ltd. ("Comp Hotel"), and South Sea Petroleum Holdings Ltd. ("South Sea
Petroleum"). Waywood is a small business consulting firm organized in the
British Virgin Islands. Mr. Jianjun Zhang is the sole shareholder of Waywood.
From Norton's inception in March 2002, to February 2003, Waywood owned 100% of
Norton, and Mr. Jianjun Zhang, from March 2002 to January 2005, was the sole
director and officer of Norton. On February 26, 2003, Waywood sold 85%, or
4,250,000 shares, of Norton's capital shares to Comp Hotel for $42,500 in cash.
Comp Hotel is a travel-related service provider operating in Hong Kong, and is
controlled by South Sea Petroleum, a Hong Kong corporation, whose principal
business is the exploration and production of crude oil in
Indonesia.
On
January 30, 2005, Waywood and Comp Hotel entered into a Share Exchange Agreement
with Bauer Invest Inc. for a reverse acquisition. Pursuant to the agreement,
Waywood and Comp Hotel sold all of their capital stock, or 5,000,000 shares of
common stock, to Bauer for retirement in exchange for $100,000 in cash and 5%,
or 1,000,000 shares of Norton’s post-merger common stock. To effectuate the
reverse acquisition, Norton issued 19,000,000 shares of its common shares to 108
shareholders of Bauer in exchange for 100% of shares in Bauer on a pro rata
basis, i.e. the number of shares received by each shareholder is proportionate
to the number of shares he/she had originally owned in Bauer. Following the
transaction, on February 7, 2005, the name of Norton was changed to Dahua
Inc.
Bauer is
a holding company, which conducts its business through its 80% owned subsidiary
Beijing Dahua Real Estate Development, Ltd., an operating company organized in
the People's Republic of China (“Dahua Real Estate”). As a result of the reverse
acquisition, Bauer became our wholly owned subsidiary, and the shareholders of
Bauer became our controlling shareholders. This transaction was accounted for as
a recapitalization, rather than a business combination. Under accounting
principles generally accepted in the United States of America, after completion
of this transaction, the Company files prior historical financial information of
Bauer and its subsidiaries for the years prior to the acquisition on a
stand-alone basis. The continuing operations of the Company will reflect the
consolidated operations of Dahua and its subsidiaries.
On May
12, 2005, Dahua Real Estate increased its registered capital, in which the
company increased its investment in Dahua Real Estate by $2,265,600 and the
minority shareholder of Dahua Real Estate increased its investment by $566,265.
Dahua Project Management Group ("Dahua Group") advanced the Company funds to
allow for the increase in investment, which amount was recorded as short-term
loans-related parties. On September 21, 2005, the Company issued, on a pro rata
basis, an aggregate of 4,750,000 shares of its common stock to shareholders of
Dahua Group in exchange for the conversion of the short-term loan ($2,265,600)
to equity shares. In connection with issuance of additional shares, pursuant to
a no-dilution clause of the Share Exchange Agreement dated January 30, 2005 the
Company entered into with Comp Hotel and Waywood, on September 21, 2005, the
Company issued 212,500 and 37,500 shares of our common stock to Comp Hotel and
Waywood, respectively.
3
Bauer was
incorporated on December 10, 2003, under the laws of the British Virgin Islands.
On May 25, 2004, the shareholders of Dahua Group transferred to Bauer 80% of the
capital stock of Dahua Real Estate in exchange for all the capital stock of
Bauer. Dahua Group is a Beijing Municipal Government licensed construction
project supervising business entity in Beijing, China. This transaction was
accounted for as a recapitalization of Dahua Real Estate, rather than a business
combination. Before the stock transfer, the shareholders of Dahua Group owned
80% of capital stock of Dahua Real Estate, and Beijing Dahua Bidding Agency
owned the remaining 20%. Beijing Dahua Bidding Agency is a Chinese corporation
servicing construction companies in biddings for major construction projects.
After the transfer, the shareholders of Bauer replaced the shareholders of Dahua
Group as holder of 80% of the capital stock of Dahua Real Estate, while Beijing
Dahua Bidding Agency still owns the remaining 20%. Both Bauer and Dahua Group
were owned by the same group of shareholders in the same proportions prior to
the acquisition by Norton.
Prior to
the acquisition, other than owning 80% of Dahua Real Estate's capital stock,
Bauer had no operations. Dahua Real Estate was incorporated in China on
September 24, 2001, to engage in the development, construction, and sale of
luxury single-family housing units. Both Norton and Bauer were non-operating
shell companies and incurred minimal costs to acquire Bauer or Dahua Real
Estate, and therefore there was no need for adjustments for any costs incurred
by Norton or Bauer to be “pushed down” in the accounts of Norton, Bauer or Dahua
Real Estate. Dahua Real Estate did not incur any other costs which were required
to be "pushed down" for the completion of the transaction.
The
promoters, control persons and affiliates of Bauer Invest, Inc. and Dahua Real
Estate are Mr. Yonglin Du and Dahua Group. Prior to the acquisition, a group of
shareholders owned 100% of Dahua Group, and the same group of the shareholders
owned 100% of Bauer in the same shareholding proportion as they owned Dahua
Group. At present, the same group of shareholders own 95% of Dahua Inc. Yonglin
Du, our CEO and President, also acts as president of Dahua Group and Bauer. In
2000, Mr. Du founded Dahua Group and has since been its Chairman of the Board of
Directors and Chief Executive Officer. Dahua Group is a Beijing Municipal
Government licensed construction project supervising business entity which is
operating in Beijing, China. Since January 30, 2005, Mr. Du has been our
Chairman of the Board of Directors and Chief Executive Officer.
The
Company has not been involved in any bankruptcy, receivership or similar
proceedings.
BUSINESS
The
Company, through its 80% owned subsidiary Beijing Dahua Real Estate Development
Ltd. ("Beijing Dahua Real Estate"), engages in the business of development,
construction and sale of luxury single-family homes in Beijing and its
circumjacent areas, in China.
Completed
Projects
In July
2003, the Company began to develop its first real estate project. The project is
called the first phase of Dahua Garden (the "First Phase"), which consists of 75
luxury residential housing units, all of which are single houses ranging from
approximately 2,000 to 5,000 square feet, each with 3-4 bedrooms with built-in
closets and adjacent bathrooms, an open eat-in kitchen, a family room, a living
room, and an attic solarium for indoor sun bathing. Those homes are within
reasonable driving distances from Beijing metropolitan areas. The project is
located at the northern skirt of Beijing, China. The property being developed
sits on a hot spring, spewing 10,000 cubic meters per day providing every house
with hot spring water for baths. The water temperature at the mouth of the hot
spring is over 60 degrees centigrade. The surplus hot spring water is discharged
into the surrounding creeks and ponds, making them unfrozen all year
round.
4
The
construction began in July 2003 and was completed in December 2005. As of
December 31, 2009, 67 units have been sold, 8 units were reserved with clients'
deposits.
New projects in
progress
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, the
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 has 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.
In
the newly-publicized layout of Changping district the purpose of the land on
which the Second Phase of Dahua Garden located has been recognized as
residential land. We are now in the process of applying for the first-degree
development right of this land.
We,
through our subsidiary Zhuolu Dahua Real Estate Development Ltd. (“Zhuolu Dahua
Real Estate”) which was established on May 21, 2008 and was wholly-owned by
Beijing Dahua Real Eatate, engage in the business of development,
construction and sale of luxury residential single-family homes in Zhuolu
county, Hebei province. The first phase of this project, known as Xuanyuan
Lakefront, consists of 246 villas, all of which are single-family houses ranging
from approximately 2,000 to 5,000 square feet, each with 3 – 4
bedrooms.
Zhuolu
county, located 2 hours north of Beijing is said to be the birthplace of the
Chinese nation. Historical records and explorations indicate that it is an
ancient battlefield where three Emperors - Huang, Yan and Chiyou held a fight.
Emperor Huang allied Yan, and defeated Chiyou. The winners merged their
languages, customs, and living habits, to form the Huaxia people, predecessor of
the Han people, the principal part of the Chinese nation. Today, most of Chinese
people still call themselves "descendants of Emperor Huang and Yan ", and Zhuolu
is the place where all these stories began. Therefore, every year it attracts
numerous visitors from all over China, even the world, to come here for a
"root-searching journey".
Besides
its historical significance, summer in Zhuolu is delightfully cool due to its
geological conditions, with temperatures ranging from 20℃ to 30℃. Each summer,
many people from Beijing or nearby cities come here for recreation to escape
from scorching heat and polluted air. A huge variety vegetable grows here,
including tomatoes, peas, potatoes, cucumbers, eggplants, etc. Urban people can
taste the freshest vegetable they ever had, along with mineral spring water
locals have drunk for generations.
Located
in east of Zhuolu and 2 hours drive from Beijing center region by Highway,
Xuanyuan Lakefront is near the Xuanyuan lake, a beautiful and tranquil lake.
There is also a spring called Emperor Huang spring nearby. In legend, while
fighting against Chiyou, Emperor Huang often bathed in the spring to recover his
strength quickly and think out ways to deal with his enemy. The water from this
spring is natural mineral water containing healthy minerals and trace elements.
Morever, Xuanyuan Lakefront is next to an apricot orchard. During springtime the
trees will be in full blossom and even air is full of sweet
scent.
5
Since
acquiring the land, we have been working on applying for construction permit
approval necessary for development and already received the following permits
from the local government.
·
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National
land use permit
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·
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Construction
land planning permit
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·
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Construction
engineering planning permit
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·
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Project
construction permit
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The
company is now in the process of construction.
Home
Construction
We act as
the general contractor for our residential home developments and hire
subcontractors for all construction activities. The use of subcontractors
enables us to reduce our investment in direct labor costs, equipment and
facilities. We generally price our housing only after we have entered into
construction contracts with subcontractors, an approach which improves our
ability to estimate costs accurately.
As the
general contractor, we select our subcontractors for construction through a
competitive bidding process. In addition to the bid price, our criteria include
the bidders' experience, reputation, recommendations and references from other
developers. The construction prices are capped and cover all materials and labor
needed to complete the construction under the construction contract. The
bid-winning subcontractor will make advance payments for all materials and
labor. We make payments to the subcontractors over time upon completion and
acceptance of certain phases of construction according to agreed-upon milestones
specified in the construction contract.
As the
general contractor, we are responsible for all planning, scheduling and
budgeting operations. There is an on-site superintendent who oversees the
subcontractors. We supervise the construction of our project, coordinate the
activities of subcontractors and suppliers, subject their work to quality and
cost controls and assure compliance with zoning and building codes.
Subcontractors
typically are retained on a project-by-project basis to complete construction at
a fixed price. Agreements with our subcontractors are generally entered into
after competitive bidding on an individual basis. We generally obtain
information from prospective subcontractors and suppliers with respect to their
financial conditions and abilities to perform under their agreements prior to
commencement of a formal bidding process. The services performed for us by
subcontractors are generally readily available from a number of qualified
subcontractors.
We use,
to the extent feasible, standardized materials in our commercial construction
and homebuilding operations in order to permit efficiencies in construction and
material purchasing that can result in higher margins. Our subcontractors
generally negotiate the purchase of major raw material components such as
concrete, lumber and structural steel. They are responsible for what they
purchase and for what they pay for. Raw materials used in our operations are
generally readily available from a number of sources but prices of such raw
materials may fluctuate due to various factors, including supply and
demand.
As the
general contractor, we are not subject to any bonding and/or insurance
requirements under Chinese law and common practice in housing construction. We
may suffer heavy or total losses in the event of fire, earthquake or other
disasters.
To date,
we have not encountered any problems that would affect the delivery date of our
units, nor have we experienced a significant increase in prices of
materials.
6
The units
available for sale is subject to government inspections prior to transfer of
title to buyers. The purpose of the inspection is to ensure that real estate
developers adhere to government standards of quality and safety.
Other
Government regulations that we must adhere to are:
·
|
Any
structures being constructed must be for residential and commercial
use;
|
·
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All
structures must be within certain
dimensions;
|
·
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Public
infrastructures must be in place, such as electrical and telephone poles,
underground pipe systems;
|
·
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There
must be various safety access routes in case of emergencies such as fire
or earthquake;
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·
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Construction
must not violate environmental laws in effect;
and
|
·
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Compliance
with certain infrastructure
standards.
|
To date
we have not violated any of the above-noted regulations.
We
typically obtain all necessary development approvals, complete a satisfactory
environmental assessment of the site, secure any necessary financing and
complete other due diligence deemed appropriate by us prior to becoming
obligated to commence the construction.
Acquisition of Land-Use
Rights
The
residential home development process in China generally consists of three
phases: (1) acquisition of land-use rights; (2) land development and
construction; and (3) sale. The development cycles vary depending on the extent
of the government approvals required, the size of the development, necessary
site preparation, weather conditions and marketing results.
Sales and
Marketing
Our sales
and marketing activities are conducted principally through our sales employees.
They are paid by base salary, plus sales commission, which is 0.3% of gross
sales. We have no single customer that will account for any substantial portion
of our sales revenues.
Our
residential homes are targeted toward buyers who desire high quality property
with many attractive features on which to build luxury homes for use as their
primary residences, vacation retreats, retirement residences, or investments.
Our target buyers include upper and middle class Chinese citizens and foreign
nationals working in Beijing and the surrounding area, such as Shanxi and Hebei
provinces, ranging from 30 to 60 years of age, including private entrepreneurs,
senior executives, technology elites, college professors and self-employed
professionals. The foreign nationals are expatriates of foreign companies based
in China. Our strategy for remaining competitive in this market involves
building on our reputation of offering quality homes; using our own sales
offices and personnel; and offering properties with many appealing features,
such as trails, water access, creeks, and attractive views.
We sell
our homes through our sales representatives who typically work from sales
offices located in the model homes at the development site. Sales
representatives assist potential buyers by providing them with basic floor
plans, price information, development and construction timetables, preview of
model homes and the selection of options. Our sales representatives are trained
by us and generally have had prior experience selling new homes in the local
market. We also market our homes for sale through direct mailing to an
identified population of prospective buyers and, to a lesser extent, through
other media, including newspapers, television and radio advertising, airplane
advertising, product tie-ins, billboards and other signage.
7
Homes are
sometimes sold prior to or during construction using sales contracts which are
accompanied by cash deposits. After receiving the Residential Housing Pre-sale
Permit issued by the government, we, the developer, are permitted by government
authorities 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 the buyer, a deposit, ranging from 10% to 20% of the sales
price, is required to be made to the developer, which we use to construct our
residential units. As of December 31, 2009, the balance of our customer deposits
was $3,681,057.
Our sales
are made pursuant to a standard sales contract. Subject to particular contract
provisions, we generally permit purchasers to cancel their contractual
obligations in the event mortgage approvals are unobtainable within a specified
period of time and under certain other circumstances, including rescission
rights which may be given under local law. Accordingly, there is possibility
that home buyers, even though they have put down a certain amount of deposit,
turn out choosing not to purchase our housing units which creates an uncertainty
and risk to our results of operations. To date we have two contracts
that have been cancelled.
To assist
in the marketing of our homes and to limit our liability for certain
construction defects, we sell our homes subject to a limited warranty that is
provided by our subcontractors. We don't provide any kind of warranty to
homebuyers. Our subcontractors are responsible for the cost to repair major
structural defects, roofing, internal walls, heating, tiling problems, if any,
for a certain period of time, from one to five years. The foregoing repair costs
are limited by our subcontractors' policy to the repair, replacement or payment
of the reasonable cost of repair or replacement of such warranted items not to
exceed an aggregate amount equal to the final sales price of the home covered by
the warranty. Once all homes have been constructed and sold, we do not have any
post-sale obligations.
Home Buyer Financing and
Deed Application
We do not
provide financing to prospective homebuyers. Approximately 25% of homebuyers in
China currently use their savings or funds from their relatives to pay for the
houses they buy. We are permitted to sell our homes before they are built. It
usually takes 18 to 20 months from ground breaking to completion, within which
the homebuyers make installment payments to the developer. At the time of
completion and delivery, the purchase price will have been paid in full. After
viewing the model units, the potential buyer usually leaves 30,000 yuan, or
$4,394, refundable deposit, upon receipt of which we will hold the unit for that
buyer. The potential buyer may withdraw the commitment within two weeks and
receive a full refund of said deposit. The parties may also enter into a binding
contract, and the buyer is required to make a 10% to 20% down payment at the
time of signing. Thereafter, the buyer makes installment payments every 2 to 3
months until the purchase price is paid in full. The actual payment terms vary
on a case-by-case basis depending on negotiations.
The
majority of homebuyers in China need to finance their homes with mortgage loans
from banks. To facilitate their mortgage application, most developers in China,
including us, are involved in the buyers' mortgage application process. We first
initiate negotiations with two banks to obtain a blanket lending commitment
which covers all potential buyers for the homes to be built by us. If a
potential buyer needs financing, we conduct a preliminary screening of the
buyer's creditworthiness. Then we forward the mortgage applications to the banks
for further processing, which usually take 30 to 60 days. Upon approval of the
mortgage extended to each buyer by the banks, the loan proceeds are transferred
directly to our bank account, rather than the buyer's. We have not, and will not
receive any finder's fees or referral fees from the banks.
It is
customary in China that developers may, depending on the type of property, use
up to 95% of the loan proceeds so obtained to meet their working capital needs.
The banks require that 5% to 20% of the proceeds be set aside. On our balance
sheets, such loan proceeds are treated as customer deposits. We have not taken
any measure to safeguard customer deposits because currently Chinese law does
not require that such deposits be placed in an escrow or trust account for
safeguarding purpose.
8
The life
of a mortgage loan in China can be up to 30 years. Because our project is
considered luxury housing, the maximum life of mortgage loans is 20 years. The
mortgage rates, which are flexible in nature, are dictated by the Chinese
central government based on prime commercial lending rates from time to time.
Due to competition among lending institutions, mortgage rates can be adjusted
downward by up to 10%. The mortgage rates currently range from 5.51% to 5.94%,
which are applied to primary residence and second home,
respectively.
Unlike
the United States, deeds for newly-built homes in China are applied for by the
developer with the government, which owns the land. Upon issuance of the deeds,
the developer distributes the deeds to individual homeowners. In order to obtain
government approval of deeds, the developer must have obtained all requisite
permits and licenses and paid all fees and taxes. Before the actual issuance of
deeds, the ownership of the real property remains with the developer even if the
homes have already been sold. Generally, the developer will wait until all homes
are completed to apply for the deeds in a blanket application, which takes
approximately 40 to 60 days. Before the issuance of deeds, the title to the
homes legally remains with the developer.
Regulation
Real
estate development is a highly regulated industry in China, and we are subject
to extensive local, district, municipal and national rules and regulations
regarding permitting, zoning, subdivision, utilities and water quality.
Regulation is carried on by municipal, district, and national authorities, of
which the municipal and district governments have the greatest regulatory
impact. The City of Beijing, in and nearby which we operate, has been adopting
increasingly restrictive regulations associated with development activities,
including the adoption of more restrictive ordinances, greater emphasis on land
use planning, pressure to increase the number of low density residential
developments, and heightened public concern aimed at limiting development as a
means to control growth. Such regulation may delay development of our properties
and result in higher developmental and administrative costs.
To date,
we are in material compliance with these laws and regulations.
Environmental
Matters
We are
subject to China's national and local environmental protection laws. These laws
could hold us liable for the costs of removal and remedy of certain hazardous
substances or wastes released on our property regardless of whether we were
responsible for the presence of hazardous substances. The presence of hazardous
substances, or the failure to properly remedy them, may have a material adverse
effect on our results of operations and financial condition. As of December 31,
2009, we are not aware of any material noncompliance, liability or claim
relating to hazardous or toxic substances in connection with our property and
operations. To date, we have not incurred any costs in complying with
environmental laws and regulations. We believe that we are in material
compliance with these laws and regulations.
Patents and
Trademarks
We do not
own any patents or trademarks.
9
Product Research and
Development
To date
we have not conducted any product research and development. We do not plan to
conduct any product research and development activities in the next twelve
months.
Employees
As of
December 31, 2009, we had 17 full-time employees. We expect that there will be
no significant changes in the number of employees in the coming twelve months.
None of our employees is represented by trade unions. We consider our employee
relations to be satisfactory.
Item
2. Description of Property
Our
executive offices moved from 19th Floor,
Building C, Tianchuangshiyuan, Huizhongbeili, Chaoyang District, Beijing, China,
100012 to 8th Floor,
Officer Tower 3, Henderson Center, 18# Jianguomennei Street Dongcheng District,
Beijing, China 100005 which was newly bought by Dahua Group. We have
contracted with Dahua Group to provide administrative and management services.
Included in those services are the payment of officer salaries and provision of
office space and other shared costs and services. We believe that these
facilities are adequate for our current and anticipated needs.
We began
our clubhouse construction in April 2007. The new building has 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. The construction cost of clubhouse was allocated in
account of construction in progress. As of December 31, 2009, the clubhouse has
completed and half of the cost $1,213,063 was carried forward to the fixed
assets. The other half was carried forward to the inventory and cost of goods
sold for free usage of the clubhouse .
Investment
Policies
At
present we have no established policy with respect to investments on real estate
or interests in real estate. However, we intend that substantially all of our
investments will be residential luxurious single-family houses. The purpose of
such investments will primarily be generating sales revenues. There are no
limitations on the percentage of assets which may be invested in any one
investment or type of investment. Our Board of Directors may set such policy
without a vote of our shareholders. We will not invest in real estate mortgages,
and we will not invest in securities of or interests in real estate investment
trusts, partnership interests, or other persons primarily engaged in real estate
activities.
We do not
plan to limit the geographical area in which we may invest, but we expect that
all of our investments will be made in metropolitan Beijing, China or
circumjacent land. We have no current plans to form a joint venture or other
arrangements with third parties to engage in real estate
development.
We may
finance our investments through both public and private secured and unsecured
debt offerings, as well as public and private placements of our equity
securities. The equity securities may include both common and preferred equity
issues. There are currently no restrictions on the amount of debt that we may
incur. Since inception, our operating activities have been mainly financed by
equity capital, an unsecured line of credit provided by Dahua Group, our
affiliate, and purchaser deposits received from our pre-sale of the First Phase
units of Dahua Garden.
Description of Real Estate
and Operating Data
One of
our completed real estate projects is the First Phase of Dahua Garden, which is
located in the northern suburban areas of Beijing, China, approximately 20
kilometers from the downtown of Beijing. It consists of 75 luxurious residential
units, each ranging from 2,000 to 5,000 square feet in size with 3 to 4
bedrooms. The residential units are constructed on a piece of land of
approximately 20,000 square meters. The construction of all of the units has
been completed and they are being sold to the public. As the developer, we do
not have title to the land, the use of which is licensed from the Chinese
government for a period of 70 years expiring on April 27, 2073, but we own all
the residential units constructed thereon until such units are sold. There are
no material mortgages, liens or other encumbrances against the land or
residential units. Upon conveyance of title to the residential units to the
buyer, the land use rights will be passed to the buyer.
10
In the
newly-publicized layout of Changping district the purpose of the land on which
the Second Phase of Dahua Garden located has been recognized as residential
land. We are now in the process of applying for the first-degree development
right of this land. The Second Phase of Dahua Garden development will include
250 homes with community clubhouse, creeks, ponds, and professionally manicured
gardens and landscape.
We,
through our subsidiary Zhuolu Dahua Real Estate which was established on May 21,
2008 and was wholly-owned by Beijing Dahua Real Estate, are engaging
in the business of development, construction and sale of luxury residential
single-family homes in Zhuolu county, Hebei province which is about 140
kilometers faraway from Beijing. The first phase will consist of 246 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
residential units are constructed on a piece of land of approximately 31,200
square meters. We have got all the permits needed and are now in the process of
construction. As the developer, we do not have title to the land, the use of
which is licensed from the Chinese government for a period of 70 years expiring
on March 25, 2078, but we own all the residential units constructed thereon
until such units are sold. There are no material mortgages, liens or other
encumbrances against the land or residential units. Upon conveyance of title to
the residential units to the buyer, the land use rights will be passed to the
buyer.
We began
our clubhouse construction in April 2007. The new building has 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. The construction cost of clubhouse was allocated in
account of construction in progress. As of December 31, 2009, the clubhouse has
completed and half of the cost $1,213,063 was carried forward to the fixed
assets. The other half was carried forward to the inventory and cost of goods
sold..
Item
3. Legal Proceedings
There are
no legal actions pending against us nor are any legal actions contemplated by
us.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the fourth quarter
ended December 31, 2009.
11
PART
II
Item
5. Market for Common Equity and Related Stockholder Matters
Market
Information
Our
common stock has been quoted on the OTC Bulletin Board under the symbol
"DHUA.OB" since December 14, 2007. Trading in our common stock has
been minimal with limited or sporadic quotations and there is no established
public trading market for our shares.
Holders
As of
December 31, 2009, there were 111 holders of record for our common shares. We
have only one class of stock outstanding. For the help that Pacific Services
provided in the company’s Form 211 reporting in the United States, the company
issued 15,000 shares of the Company’s Common Stock, $0.0001 par value per share
to Pacific Services Inc in January 2, 2008. The fair value of this share paid
for services is $0.05.
Stock Options, Warrants and
Convertible Securities
We have
not granted any stock options or warrants to purchase shares of our common
stock, and we have not issued and do not have any securities outstanding that
may be converted into our common shares or have any rights convertible or
exchangeable into shares of our common stock.
Dividends
We have
not paid any dividends since our incorporation and do not anticipate paying
dividends in the foreseeable future. We intend to retain future earnings, if
any, to fund the expansion and growth of our business.
There are
no restrictions in our Articles of Incorporation or Bylaws that prevent us from
declaring dividends. The Delaware Revised Statutes, however, do prohibit us from
declaring dividends, after giving effect to the distribution of the dividend if:
(i) we would not be able to pay our debts as they become due in the usual course
of business; or (ii) our total assets would be less than the sum of our total
liabilities plus the amount that would be needed to satisfy the rights of
shareholders who have preferential rights superior to those receiving the
distribution.
Securities Authorized for
Issuance under Equity Compensation Plans
We do not
have any compensation plan under which equity securities are authorized for
issuance.
Rule 144
Shares
As of
December 31, 2009, there were 25,015,000 shares of common stock issued and
outstanding, of which 17,452,000 are “restricted securities”, as that term is
defined under Rule 144 of the Securities Act of 1933. Under Rule 144, such
shares can be publicly sold, subject to volume restrictions and certain
restrictions on the manner of sale, commencing one year after their
acquisition.
In
general, under Rule 144 as currently in effect, any of our affiliates and any
person or persons whose sales are aggregated who has beneficially owned his or
her restricted shares for at least one year, may be entitled to sell in the open
market within any three-month period a number of shares of common stock that
does not exceed the greater of (i) 1% of the then outstanding shares of our
common stock, or (ii) the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also affected by limitations on manner of sale, notice requirements, and
availability of current public information about us. Non-affiliates, who have
held their restricted shares for one year may be entitled to sell their shares
under Rule 144 without regard to any of the above limitations, provided they
have not been affiliates for the three months preceding such sale.
12
Item
6. Management's Discussion and Analysis or Plan of
Operation
We were
incorporated on March 8, 2002 in the State of Delaware under the name of Norton
Industries Corp. ("Norton") as a blank check company for the purpose of either
merging with or acquiring an operating company with operating history and
assets. From March 8, 2002 to January 30, 2005, Norton had conducted virtually
no business other than organizational matters and the filings of periodic
reports with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended.
On
January 30, 2005, Norton entered into a share exchange agreement, by which
Norton acquired all of the capital shares of Bauer Invest Inc. Bauer is a
holding company, which conducts its business through its 80% owned subsidiary
Beijing Dahua Real Estate Development, Ltd., an operating company organized in
China ("Beijing Dahua Real Estate"). As a result of this transaction, Bauer
became our wholly owned subsidiary. This transaction was accounted for as a
recapitalization, rather than a business combination. Under accounting
principles generally accepted in the United States of America, after completion
of this transaction, we filed prior historical financial information of Bauer
and its subsidiaries, on a stand-alone basis, for two years prior to the
acquisition. Our continuing operations reflect the consolidated operations of
Dahua and its subsidiaries.
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
75 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
December 31, 2009, out of 75 luxury residential units, 67 units have been sold,
8 units were reserved with clients' deposits.
On May
21, 2008 we established Zhuolu Dahua Real Estate Development Ltd which was
wholly-owned by Beijing Dahua Real Estate Development Ltd. and engage in the
business of development, construction and sale of luxury residential
single-family homes in Zhuolu county, Hebei province which is about 140
kilometers faraway from Beijing. The first phase of the project which known as
Xuanyuan Lakefront will consist of 246 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. We have got all the permits needed and are now in the
process of construction. The company wants to create a demonstration base of
ecological buildings circumjacent to Beijing.
We are
also applying for the permits of the Second Phase of Dahua Garden. In the
newly-publicized layout of Changping district the purpose of the land on which
the Second Phase of Dahua Garden located has been recognized as residential
land. We are now in the process of applying for the first-degree development
right of this land.
Results of
Operations
Years Ended December 31,
2009 and 2008
Revenues
We began
our First Phase of Dahua Garden construction, which consists of 75 luxury
residential units, in July 2003. The construction was substantially completed in
December 2005. As of December 31, 2009, we have sold 67 units out of 75
units. We recognized sales revenues of $2,545,171 and $1,268,627 from
the sale of our housing units, for the years ended December 31, 2009 and 2008,
respectively.
13
Cost of
Good Sold
Cost of
good sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the years ended December 31, 2009 and 2008, our cost of goods sold was
$3,499,839 and $1,020,978 respectively. We made a provision of $27,443 for
houses which will be sold below cost. As of December 31, 2009, we didn’t
recognize the sales revenues of such houses, because they didn’t meet the
requirement of revenue recognition. However, the sales prices of such houses
were predetermined. Since the cost per square meter increased in 2009, it is
estimated that the revenues will be lower than the costs when the revenues are
recognized.
Construction
in progress has completed on December 31, 2009 and for the reason that two
stories of which was used as clubhouse for the homeowners part of the cost of
construction in progress was carried forward to cost of goods sold. As of
December 31, 2009, the balance which was carried forward to cost of goods sold
was $1,149,871.
Operating
Expenses
For the
year ended December 31, 2009, our operating expenses decreased by $165,343, or
23%, to $554,649 from $719,992 in the prior year, mainly due to the decrease of
the advertising expense, which decreased $70,950. The payroll expense increased
$50,409, or 55.8%. Other general and administrative expenses decreased $135,955,
or 30.8%.
Net
Income
For the
year ended December 31, 2009, we had net loss of $902,327 or $ 0.04 per share,
as compared with net loss of $247,371, or $0.01 per share, for the year of
2008.
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 December 31, 2009, our customer deposit balance was
$3,681,057.
We also
borrow from time to time based on a verbal line of credit agreement from Dahua
Group, our affiliate. There was no written line of credit agreement until June
20, 2005, to recapture the credit arrangement. The funds so borrowed are
unsecured and there is no upper limit on the amount of money that we can borrow
as long as there are funds available and we need it for our operation. The money
we borrow under this arrangement bears interest at an annual rate of 6%,
repayable within 30 days upon demand by the lender. As of December 31, 2009, the
short-term loans due to related parties had balance of $1,912,796, including
accrued interest of $229,373.
On May
12, 2005, Beijing Dahua Real Estate Development, Ltd, our operating subsidiary,
increased its registered capital, in which Dahua increased its investment by
$2,265,600 and the minority shareholder increased its investment by $566,265.
Dahua Group advanced funds to us to allow for the increase in investment. On
September 21, 2005, we issued 4,750,000 shares to Dahua Group at the price of
$0.477 per share in exchange for the short-term loans Dahua Group provided. At
the same time, according to the Shares Exchange Agreement signed on January 30,
2005, it is our responsibility to maintain the ownership percentage held by Comp
Hotel International Ltd. ("Comp Hotel") and Waywood Investments Ltd.
("Waywood"). In this regard, we issued 212,500 shares and 37,500 shares to Comp
Hotel and Waywood, respectively. There was no cash inflow from this issuance.
After the capital increase, the subsidiary's registered capital is $4,036,145,
of which we, through Bauer, hold 80% of the shares of Dahua Real
Estate.
14
As of
December 31, 2009, we had cash and cash equivalent balance of $65,801. For the
year ended December 31, 2009, our operating activities used $969,469 of net
cash, largely due to decrease of customer deposits which were 1,759,647 as of
December 31, 2009. For the year ended December 31, 2009, the investing
activities provided $23,377 of net cash, mainly due to other receivables
receipts. For the same period, the financing activities provided $834,840 of net
cash, which was due to net proceeds from loans payable to related
parties.
As of
December 31, 2005, our First Phase of Dahua Garden was completed. 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.
We are
also now in the process of construction of the project in Zhuolu through our
subsidiary Zhuolu Dahua Real Estate Development Ltd. The first phase of Xuanyuan
Lakefront will consist of 246 luxury residential units. It is estimated that
approximately $17.5 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 of Dahua Garden will
also be used to finance projects 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 a bank that extended mortgage loans to our home
buyers, whereby we agreed to provide a certain limited guarantee, which covers
the risk before the conveyance of title upon closing. Upon initiating the loan
on behalf of the buyer for the down payment, the bank has withheld a percentage
ranging from 5% to 20% of the loan and deposited such funds into a segregated
account in the bank. At December 31, 2009, the balance of this separate account
was $734,317. 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. Please see Note 6 and Note 7
of Notes to the Consolidated Financial Statements for details.
Critical Accounting Policies
and Estimates
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, which are based on our historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe that revenue recognition is one of our more significant
judgments and estimates used in the preparation of our financial
statements.
15
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.
Inventory Valuation and
Related Prepaid Construction Costs
The
inventories are valued at cost based on the level of completion using the
weighted-average method. The company made a provision of $27,443 for houses
which will be sold below cost. As of December 31, 2009, the company didn’t
recognize the sales revenue of such houses, because they didn’t meet the
requirement of revenue recognition. However the sales prices of such houses were
predetermined. Since the cost per square meter increased in 2009, it is
estimated that the revenues will be lower than the costs when the revenues are
recognized.
Construction
in progress has completed on December 31, 2009 and half of the cost of
construction in progress was carried forward to cost of goods sold and inventory
for the reason that two stories of which was used as clubhouse for the
homeowners. As of December 31, 2009, the balance which was carried forward to
cost of goods sold and inventory was $1,149,871 and $147,517.
Prepaid
construction costs consist of payment to our subcontractors before they provide
us services. Prepaid construction costs were converted into inventory when the
subcontractors finished their work.
At each
balance sheet date, we review the carrying amounts of our tangible and
intangible assets to determine whether there is any indication that those assets
have suffered an impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the
impairment loss (if any). Where it is not possible to estimate the recoverable
amount of an individual asset, the company estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
Recoverable
amount is the greater of net selling price and value in use. In assessing value
in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset.
If the
recoverable amount of an asset (or cash-generating units) is estimated to be
less than its carrying amount, the carrying amount of the asset (cash-
generating unit) is reduced to its recoverable amount. An impairment loss is
recognized as an expense immediately.
RISK
FACTORS
Investing
in shares of our common stock involves a high degree of risk. You should
carefully consider the following risk factors, in addition to the other
information set forth in this report, before you purchase these shares. The
risks and uncertainties described below are those we have identified as
material. If any of the events contemplated by the following discussion of risks
should occur, our business, financial condition and results of operations may
suffer. As a result, the trading price of our common stock could decline and you
could lose part or all of your investment in our common stock.
16
Risks Related to Our
Business
WE LACK
AN OPERATING HISTORY UPON WHICH AN EVALUATION OF OUR FUTURE SUCCESS OR FAILURE
CAN BE MADE.
We were
incorporated in March 2002 as a blank check company for the purpose of seeking
to complete a merger or business acquisition. We conducted virtually no business
until January 30, 2005, when we acquired Bauer Invest Ltd. Bauer is a holding
company, which conducts its business through its 80% owned subsidiary Beijing
Dahua Real Estate Development, Ltd., a private company operating in the People's
Republic of China (“Beijing Dahua Real Estate”). Dahua Real Estate was
incorporated on September 24, 2001, to engage in the development and sale of
luxury single-family houses in Beijing, China. The acquisition of Bauer was
accounted for as a recapitalization, rather than a business combination.
Accordingly, the historical operations of Bauer and its subsidiaries were
represented as our historical operations. Our limited operating history makes it
difficult for you to evaluate our business and future prospects.
WE WILL
NEED ADDITIONAL FINANCING TO CARRY OUT OUR SECOND PHASE PROJECT AND THE PROJECT
IN ZHUOLU. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO DELAY
THE IMPLEMENTATION OF OUR PROJECTS, AND OUR ABILITY TO INCREASE REVENUE WILL BE
MATERIALLY IMPAIRED.
Since
inception, we have been dependent on short-term loans and customer deposits to
meet our cash requirements. As of December 31, 2005 we completed the
construction of our First Phase of Dahua Garden project consisting of 75 luxury
single-family houses. Of 75 units, 67 houses were sold and 8 houses
were reserved with clients’ deposits at December 31, 2009. We are currently
applying with Beijing municipal and Changping district governmental agencies for
the first-degree development right of the Second Phase of Dahua Garden. To date
we have not received any licenses, permits or approvals from governmental
authorities to commence our Second Phase construction. It is estimated that we
need approximately $60.5 million in order to complete our Second Phase project.
We are also in the process of construction of Xuanyuan Lakefront in Zhuolu
county in Hebei province through our subsidiary Zhuolu Dahua Real Estate. It is
estimated that we needed approximately $17.5 in order to complete the project.
We intend to use (i) our proceeds from sales of our First Phase housing units,
(ii) customer deposits from our pre-sale of the housing units in the Second
Phase, and (iii) short-term borrowings from Dahua Group, our affiliate, to
finance our projects. At present we do not have any arrangements for additional
financing. If we are unable to obtain additional financing on terms acceptable
to us, we may have to delay or curtail our Second Phase project, and our ability
to increase revenue will be materially impaired.
IF WE
RAISE ADDITIONAL CAPITAL THE VALUE OF YOUR INVESTMENT MAY DECREASE.
If we
need to raise additional capital to implement or continue operations, we will
likely issue additional equity or convertible debt securities. If we issue
equity or convertible debt securities, the net tangible book value per share may
decrease, the percentage ownership of our current stockholders may be diluted
and such equity securities may have rights, preferences or privileges senior to
or more advantageous than our common stockholders.
17
WE NEED
PERMITS, LICENSES OR APPROVALS FROM GOVERNMENT AUTHORITIES TO BEGIN OUR
CONSTRUCTION OF THE SECOND PHASE PROJECT. IF WE FAIL TO OBTAIN ALL REQUIRED
LICENSES, PERMITS, OR APPROVALS, OUR OPERATION WILL BE MATERIALLY
IMPAIRED
Before we
can develop a property, we must obtain a variety of approvals from local and
municipal governments with respect to such matters as zoning, density,
subdivision, traffic considerations, site planning and environmental issues.
Although there are currently no unfavorable rulings that would have a
significant adverse effect on the development of our proposed Second Phase of
Dahua Garden, there is no assurance that we will be able to obtain all required
licenses, permits, or approvals from government authorities. If we fail to
obtain all required licenses, permits, or approvals, our operation will be
materially impaired.
RECENT
PRC REGULATIONS RELATING TO CUTTING DOWN LUXURY SINGLE FAMILY HOUSE
CONSTRUCTIONS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN. 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.
In August
2006, the Chinese government issued a series of rules and regulations in an
attempt to push down rising house prices in China by cutting down luxury single
family house constructions and supporting 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. All
permits issued previously have to be re-reviewed and re-approved; and (2) 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. 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.
As of the date of this report, we don’t have any current plan or arrangements
for development of apartment buildings.
WE ACT AS
GENERAL CONTRACTOR ON OUR CONSTRUCTION PROJECTS, AND IF ANY OF OUR
SUBCONTRACTORS SHOULD FAIL TO COMPLETE THEIR JOBS ON TIME, OUR BUSINESS COULD BE
DISRUPTED.
We act as
general contractor on our construction projects. We hire unaffiliated
subcontractors to do work for us. In the event that any of our subcontractors
should fail to complete their jobs on time, our business could be disrupted,
which will have an adverse effect on our results of operation and our financial
condition.
WE DEPEND
ON KEY PERSONNEL FOR THE SUCCESS OF OUR BUSINESS. OUR BUSINESS MAY BE SEVERELY
DISRUPTED IF WE LOSE THE SERVICES OF OUR CEO OR FAIL TO SUCCESSFULLY RECRUIT
QUALIFIED MANAGERIAL PERSONNEL HAVING EXPERIENCE IN BUSINESS.
Our
success is heavily dependent upon the continued service of Yonglin Du, our chief
executive officer. Mr. Du has valuable personal relationships with government
agencies and executive officers in the industry. A good personal relationship is
sometimes crucial for doing business in China. If Mr. Du is unable or unwilling
to continue in his position, we may not be able to easily replace him. Loss of
his services could delay our applications for construction permit and land
acquisition, and our business may be severely disrupted. We do not maintain
key-man insurance on the life of Mr. Du. In addition, in order to successfully
implement and manage our business plan, we will be dependent upon, among other
things, successfully recruiting qualified managerial personnel having experience
in business. Competition for qualified individuals is intense. There can be no
assurance that we will be able to retain existing employees or that we will be
able to find, attract and retain qualified personnel on acceptable
terms.
18
OUR
OFFICERS AND DIRECTORS ARE SUBJECT TO CONFLICTS OF INTEREST, AND THERE IS A RISK
THAT THEY MAY PLACE THEIR INTERESTS AHEAD OF YOURS.
We
believe that our officers and directors will be subject to conflicts of
interest. The conflicts arise from their relationships with our affiliate.
Yonglin Du, our chief executive officer, also serves as president and a director
of Dahua Project Management Group Co. Ltd. (“Dahua Group”), a Beijing Municipal
Government licensed construction project supervising business entity. Hua Meng,
our chief financial officer, and Qinna Zeng, our corporate secretary, are also
employed by Dahua Group. They may have conflicts of interest in allocating time,
services, and functions between us and Dahua Group, in which any of them are or
may become involved. Mr. Du anticipates devoting a minimum of twenty to
thirty-two hours per week of his business hours, and each of Ms. Meng and Ms.
Zeng fifteen to twenty hours of their business hours to our business activities.
If and when the business operations increase and a more extensive time
commitment is needed, they are prepared to devote more time to our affairs, in
the event that becomes necessary.
To ensure
that potential conflicts of interest are avoided or declared to us and to comply
with the requirements of the Sarbanes-Oxley Act of 2002, our Board of Directors,
on January 30, 2005, adopted a Code of Business Conduct and Ethics, among other
things, to reduce potential conflicts of interest. Conflicts of interest must,
to the extent possible, be avoided, and any material transaction or relationship
involving a potential conflict of interest must be reviewed and approved in
advance by a majority of the board of directors, or, if required by law, a
majority of disinterested stockholders. No personal loans will be made to
executive officers and directors.
All our
transactions with affiliates have been and will be made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
Our policy is to require that a majority of board members approve all
transactions between us and our officers, directors, principal stockholders and
their affiliates.
WE HAVE
NOT CARRIED PROPERTY OR CASUALTY INSURANCE. ANY BUSINESS
DISRUPTION,
LITIGATION OR NATURAL DISASTER MIGHT RESULT IN SUBSTANTIAL COSTS AND DIVERSION
OF RESOURCES.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products, and do not, to our
knowledge, offer business liability insurance. As a result, we do not have any
business liability insurance coverage for our operations. Any
business property loss, natural disaster or litigation might result in
substantial costs and diversion of resources.
OUR
QUARTERLY OPERATING RESULTS, REVENUES AND EXPENSES MAY FLUCTUATE SIGNIFICANTLY,
WHICH COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON
STOCK.
Our
operating results, revenues and expenses may fluctuate significantly from
quarter to quarter due to a variety of factors including:
·
|
The
timing, size and execution of sales contracts and home
deliveries;
|
·
|
Lengthy
and unpredictable sales
cycles;
|
·
|
Changes
in our operating expenses;
and
|
·
|
Fluctuations
in general economic
conditions.
|
19
We
believe that period-to-period comparisons of our results of operations are not a
good indication of future performance. It is possible that our operating results
will be below your expectations. In that event, the trading price of our common
stock may fall.
MANY OF
OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN WE ARE, AND THEY HAVE GREATER
FINANCIAL RESOURCES AND HAVE MORE EXPERIENCED MANAGERS THAN WE DO.
We are a
small company and have little market share in our target market. The market of
residential housing development in Beijing, China, is highly competitive. We
compete with numerous entities, many of which are significantly larger than we
are, and have greater financial resources and have more experienced managers
than we do. As a result, they may be able to respond more quickly to new or
emerging house plans or construction materials and changes in customer demands
or to devote greater resources to the development, promotion and sale of their
products or services than we can. If we cannot compete effectively, we may never
become profitable. Although no one of our competitors currently dominates or
significantly influences the market, they could adversely affect
us.
THE
RESIDENTIAL REAL ESTATE DEVELOPMENT INDUSTRY IS A HIGH RISK INDUSTRY. IF MARKET
CONDITIONS CHANGE DRAMATICALLY UNFAVORABLY TO US, WE MAY GO OUT OF
BUSINESS.
The real
estate development industry in general, and the residential luxury real estate
development industry in particular, is a high risk industry, subject to changes
in general economic conditions, fluctuating interest rates, and changing demand
for the types of developments being considered. Volatility in local and regional
land use demands, as well as changing supply and demand for the specific uses
for which the real property is being developed, are also factors in assessing
the relative risks of the business. The demand for residential real estate
development is particularly sensitive to changing interest rates and shifting
demographics. Both of these factors affecting the demand for residential housing
are highly unpredictable over both the short-and long-term. If market conditions
change dramatically and unfavorably to us, we may go out of
business.
Risks Related to Doing
Business in China
POLITICAL
AND ECONOMIC POLICIES IN CHINA COULD AFFECT OUR BUSINESS IN UNPREDICTABLE
WAYS.
Substantially
all of our assets are located in China and substantially all of our revenues are
expected to derive from our operations in China. Therefore, our results of
operations and prospects are subject, to a significant degree, to economic and
political developments in China. The economy of China differs from the economies
of most developed countries in many respects, including:
·
|
The
extent of government
involvement;
|
·
|
Level
of development; and
|
·
|
Allocation
of resources.
|
The
economy of China has been in transition from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces and the
reduction of state ownership of productive assets, a substantial portion of
productive assets in China is still owned by the Chinese government, which
continues to play a significant role in regulating China's economic development,
setting monetary policy and providing preferential treatment to particular
industries or companies. Political and economic policies in China could affect
our business in unpredictable ways. If there are any unfavorable changes in
government policies, such as government control over capital expenditures,
changes in monetary policy, or changes in planning and zoning policy, we may
experience delays or other problems in obtaining government permits or licenses
to start or complete our projects.
20
OUR
ASSETS, OFFICERS AND DIRECTORS ARE LOCATED OUTSIDE OF THE U.S. IT IS DIFFICULT
TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON US AND OUR
OFFICERS AND DIRECTORS.
Our
assets, officers and directors are located in China. As a result, it may be
difficult to effect service of process within the United States and enforce
judgment of the US courts obtained against us and our executive officers and
directors. Particularly, our shareholders may not be able to:
·
|
Effect
service of process within the United States on us or any of our executive
officers and directors;
|
·
|
Enforce
judgments obtained in U.S. courts against us based upon the civil
liability provisions of the U.S. federal securities
laws;
|
·
|
Enforce,
in a court in China, judgments of U.S. courts based on the civil liability
provisions of the U.S. federal securities laws;
and
|
·
|
Bring
an original action in a court in China to enforce liabilities against us
or any of our executive officers and directors based upon the U.S. federal
securities laws.
|
GOVERNMENT
CONTROL OF CURRENCY CONVERSION MAY AFFECT OUR ABILITY TO PAY DIVIDENDS DECLARED,
IF ANY, IN FOREIGN CURRENCIES.
It is
expected that a substantial portion of our revenues, if any, will be in “yuan”,
the national currency of China, which is currently not a freely convertible
currency. A portion of our revenues may have to be converted into US dollars to
make payment of dividends declared, if any, in respect of our common shares.
Under China's existing foreign exchange regulations, we will be able to pay
dividends in foreign currencies without prior approval from the State
Administration of Foreign Exchange of China by complying with certain procedural
requirements. However, the Chinese government may take measures at its
discretion in the future to restrict access to foreign currencies if foreign
currencies become scarce in China. We may not be able to pay dividends in
foreign currencies to our shareholders if the Chinese government restricts
access to foreign currencies for current account transactions.
FLUCTUATIONS
IN THE EXCHANGE RATE BETWEEN THE CHINESE CURRENCY AND THE UNITED STATES DOLLAR
MAY BRING DOWN OUR OPERATING INCOME.
The
functional currency of our operations in China is "Yuan." Results of our
operations are translated at average exchange rates into United States dollars
for purposes of reporting results. As a result, fluctuations in exchange rates
may adversely affect our expenses and results of operations as well as the value
of our assets and liabilities. On July 21, 2005, the Chinese government
changed its decade-old policy of pegging the value of yuan to the U.S. dollar.
Under the new policy, Yuan is permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy has
resulted in an approximately 17.6% appreciation of the yuan against the U.S.
dollar between July 21, 2005 and December 31, 2009. Our revenues and costs
are denominated in yuan, and our financial assets are also denominated in yuan.
Any significant fluctuations in the exchange rate between the yuan and the
United States dollar may bring down our operating income and lower our stock
price. We have no current plans to undertake any hedging activity to minimize
exchange rate fluctuations.
21
Risks Related to Investment
in Our Securities
OUR
COMMON STOCK IS QUOTED ON THE OVER-THE-COUNTER BULLETIN BOARD WHICH MAY MAKE IT
MORE DIFFICULT FOR STOCKHOLDERS TO SELL THEIR SHARES AND MAY CAUSE THE MARKET
PRICE OF OUR COMMON STOCK TO DECREASE.
Because
our common stock is quoted on the OTC Bulletin Board, the liquidity of our
common stock is impaired, not only in the number of shares that are bought and
sold, but also through delays in the timing of transactions, and limited
coverage by security analysts and the news media of us. As a result,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock was traded on NASDAQ or a national securities exchange, like
the American Stock Exchange.
THERE HAS
BEEN LOW VOLUME AND THEREFORE AN INACTIVE MARKET FOR OUR COMMON STOCK, OUR STOCK
PRICE MAY BE VOLATILE OR MAY DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE,
AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE YOUR STOCK PURCHASE
PRICE.
If you
purchase shares of our common stock, you may not be able to resell those shares
at or above your original purchase price. An active or liquid market in our
common stock may not develop or, if it does develop, it may not be sustainable.
The market price of our common stock may fluctuate significantly in response to
numerous factors, many of which are beyond our control.
OUR
COMMON STOCK IS DEEMED A PENNY STOCK. AS A RESULT, TRADING OF OUR SHARES IS
SUBJECT TO SPECIAL REQUIREMENTS THAT COULD IMPEDE OUR SHAREHOLDERS' ABILITY TO
RESELL THEIR SHARES.
The
shares offered by this prospectus constitute penny stock under the Securities
Exchange Act of 1934 (the “Exchange Act”). The shares will remain penny stock
for the foreseeable future. As defined in Rule 3a51-1 of the Exchange Act, penny
stocks generally are equity securities with a price of less than $5.00, other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system.
Section
15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Moreover, Rule 15g-9 of the Exchange Act
requires broker-dealers in penny stocks to approve the account of any investor
for transactions in such stocks before selling any penny stock to that investor.
This procedure requires the broker-dealer to:
·
|
Obtain
from the investor information concerning his or her financial situation,
investment experience and investment
objectives;
|
·
|
Reasonably
determine, based on that information, that transactions in penny stocks
are suitable for the investor and that the investor has significant
knowledge and experience to be reasonably capable of evaluating the risks
of penny stock transactions;
|
·
|
Provide
the investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above;
and
|
22
·
|
Receive
a signed and dated copy of such statement from such investor, confirming
that it accurately reflects the investor's financial situation, investment
experience and investment
objectives.
|
Compliance
with these requirements may make it more difficult for investors in our common
stock to resell the shares to third parties or to otherwise dispose of
them.
Item
7. Financial Statements
The
following report of independent registered public accounting firm and the
consolidated financial statements of the Company are included
below:
Report
of Independent Registered Public Accounting Firm
|
26
|
|
Consolidated
Balance Sheets
|
27
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
28
|
|
Consolidated
Statements of Cash Flows
|
29
|
|
Consolidated
Statements of Changes in Equity
|
30
|
|
Notes
to Consolidated Financial Statements
|
31
|
23
Dahua,
Inc.
Consolidated
Financial Statements
For the
Years Ended December 31, 2009 and 2008
24
25
DAHUA,
INC.
CONSOLIDATED
BALANCE SHEETS
December
31, 2009
|
December
31, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 65,801 | $ | 176,935 | ||||
Inventory-short-term
|
3,651,644 | 7,756,324 | ||||||
Prepaid
expenses
|
42,603 | 10,061 | ||||||
Deferred
taxes - current
|
480,700 | 104,473 | ||||||
Total
Current Assets
|
4,204,748 | 8,047,793 | ||||||
Property,
plant and equipment, net of accumulated depreciation
|
1,574,567 | 465,220 | ||||||
Construction
in progress
|
- | 2,152,604 | ||||||
Inventory-long-term
|
3,278,726 | - | ||||||
Net
other receivables
|
4 | 161,489 | ||||||
Due
from related parties
|
- | 658 | ||||||
Prepaid
tax
|
569,340 | 716,638 | ||||||
Restricted
cash
|
734,317 | 731,238 | ||||||
Total
Assets
|
$ | 10,361,702 | $ | 12,275,640 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 423,940 | $ | 337,601 | ||||
Customer
deposits
|
3,681,057 | 5,436,356 | ||||||
Short-term
loans - related parties
|
1,683,423 | 847,435 | ||||||
Accrued
interest - short-term loans, related parties
|
229,373 | 190,087 | ||||||
Other
accruals
|
225,593 | 222,368 | ||||||
Total
Current Liabilities
|
6,243,386 | 7,033,847 | ||||||
Dahua
Inc. stockholders' equity:
|
||||||||
Preferred
stock: par value $0.0001; 20,000,000 shares authorized;
|
||||||||
none
issued and outstanding
|
- | - | ||||||
Common
stock: par value $0.0001; 80,000,000 shares authorized;
|
||||||||
25,015,000
shares issued and outstanding
|
2,502 | 2,502 | ||||||
Additional
paid-in capital
|
3,131,200 | 3,131,200 | ||||||
Retained
earnings (deficit)
|
(560,814 | ) | 341,513 | |||||
Accumulated
other comprehensive income
|
788,324 | 784,778 | ||||||
Total
Dahua Inc. stockholders' equity
|
3,361,212 | 4,259,993 | ||||||
Non-controlling
interest
|
757,104 | 981,800 | ||||||
Total
Equity
|
4,118,316 | 5,241,793 | ||||||
Total
Liabilities and Equity
|
$ | 10,361,702 | $ | 12,275,640 |
See
accompanying notes to consolidated financial statements
26
DAHUA,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
INCOME
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Sales
revenues
|
$ | 2,545,171 | $ | 1,268,627 | ||||
Cost
of goods sold
|
3,499,839 | 1,020,978 | ||||||
Gross
profit
|
(954,668 | ) | 247,649 | |||||
Expenses:
|
||||||||
Advertising
|
- | 70,950 | ||||||
Bad-debts
|
797 | 7,196 | ||||||
Depreciation
|
107,262 | 109,710 | ||||||
Payroll
expense
|
140,801 | 90,392 | ||||||
Other
general and administrative
|
305,789 | 441,744 | ||||||
Total
expenses
|
554,649 | 719,992 | ||||||
Income
(loss) from operations
|
(1,509,317 | ) | (472,343 | ) | ||||
Other
income (expense)
|
||||||||
Other
income
|
- | 1,651 | ||||||
Interest
income
|
5,438 | 58,907 | ||||||
Total
other income (expense)
|
5,438 | 60,558 | ||||||
Income
before income taxes
|
(1,503,879 | ) | (411,785 | ) | ||||
Income
tax expense (benefit)
|
(375,970 | ) | (102,759 | ) | ||||
Net
income (loss)
|
(1,127,909 | ) | (309,026 | ) | ||||
Less:
Net income (loss) attributable to the non-controlling
interest
|
(225,582 | ) | (61,655 | ) | ||||
Net
income (loss) attributable to Dahua Inc.
|
$ | (902,327 | ) | $ | (247,371 | ) | ||
Earnings
per share - basic and diluted:
|
||||||||
Net
income (loss) attributable to Dahua Inc. common
stockholders
|
$ | (0.04 | ) | $ | (0.01 | ) | ||
Weighted
-average shares outstanding, basic and diluted
|
25,015,000 | 25,014,959 | ||||||
Dahua
Inc. Comprehensive Income (loss)
|
||||||||
Net
income (loss)
|
$ | (1,127,909 | ) | $ | (309,026 | ) | ||
Other
comprehensive income (loss), net of tax
|
||||||||
Foreign
currency translation adjustment
|
4,432 | 352,517 | ||||||
Comprehensive
income (loss)
|
$ | (1,123,477 | ) | $ | 43,491 | |||
Comprehensive
loss (income) attributable to the non-controlling
interest
|
224,696 | (9,024 | ) | |||||
Comprehensive
income (loss) attributable to Dahua Inc.
|
$ | (898,781 | ) | $ | 34,244 |
See
accompanying notes to consolidated financial statements
27
DAHUA,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (1,127,909 | ) | $ | (309,026 | ) | ||
Adjustments
to reconcile net income to net cash
|
||||||||
Provided
by operating activities:
|
||||||||
Depreciation
|
107,262 | 109,710 | ||||||
Stock
issued for services
|
- | 750 | ||||||
Provision
for bad-debts
|
- | 7,196 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Inventory
|
1,945,709 | (794,854 | ) | |||||
Deferred
taxes - current
|
(375,970 | ) | (102,759 | ) | ||||
Prepaid
tax
|
133,466 | (458,253 | ) | |||||
Prepaid
expenses
|
(17,880 | ) | 145,866 | |||||
Accounts
payable
|
114,608 | 83,593 | ||||||
Customer
deposits
|
(1,759,647 | ) | 96,422 | |||||
Accrued
interest
|
39,091 | 27,763 | ||||||
Restricted
cash
|
(2,393 | ) | (4,537 | ) | ||||
Other
accruals
|
(25,806 | ) | 30,055 | |||||
Net
cash used in operating activities:
|
(969,469 | ) | (1,168,074 | ) | ||||
Cash
Flows from Investing Activities:
|
||||||||
Property,
plant & equipment
|
(138,850 | ) | (16,982 | ) | ||||
Construction
in progress
|
- | (1,287,974 | ) | |||||
Other
receivables receipts
|
161,568 | 149,391 | ||||||
Due
from related parties
|
659 | (648 | ) | |||||
Net
cash provided by (used in) investing activities:
|
23,377 | (1,156,213 | ) | |||||
Cash
Flows from Financing Activities:
|
||||||||
Net
proceeds from loans payable - related parties
|
834,840 | 507,676 | ||||||
Net
proceeds from other receivable
|
|
- | ||||||
Net
cash provided financing activities:
|
834,840 | 507,676 | ||||||
Effect
of rate chages on cash
|
118 | 99,920 | ||||||
Increase
(decrease) in cash and cash equivalents
|
(111,134 | ) | (1,716,691 | ) | ||||
Cash
and cash equivalents, beginning of period
|
176,935 | 1,893,626 | ||||||
Cash
and cash equivalents, end of period
|
$ | 65,801 | $ | 176,935 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid in cash
|
$ | - | $ | - | ||||
Sales
tax paid in cash
|
$ | 4,634 | $ | 359,613 | ||||
Income
taxes paid in cash
|
$ | 14,645 | $ | 183,671 | ||||
Non-cash
activities
|
||||||||
Stock
issued for services
|
- | 750 |
See
accompany notes to consolidated financial statements
28
DAHUA
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
Common
Share
|
Common
Stock
|
Additional
Paid
in Capital
|
Retained
Earnings
|
Accumulated
other
comprehensive
Income
|
Non-controlling
Interest
20%
|
Total
Equity
|
||||||||||||||||||||||
Balance
January 1, 2008
|
25,000,000 | $ | 2,500 | $ | 3,130,452 | $ | 588,884 | $ | 502,940 | $ | 972,776 | $ | 5,197,552 | |||||||||||||||
Net
Income (loss)
|
(247,371 | ) | (61,655 | ) | (309,026 | ) | ||||||||||||||||||||||
Foreign
currency translation
|
281,838 | 70,679 | 352,517 | |||||||||||||||||||||||||
Stock
issued for services $0.05 per share
|
15,000 | 2 | 748 | 750 | ||||||||||||||||||||||||
Balance
December 31, 2008
|
25,015,000 | $ | 2,502 | $ | 3,131,200 | $ | 341,513 | $ | 784,778 | $ | 981,800 | $ | 5,241,793 | |||||||||||||||
Net
Income (loss)
|
(902,327 | ) | (225,582 | ) | (1,127,909 | ) | ||||||||||||||||||||||
Foreign
currency translation
|
3,546 | 886 | 4,432 | |||||||||||||||||||||||||
Balance
December 31, 2009
|
25,015,000 | $ | 2,502 | $ | 3,131,200 | $ | (560,814 | ) | $ | 788,324 | $ | 757,104 | $ | 4,118,316 |
See
accompany notes to consolidated financial statements
29
DAHUA
INC.
NOTES TO
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.
(“Beijing Dahua”) 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.
Zhuolu
Dahua Real Estate Development, Ltd. (“Zhuolu Dahua”) was established on May 21,
2008 in the People’s Republic of China (“PRC”). It is the wholly-owned
subsidiary of Beijing Dahua Real Estate Development, Ltd.
These
financial statements are essentially those of Beijing Dahua and Zhuolu Dahua
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 the construction of the First
Phase of Dahua Garden and all of the houses are sold or available for sale.
The Company is now engaging in the development of real estate and the sale of
commodity housing in Zhuolu county in Hebei province. The company has got all
the permits needed and is now in the process of construction.
2. Basis
of Presentation
The
consolidated financial statements include the accounts of Dahua, Inc., Bauer
Invest, Inc., Beijing Dahua Real Estate Development Ltd and Zhuolu Dahua Real
Estate Development Ltd. All inter-company accounts and transactions have been
eliminated in consolidation. The Company records minority interest, 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.
30
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 December 31, 2009.
Inventory
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. The company made a provision of $27,455 for houses which will be sold
below cost which is included in cost of goods sold. As of December 31, 2009 the
company didn’t recognize the sales revenue of such houses, because they didn’t
meet the requirement of revenue recognition. However the sales prices of such
houses were predetermined. Since the cost per square meter increased in 2009, it
is estimated that the revenues will be lower than the costs when the revenues
are recognized.
Property, plant &
equipment
Property,
plant & 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. Equipment is depreciated over their estimated useful lives as
follows:
Computer
equipment
|
3
years
|
|
Office
equipment
|
7
years
|
|
Vehicles
|
7
years
|
Depreciation
expense for the years ended December 31 2009 and 2008 was $107,262 and $109,710,
respectively.
31
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired, according to the guidelines established in the Accounting
Standards Codification (“ASC Topic”) 360. The Company also evaluates the periods
of amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of long –term 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 $0
and $70,950 for the years ended December 31, 2009 and 2008,
respectively.
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.
32
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:
2009
|
2008
|
|||||||
NUMERATOR
FOR BASIC AND DILUTED EPS
|
||||||||
Net
income to common stockholders
|
$ | (902,327 | ) | $ | (247,371 | ) | ||
DENOMINATORS
FOR BASIC AND DILUTED EPS
|
||||||||
Weighted
average shares of common stock outstanding
|
25,015,000 | 25,014,959 | ||||||
Add:
dilutive equity securities outstanding
|
- | - | ||||||
Denominator
for diluted EPS
|
25,015,000 | 25,014,959 | ||||||
EPS
– Basic
|
$ | (0.04 | ) | $ | (0.01 | ) | ||
EPS
– Diluted
|
$ | (0.04 | ) | $ | (0.01 | ) |
The
Company had no potentially dilutive securities outstanding at December 31, 2009
and 2008.
4.Inventory
Inventories
consist primarily of compulsory land acquisition and removal compensation costs,
prophase
engineering cost, infrastructure cost, capitalized interest, indirect
development costs, auxiliary
public establishment costs and construction and installation project costs, etc
in Zhuolu Dahua and
Dahua Phase II. It also represents completed houses available for sale at
December 31, 2009 in
Beijing Dahua. During 2005, the Company completed its housing construction of
the First Phase of
Dahua Garden. As of December 31, 2009, 67 units were sold, 8 units were
reserved with clients’
deposits.
As of
December 31, 2009, inventory in Beijing Dahua and project in Zhuolu was as
follows:
Inventory
in Beijing Dahua
|
Inventory
in Zhuolu Dahua
|
Inventory
in Beijing Dahua
|
||||||||||
Phase
I
|
Phase
II
|
|||||||||||
December
31, 2009
|
$ | 3,615,644 | $ | 2,186,142 | $ | 1,092,584 | ||||||
3,615,644 | 2,186,142 | 1,092,584 |
33
5.
Property, plant and equipment
Property,
plant & equipment are carried at cost less accumulated depreciation, which
is computed using the straight-line method over the useful lives of the
assets.
Land and
buildings represent the cost carried forward from construction in progress as
the company has completed the construction of the clubhouse on December 31,
2009. Half cost was carried forward to Land and Buildings and the other half was
carried to the inventory and cost of goods sold for the reason that two stories
of which was used as clubhouse to the home owner association. As of December 31,
2009, the balance of Land and Buildings was $1,213,063.
6.
Related Party Transactions
Short-term
loans due to related parties had balances of $1,912,796 and $1,037,522
(including accrued interest) at December 31, 2009 and 2008
respectively. The loans carry an annual interest rate of 6 percent
and are due on demand. Interest accrued on the loans was $229,373 and
$190,087 for the years ended December 31, 2009 and
2008 respectively.
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 was $3,681,057 and $5,436,356 at December 31,
2009 and 2008 respectively. Of the 8 units reserved, one unit’s
deposits are money received from bank arrangements (see note 8) in the amounts
of $515,509. Accordingly, the bank has liens against this unit.
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 December 31, 2009 and 2008, the
balance of this separate account was $734,317 and $731,238 respectively. 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 7.
9.
Tax
The
Company made a provision for sales tax, which totaled $152,775 and $75,725
respectively for the year ended December 31, 2009 and 2008. The sales tax is
calculated on the basis of sales revenues. The provision for sales tax is
included as part of cost of goods sold.
Income
tax expense (benefit) consists of the following:
Year
Ended December 31,
|
||||||||
Current:
|
2009
|
2008
|
||||||
Foreign
|
$ | - | $ | - | ||||
- | - | |||||||
Deferred:
|
||||||||
Foreign
|
(375,970 | ) | (102,759 | ) | ||||
(375,970 | ) | (102,759 | ) | |||||
Income
tax expense (benefit)
|
$ | (375,970 | ) | $ | (102,759 | ) | ||
34
A
reconciliation of income tax expense (benefit) to the amount computed using
statutory rates is as follow
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Tax
at statutory rate
|
$ | (375,970 | ) | $ | (102,759 | ) | ||
Non-deductibe
expenses
|
- | - | ||||||
$ | (375,970 | ) | $ | (102,759 | ) |
The
Company has implemented ASC Topic 740, which provides for a liability approach
to accounting for income taxes. Total deferred tax assets and
liabilities as of December 31, 2009 are as follows:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets - Tax NOL
|
$ | 480,700 | $ | 104,473 | ||||
Deferred
tax liabilities
|
- | - | ||||||
Net
deferred tax asset (liability) - current
|
$ | 480,700 | $ | 104,473 |
Deferred
income taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes.
Deferred
income taxes are recognized for the tax consequences of temporary differences by
applying statutory tax rates to differences between the financial reporting and
the tax bases of existing assets and liabilities. These temporary
differences related primarily to bad debt provisions and losses on the sale of
property.
The
company has a net operating loss caryforward of approximately $1,922,800
expiring in 2029. The tax benefit of these net operating loss
carryforwards, based on an effective tax rate of 25% is approximately
$480,700.
The
Company paid sales tax in cash, which totaled $4,634 for the year ended December
31, 2009. The company paid sales tax and income tax in cash, which totaled
$359,613 and $183,671 respectively, for the year ended December 31,
2008.
35
.
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.
For the help that Pacific Services provided in the company’s Form 211 reporting
in the United States, the company issued 15,000 shares of the Company’s Common
Stock, $0.0001 par value per share to Pacific Services Inc on January 2, 2008.
The fair value of this share paid for services is $0.05. As of
December 31, 2009, there were 25,015,000 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.
12.
Others receivable
Others
receivable primarily represent loans due from outside parties. As of
December 31, 2009, the balance of others receivable was
$7,327. The company made a provision of 7,323 for bad-debts for other
receivable for the reason that collection of the full amount becoming
questionable.
13. Leases
The
Company leased in 1997 a pond and filled it and leveled up for land exploitation
from an outside party for approximately $ 32,500.00 per year which will end in
2047. This lease is for an initial term of 50 years and requires fixed annual
payments. In the year ended December 31, 2009 the Company paid approximately
$38,061 for the lease payment. These leases contain renewal and right of first
refusal options and require the adherence to certain covenants and conditions.
Rental expense is recognized on the straight-line basis, although rental
payments vary over the lease terms. Future minimum lease payments are as
follows:
Year
ending December 31,
2010
|
$ | 32,500 | ||
2011
|
$ | 32,500 | ||
2012
|
$ | 32,500 | ||
2013
|
$ | 32,500 | ||
2014
|
$ | 32,500 | ||
Thereafter
|
$ | 1,072,500 | ||
$ | 1,235,000 |
36
14. Recent
Accounting Pronouncements
Effective
April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and
Disclosures – Overall – Transition and Open Effective Date Information
(“ASC 820-10-65”). ASC 820-10-65 provides additional guidance for estimating
fair value in accordance with ASC 820-10 when the volume and level of activity
for an asset or liability have significantly decreased. ASC 820-10-65 also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. The adoption of ASC 820-10-65 did not have an impact on the
Company’s consolidated results of operations or financial
condition.
Effective
April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall –
Transition and Open Effective Date Information (“ASC 825-10-65”). ASC
825-10-65 amends ASC 825-10 to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements and also amends ASC 270-10 to require those disclosures in all
interim financial statements. The adoption of ASC 825-10-65 did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU
2009-13”) and ASU 2009-14, Certain Arrangements That Include
Software Elements, (amendments to FASB ASC Topic 985, Software) (“ASU
2009-14”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-14 removes tangible products from the scope
of software revenue guidance and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
covered by the scope of the software revenue guidance. ASU 2009-13 and ASU
2009-14 should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with early adoption permitted. The Company does not expect
adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the
Company’s consolidated results of operations or financial
condition.
In
January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation
(Topic 810): Accounting and
Reporting for Decreases in Ownership of a Subsidiary. This amendment to
Topic 810clarifies, but does not change, the scope of current US GAAP. It
clarifies the decrease in ownership provisions of Subtopic 810-10 and removes
the potential conflict between guidance in that Subtopic and asset derecognition
and gain or loss recognition guidance that may exist in other US GAAP. An entity
will be required to follow the amended guidance beginning in the period that it
first adopts FAS 160 (now included in Subtopic 810-10). For those entities that
have already adopted FAS 160, the amendments are effective at the beginning of
the first interim or annual reporting period ending on or after December 15,
2009. The amendments should be applied retrospectively to the first period that
an entity adopted FAS 160. Adoption of ASU 2010-02 did not have a material
impact on the Company’s consolidated results of operations or financial
condition.
In
January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic
505): Accounting for
Distributions to Shareholders with Components of Stock and Cash (A
Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505
clarifies the stock portion of a distribution to shareholders that allows them
to elect to receive cash or stock with a limit on the amount of cash that will
be distributed is not a stock dividend for purposes of applying Topics 505 and
260. Effective for interim and annual periods ending on or after December 15,
2009, and would be applied on a retrospective basis. Adoption of ASU 2010-01 did
not have a material impact on the Company’s consolidated results of operations
or financial condition.
37
15.
Subsequent Events
The
Company has evaluated all subsequent events through the date these financial
statements were issued.
Item
8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
There are
no changes in and disagreements with accountants on accounting and financial
disclosure.
Item
9A (T). Controls and Procedures
(a) Evaluation of disclosure controls
and procedures.
In
connection with the preparation of this annual report, an evaluation was carried
out by the Registrant’s management, with the participation of the principal
executive officer and the principal financial officer, of the effectiveness of
the Registrant’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange
Act”)) as of December 31, 2009. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Commission’s rules and forms,
and that such information is accumulated and communicated to management,
including the chief executive officer and the chief financial officer, to allow
timely decisions regarding required disclosures.
The
Company’s management, with the participation of its chief executive officer and
chief financial officer, evaluated the effectiveness of its disclosure controls
and procedures. The term “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, Company’s management concluded that
because of the existence of certain related party loans in violation of Section
402 of the Sarbanes-Oxley Act of 2002 contributed to in part by a lack of review
and approval of these related party loans by independent directors constituting
a significant deficiency in internal control over financial reporting, the
Company’s disclosure controls and procedures were not effective as of December
31, 2009. As of December 31, 2009, the Company advanced money to two
related parties with a total outstanding amount in excess of
$48,522.
38
(b) Management’s Report on Internal
Control over Financial Reporting
The
management of the Registrant is responsible for establishing and maintaining
adequate internal control over financial reporting. The Registrant’s internal
control over financial reporting is a process, under the supervision of the
principal executive officer and the principal financial officer, designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Registrant’s financial statements for external
purposes in accordance with United States generally accepted accounting
principles (GAAP). Internal control over financial reporting includes those
policies and procedures that:
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the Registrant’s
assets;
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and the
board of directors; and
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Registrant’s assets
that could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
The
Registrant’s management conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Tread way
Commission. Our management has concluded that our internal control
over financial reporting is effective based on these criteria.
(c) Changes
in internal controls over financial reporting.
During
the fourth quarter ended on December 31, 2009, there has been no change in
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
(d)
Attestation Report of the Registered Public Accounting Firm
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. We were not required to have, nor have we, engaged our independent
registered public accounting firm to perform an audit of internal control over
financial reporting pursuant to the rules of the Commission that permit us to
provide only management’s report in this annual report..
39
Item
9B. Other Information
There
were no events requiring disclosure that had not been made under Form 8K in the
fourth quarter of our fiscal year.
PART
III
Item
10. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors and Executive
Officers
Each of
our directors is elected by the shareholders to a term of one year and serves
until his or her successor is elected and qualified, or until he or she resigns
or is removed from office. Each of our officers is elected by the board of
directors to a term of one year and serves until his or her successor is duly
elected and qualified, or until he or she resigns or is removed from office. The
board of directors has no nominating or compensation committees. The board of
directors does not have an audit committee financial expert.
The name,
age and position of our officers and directors are set forth below:
Name
|
Age
|
Position
Held
|
|||
Du
Yonglin
|
68
|
President,
Chief Executive Officer and Director
|
|||
Wang
Wulong
|
70
|
Director
|
|||
Meng
Hua
|
34
|
Chief
Financial Officer
|
|||
Zeng
Qinna
|
32
|
Corporate
Secretary
|
The
following is a brief description of business experience of each of our directors
and executive officers during the past five years.
Mr.
Yonglin Du has been our Chairman, Chief Executive Officer and President since
January 30, 2005. From 1982 to 2003, Mr. Du held various positions in
China's petroleum and petrochemical industries, including Deputy Director of the
Research Institute of Daqing Oilfield, Head of Petroleum and Petrochemical
Division of the State Planning Commission, Deputy Director of the Energy
Institute of the State Planning Commission, President of Shanghai Petroleum and
Natural Gas Company. In 2000, he founded Dahua Project Management Group Co. Ltd.
("Dahua Group"), of which he has been serving as its Chairman of the Board of
Directors and Chief Executive Officer. Dahua Group is a Beijing Municipal
Government licensed construction project supervising business entity located in
Beijing, China.
Mr.
Wulong Wang has been our Director since January 30, 2005. A graduate of Beijing
Post and Telecommunication University, Mr. Wang is a senior engineer and China's
registered Consulting Engineer. He joined China's State Planning Commission in
1979, and served as its Deputy Chief of Investment Bureau from 1988 to 1992,
Chief of Key Construction Bureau from 1992 to 1994, Chief of Investment Bureau
from 1994 to 1995. From 1995 to 2002, Mr. Wang served as the President of China
International Engineering Consulting Co. Limited, and from 2002 to the present
as a member of the Expert Committee of China Engineering Consulting Co. Limited,
as well as a member of the Economic Commission of Chinese National People's
Political Consultative Conference.
40
Ms. Hua
Meng has been our Chief Financial Officer since January 30, 2005. She graduated
from the Central University of Finance and Economics of China in July 2003 with
a master degree in accounting. Ms. Meng is a Certified Public Accountant in
China. From July 1999 to May 2000, she was employed at Beijing Baisheng Light
Industry Development Co. Ltd. as an accountant. From July 2003 to the present,
Ms. Meng has also been chief financial officer of Dahua Project Management Group
Co., Ltd., a Beijing Municipal Government licensed construction project
supervising business entity in Beijing, China.
Ms. Qinna
Zeng has been our Corporate Secretary since January 30, 2005. She graduated from
the Central University of Finance and Economics in China in July 2003 with a
master degree in finance. From July 1999 to August 2000, Ms. Zeng worked for the
Lichuan Branch of People's Bank of China as a statistician. From July 2003 to
the present, Ms. Zeng has also been corporate secretary of Dahua Project
Management Group Co. Ltd., a Beijing Municipal Government licensed construction
project supervising business entity in Beijing, China.
None of
our directors and officers has ever held any position in a reporting
company.
Significant
Employees
There are
no significant employees other than our executive officers.
Family
Relationships
There are
no family relationships among directors or officers.
Involvement in Certain Legal
Proceedings
During
the past five years, none of our officers, directors, promoters or control
persons has had any involvement in any of the following events:
1.
|
Any
bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that
time;
|
2.
|
Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding, excluding traffic violations and other minor
offenses;
|
3.
|
Being
subject to any order, judgment or decree, not substantially reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
enjoining, barring, suspending or otherwise limiting his involvement in
any type of business, securities or banking business;
and/or
|
41
4.
|
Being
found by a court of competent jurisdiction, in a civil action, the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended or
vacated.
|
Code of
Ethics
We had
adopted a code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. A copy of the code of ethics may be
obtained by any person, without charge, who sends a written request to Dahua
Inc. c/o Corporate Secretary, 8th Floor,
Officer Tower 3, Henderson Center, 18# Jianguomennei Street Dongcheng District,
Beijing, China 100005
Section 16(a) Beneficial
Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors, and persons who own more than 10% of a registered class of our
equity securities, to file reports of ownership and changes in ownership of our
equity securities with the Securities and Exchange Commission. Officers,
directors and greater than 10% shareholders are required by the Securities and
Exchange Commission regulations to furnish us with copies of all Section 16(a)
filings. To our knowledge, for the year ended December 31, 2009, based solely on
a review of the copies of such reports furnished to us and representations by
these individuals that no other reports were required during the year ended
December 31, 2009, all Section 16(a) filing requirements applicable to our
directors, officers and greater than 10% beneficial owners have been timely
filed.
Item
11. Executive Compensation
Summary Compensation
Table
SUMMARY
COMPENSATION TABLE
Name
and
Principal Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Non- Equity Incentive
Plan Compensation ($)
|
Nonquali- fied Deferred
Compensation Earnings ($)
|
All
Other
Compensation ($)
|
Total ($)
|
|||||||||||||||||||||||||
Yonglin
Du
|
2009
|
29,290
|
-
|
-
|
-
|
- | - | - | 29,290 | |||||||||||||||||||||||||
CEO
and
|
2008
|
29,262 | - | - | - | - | - | - | 29,262 | |||||||||||||||||||||||||
President
|
||||||||||||||||||||||||||||||||||
Hua
Meng
|
2009
|
8,787 | - | - | - | - | - | - | 8,787 | |||||||||||||||||||||||||
CFO
|
2008
|
8,779 | - | - | - | - | - | - | 8,779 |
(i)
|
The
annual salaries paid Mr. Du were 200,000 yuan, or approximately $29,290,
and Ms. Meng 60,000 yuan, or approximately $8,787,
respectively.
|
42
At the
end of the last completed fiscal year, there were no “most highly compensated
executive officers” as that term is defined in Item 402(m) (2) of Regulation
S-K, and there were no additional individuals for whom disclosure would have
been made in this table but for the fact that the individual was not serving as
our executive officer.
Outstanding Equity Awards at
Fiscal Year-End Table
We do not
have any equity incentive plans. No option or stock awards have been granted to
any of our executive officers or directors since our inception. Pursuant to Item
402(m)(5) of Regulation S-K, the Outstanding Equity Awards at Fiscal Year-End
Table is omitted because there has been no compensation awarded to, earned by,
or paid to any of the named executive officers or directors required to be
reported in that table.
Compensation of
Directors
The
members of the Board of Directors are not compensated by us for their service as
members of the Board of Directors, but may be reimbursed for reasonable expenses
incurred in connection with attendance of meetings of the board of directors.
There are no arrangements pursuant to which directors are or will be compensated
in the future for any services provided as a director.
Employment Contracts,
Termination of Employment, Change-in-Control Arrangements
We have
not entered employment agreements with our executive officers. There are no
compensatory plans or arrangements, including payments to be received from us,
with respect to a named executive officer, if such plan or arrangement would
result from the resignation, retirement or any other termination of such
executive officer's employment with us or form a change-in-control of us or a
change in the named executive officer's responsibilities following a
change-in-control.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Security Ownership of
Certain Beneficial Owners
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 28, 2010, each person who is known by
us to own beneficially more than 5% of our outstanding common stock. We have
only one class of securities outstanding. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where
applicable.
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
& Nature of Beneficial Owner
|
Percent
of Class
|
|||||
Common
Stock
|
Yonglin
Du
8th
Floor, Officer Tower 3,
Henderson
Center,
18#
Jianguomennei Street
Dongcheng
District,
Beijing,
China 100005
|
1,900,000
shares
|
7.60 | % |
43
Security Ownership of
Management
The
following table sets forth certain information, as of March 31, 2010, as to each
class of our equity securities beneficially owned by all of our directors and
nominees, each of the named executive officers, and our directors and executive
officers as a group.
Title of Class
|
Name and Address of Beneficial
Owner(1)
|
Amount & Nature of Beneficial
Owner
|
Percent of Class
|
|||||
Common
Stock
|
Yonglin
Du(2)
8th
Floor, Officer Tower 3,
Henderson Center,
18#
Jianguomennei Street
Dongcheng
District,
Beijing,
China 100005
|
1,900,000
shares
|
7.60 | % | ||||
Common
Stock
|
Qinna
Zeng (3)
#1712,
Courtyard 5,
Beiyuan
Road,
Chaoyang
District,
Beijing
|
72,500
shares
|
* | (4) | ||||
Common
Stock
|
Hua
Meng (5)
#
8104, Courtyard
11,
Anning Zhuang,
Xisanqi,
Haidian District,
Beijing
|
15,000
shares
|
* | |||||
Common
Stock
|
Wang
Wulong
c/o
Dahua Inc.
8th
Floor, Officer Tower 3,
Henderson Center,
18#
Jianguomennei Street
Dongcheng
District,
Beijing,
China 100005
|
Nil
|
Nil
|
|||||
All
officers and directors as a group
|
1,987,500
shares
|
7.95 | % |
(1)
|
The
persons named above do not have any specified rights to acquire, within 60
days of the date of this registration statement any options, warrants or
rights and no conversion privileges or other similar obligations
exist.
|
44
(2)
|
Yonglin
Du is our CEO, President and a
director.
|
(3)
|
Qinna
Zeng is our Corporate Secretary.
|
(4)
|
Less
than one percent of the total number of shares outstanding.
|
(5)
|
Hua
Meng is our Chief Financial
Officer.
|
We do not
have any securities that are convertible into common stock.
Changes in
Control
There are
no arrangements that the management is aware of that may result in changes in
control as that term is defined by the provisions of Item 403(c) of Regulation
S-K. There are no provisions within our Articles or Bylaws that would delay or
prevent a change of control.
Item
13 Certain Relationships and Related Transactions
(a) Transactions with
Related Persons
None.
(b)
Parents
None.
(c)Promoters and Control
Persons
Prior to
the reverse merger on January 30, 2005, Comp Hotel International Ltd. ("Comp
Hotel") and Waywood Investment Ltd. ("Waywood") collectively owned 100% of
capital stock of our predecessor, Norton Industries Corp. On January 30, 2005,
Comp Hotel and Waywood entered into a share exchange agreement with Bauer Invest
Inc., a British Virgin Islands corporation ("Bauer"), pursuant to which Comp
Hotel and Waywood sold all outstanding capital shares, or 5,000,000 shares of
common stock of Norton, to Bauer in exchange for $100,000 in cash and 5% of the
post-acquisition shares. As a result, Waywood and Comp Hotel received 150,000
and 850,000 shares, respectively, of our common stock. The numbers of shares
they received were proportionate to the respective numbers of shares they
originally owned in Norton Industries Corp.
Waywood
Investment Ltd. ("Waywood") is the sole promoter of our predecessor, Norton
Industries Corp ("Norton"). Waywood is a small business consulting firm
incorporated in the British Virgin Islands. Jianjun Zhang is the sole
shareholder of Waywood. From inception of Norton until the reverse merger of
Norton on January 30, 2005, Mr. Zhang was the sole director and executive
officer of Norton. On February 26, 2003, Waywood entered into a stock purchase
agreement with Comp Hotel International Ltd., a British Virgin Islands
corporation ("Comp Hotel"), pursuant to which Comp Hotel acquired 4,250,000
shares, or 85%, of Norton's common stock from Waywood in exchange for $42,500 in
cash. Comp Hotel is a travel-related service provider operating in Hong Kong,
and is controlled by South Sea Petroleum Holdings Limited, a Hong Kong
corporation, whose principal business is the exploration and production of crude
oil in Indonesia. Immediately prior to the date of reverse merger between Bauer
Invest and Norton Industries Corp., Comp Hotel, owned 85%, and Waywood owned
15%, of Norton's issued and outstanding shares, respectively.
45
In
connection with issuance of additional common shares as a result of capital
increase in our subsidiary, pursuant to a no-dilution clause of the Share
Exchange Agreement dated January 30, 2005, on September 21, 2005, we issued
212,500 and 37,500 shares of our common stock to Comp Hotel and Waywood,
respectively.
Related Party
Loans
Set forth
below is a chart of all related party loans (lines of credit) extended to us as
of December 31, 2009:
Party
|
Current
Loan Balance
|
Date
|
|||
Dahua
Project Management Group
|
$ | 758,238 |
October
2001
|
||
Donghui
Du
|
7,772 |
December
2001
|
|||
Dahua
Weiye Investment Co.
|
764,283 |
February
2009
|
|||
Dahua
Farming
|
153,130 |
October
2001
|
|||
Total
|
$ | 1,683,423 |
All the
related parties set forth above are parties in which Mr. Yonglin Du, our
president and CEO, holds an executive position. Donghui Du is Mr. Yongling Du’s
son.
We
entered a written loan agreement with Dahua Project Management Group. Please see
Exhibit 10. 6. All other loans or lines of credit are extended based
on verbal agreements. All the loans so borrowed are unsecured. The money we
borrow from them bear’s interest at an annual rate of 6%, then prevailing market
rate, repayable within 30 days upon demand by lender.
Item
14. Exhibits
(a) The
following exhibits are filed as part of this report.
Exhibit Number
|
Description
|
|
2.1
|
Share
Exchange Agreement dated January 30, 2005 between Norton Industries Corp.
and Bauer Invest, Inc. (Incorporated by reference to Current Report
on Form 8-K filed on February 1, 2005, Commission File No.
0-49852).
|
|
2.2
|
Share
Exchange Agreement dated January 26, 2003 between Norton Industries Corp.
and Comp Hotel International Ltd. (Incorporated by reference to
Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File No. 333-122622).
|
|
2.3
|
Share
Transfer Agreement dated May 25, 2004 between Bauer Invest, Inc. and
Dahua Project Management Group Co., Ltd. (Incorporated by reference
to Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File 333-122622).
|
46
3.1
|
Articles
of Incorporation (Incorporated by reference to Registration Statement on
Form 10- SB filed on June 10, 2002, Commission File No.
0-49852).
|
|
3.2
|
Certificate
of Amendment of Articles of Incorporation (Incorporated by reference
to Registration Statement on Form SB-2 filed on February 8, 2005,
Commission File No. 333- 122622).
|
|
3.3
|
Bylaws
(Incorporated by reference to Registration Statement on Form 10-SB filed
on June 10, 2002 Commission File No. 0-49852).
|
|
4.1
|
Specimen
Stock Certificate (Incorporated by reference to Registration Statement on
Form 10-SB/A filed on July 29, 2002, Commission File No.
0-49852).
|
|
10.1
|
Land
Use Rights Transfer Agreement (Incorporated by reference to Registration
Statement on Form SB-2/A filed on November 14, 2005, Commission File
No. 333-122622)
|
|
10.2
|
Agreement
dated September 24, 2003, between Beijing Dahua Real Estate and
Aocheng Construction Management Ltd. (Incorporated by reference to
Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File No. 333-122622)
|
|
10.3
|
National
Land Use Permit issued on October 20, 2003 (Incorporated by reference
to Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File No. 333-122622)
|
|
10.4
|
Development
Planning Permit issued on September 4, 2003 (Incorporated by reference
to Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File No. 333-122622)
|
|
10.5
|
Development
Construction Permit issued on September 28, 2003 (Incorporated
by reference to Registration Statement on Form SB-2/A filed on
November 14, 2005, Commission File No.
333-122622).
|
|
10.6
|
Line
of Credit Agreement between Beijing Dahua Real Estate and Dahua
Project Management Group (Incorporated by reference to Registration
Statement on Form SB-2/A filed on November 14, 2005, Commission File
No. 333-122622).
|
|
10.7
|
Agreement
between Beijing Dahua Real Estate Development Ltd. and
Beijing Dahua Gonghong Economic Research Center
dated June 18, 2003 (Incorporated by reference to Registration
Statement on Form SB-2/A filed on March 8, 2006, Commission File No.
333- 122622).
|
|
10.8
|
Agreement
between Beijing Dahua Real Estate Development Ltd. and
Beijing Dahua Gonghong Economic Research Center
dated June 2004 (Incorporated by reference to Registration Statement
on Form SB-2/A filed on March 8, 2006, Commission File No.
333- 122622).
|
47
14.1
|
Code
of Business Conduct and Ethics (Incorporated by reference to Registration
Statement on Form SB-2 filed on February 8, 2005, Commission File No.
333-122622).
|
|
21
|
Subsidiaries
of the Registrant (Incorporated by reference to Registration Statement on
Form SB-2/A filed on November 14, 2005, Commission File No.
333-122622).
|
|
31.1
|
Section
302 Certification by CEO.
|
|
31.2
|
Section
302 Certification by CFO.
|
|
32.1
|
Section
906 Certification by CEO
|
|
32.2
|
Section
906 Certification by CFO.
|
Item
15 Principal Accountant Fees and Services
The
following is a summary of the fees billed to us by our principal accountants
during the fiscal years ended December 31, 2009 and 2008:
Fee category
|
2009
|
2008
|
||||||
Audit
fees
|
$ | 42,000 | $ | 42,000 | ||||
Audit-related
fees
|
- | - | ||||||
Tax
fees
|
- | 3,850 | ||||||
All
other fees
|
- | - | ||||||
Total
fees
|
$ | 42,000 | $ | 45,850 |
Audit
Fees consists of fees for professional services rendered by our principal
accountants for the audit of our annual financial statements or services that
are normally provided by our principal accountants in connection with statutory
and regulatory filings or engagements.
As of
December 31, 2009, we did not have an audit committee. Our Board of Directors
reviewed and pre-approved all audit and non-audit services provided by Child,
Van Wagoner & Bradshaw, PLLC and has determined that the firm's provision of
such services to us during fiscal 2009 is compatible with and did not impair the
independence of Child, Van Wagoner & Bradshaw, PLLC. It is the practice of
our Board of Directors to consider and approve in advance all auditing and
non-auditing services provided to us by our independent auditors in accordance
with the applicable requirements of the Securities and Exchange
Commission.
48
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DAHUA,
INC.
Date:
March 31, 2010
By:
|
/s/
|
|
Yonglin
Du, President and
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
/s/
|
March
31, 2010
|
||
Yonglin
Du, President, Chief Executive Officer and Director
|
Date
|
||
(Principal
Executive Officer)
|
|||
/s/
|
March
31, 2010
|
||
Hua
Meng, Chief Financial Officer
|
Date
|
||
(Principal
Financial Officer and Principal Accounting Officer)
|
|||
/s/
|
March
31, 2010
|
||
Wulong
Wang, Director
|
Date
|
49