chrn10q630.htm
United
States
Securities
and Exchange Commission
Washington,
D. C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT PUSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
[
]
|
TRANSITION
REPORT PUSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _____ to _____
Commission
File No.
0-25380
CHINA
HUAREN ORGANIC PRODUCTS, INC.
(Exact
Name of Small Business Issuer as specified in its Charter.)
DELAWARE |
|
43-1401158 |
(State of Other
Jurisdiction of incorporation or organization) |
|
(I.R.S. Employer
I.D. No.) |
c/o
American Union Securities, Inc. , 100 Wall Street, 15th Floor,
New York, NY 10005
(Address
of Principal Executive Offices, including zip code)
212-232-0120
(Issuer's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 ý No
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
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
reporting
company)
|
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No ý
The
number of shares of common stock, par value $.01 per share, outstanding as
of August 19, 2008 was 14,699,853.
CHINA HUAREN
ORGANIC PRODUCTS, INC.
FORM
10-Q
|
QUARTERLY
PERIOD ENDED June 30, 2008
|
INDEX
TABLE
OF CONTENTS
PART
1 - FINANCICAL INFORMATION |
|
|
|
|
|
Page |
Item
1: |
Financial
Statemtents |
3
|
|
|
|
Item 2: |
Management's
Discussion and Analysis of Financial Condition |
10 |
|
and Results of
Operations |
|
|
|
|
Item 3: |
Quantitative and
Qualitative Disclosures About Market Risk |
11 |
|
|
|
Item 4T: |
Controls and
Procedures |
11 |
|
|
|
PART
11 - OTHER INFORMATION |
|
|
|
Item 1: |
Legal
Proceedings |
12 |
|
|
|
Item 1A: |
Risk
Factors |
12 |
|
|
|
Item 2: |
Unregistered Sales
of Equity Securities and Use of Proceeds |
12 |
|
|
|
Item 3: |
Defaults Upon Senior
Securities |
12 |
|
|
|
Item 4: |
Submission of
Matters to a Vote of Security Holders |
12 |
|
|
|
Item 5: |
Other
Infomration |
12 |
|
|
|
Item 6: |
Exhibits |
12 |
Part
I
Financial
Information
Item
1.
|
Financial
Statements
|
CHINA HUAREN ORGANIC PRODUCTS INC. AND SUBSIDIARY
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
Assets
|
|
|
|
|
|
|
Unaudited
|
|
Audited
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
$
|
14,510
|
$
|
76,658
|
|
Accounts
receivable, net of allowance for doubtful amounts of
$48,567
|
|
|
|
|
|
|
and
$45,668 , respectively
|
|
4,808,161
|
|
4,521,106
|
|
Inventories
|
|
|
|
300,373
|
|
762,972
|
|
Prepaid
expenses
|
|
1,572,500
|
|
1,591,952
|
|
Other
current assets
|
|
8,019
|
|
110
|
|
|
|
Total
Current Assets
|
|
6,703,563
|
|
6,952,798
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
9,211
|
|
10,670
|
Deposit
for Purchase of Fixed Assets
|
|
3,927,424
|
|
3,692,950
|
|
|
|
Total
Assets
|
|
10,640,198
|
|
10,656,418
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
98,824
|
|
87,732
|
|
Loan
from officers/stockholders
|
|
93,670
|
|
90,132
|
|
Tax
payable
|
|
|
|
1,677,889
|
|
1,570,078
|
|
Other
current liabilities
|
|
481
|
|
5,127
|
|
|
|
Total
Current Liabilities
|
|
1,870,864
|
|
1,753,069
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
Series
C preferred stock, $0.01 par value, 150,000 shares
authorized
|
|
|
|
|
|
|
100,000 shares
issued and outstanding
|
|
1,000
|
|
1,000
|
|
Common
stock,$0.01 par value,100,000,000 shares authorized
|
|
|
|
|
|
|
14,699,853
shares issued and outstanding
|
|
146,999
|
|
146,999
|
|
Additional
paid-in capital
|
|
6,043,876
|
|
6,043,876
|
|
Reserve
fund
|
|
|
259,244
|
|
259,244
|
|
Retained
earnings
|
|
766,752
|
|
1,447,838
|
|
Accumulated
other comprehensive income
|
|
1,551,463
|
|
1,004,392
|
|
|
|
Total
Shareholders’ Equity
|
|
8,769,334
|
|
8,903,349
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
10,640,198
|
$
|
10,656,418
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
HUAREN ORGANIC PRODUCTS INC. AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
|
Unaudited
|
Revenues
|
|
|
$
|
-
|
$
|
1,345,385
|
|
-
|
$
|
6,580,678
|
Cost
of Goods Sold
|
|
|
-
|
|
789,864
|
|
-
|
|
5,773,838
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
-
|
|
555,521
|
|
-
|
|
806,840
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
2,331
|
|
3,102
|
|
4,912
|
|
73,048
|
|
General
and administrative expenses
|
|
47,781
|
|
99,712
|
|
61,835
|
|
164,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operation Expenses
|
|
|
50,112
|
|
102,814
|
|
66,747
|
|
237,134
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income From Operations
|
|
(50,112)
|
|
452,707
|
|
(66,747)
|
|
569,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,656
|
|
4,228
|
|
9,180
|
|
8,423
|
|
Other
expense, net
|
|
|
(45,673)
|
|
(32,629)
|
|
(80,582)
|
|
(77,463)
|
|
Loss
on disposal of inventory
|
|
(542,937)
|
|
-
|
|
(542,937)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expenses
|
|
|
(583,954)
|
|
(28,401)
|
|
(614,339)
|
|
(69,040)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income Before Income Taxes
|
|
(634,066)
|
|
424,306
|
|
(681,339)
|
|
500,666
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
-
|
|
140,021
|
|
-
|
|
165,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$
|
(634,066)
|
$
|
284,285
|
|
(681,086)
|
$
|
335,446
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
189,733
|
|
124,251
|
|
547,071
|
|
209,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
(Loss) Income
|
$
|
(444,333)
|
$
|
408,536
|
|
(134,015)
|
$
|
544,920
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Per Common Share
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
$
|
(0.04)
|
$
|
0.02
|
|
(0.05)
|
$
|
0.02
|
-Diluted
|
|
|
$
|
(0.04)
|
$
|
0.02
|
|
(0.05)
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Common Shares Outstanding*
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
|
14,699,853
|
|
14,699,853
|
|
14,699,853
|
|
14,699,853
|
-Diluted
|
|
|
|
14,999,850
|
|
14,999,850
|
|
14,999,850
|
|
14,999,850
|
|
|
|
|
|
|
|
|
|
|
|
|
*
As restated to reflect recapitalization and the subsequent reverse stock
split.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA HUAREN ORGANIC PRODUCTS INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
Unaudited
|
|
Unaudited
|
Cash
Flows From Operating Activities:
|
|
|
|
|
Net (Loss)
Income
|
|
$
|
(681,086)
|
$
|
335,446
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
|
|
Provided
by Operating Activities
|
|
|
|
|
|
Bad
debt adjustment
|
|
|
-
|
|
20,358
|
|
Depreciation
|
|
|
2,076
|
|
6,145
|
|
Loss
on disposal of inventory
|
|
542,937
|
|
-
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
(4,026,577)
|
|
Inventories
|
|
|
(47,727)
|
|
4,417,882
|
|
Other
receivable
|
|
|
(575)
|
|
-
|
|
Employee
travel and operation advance
|
|
-
|
|
15,248
|
|
Advances
to suppliers
|
|
|
(7,290)
|
|
49,478
|
|
Prepaid
expenses
|
|
|
113,333
|
|
194,259
|
|
Accounts
payable and accrued expenses
|
|
5,192
|
|
67,777
|
|
Customer
deposit
|
|
|
-
|
|
(75,052)
|
|
Tax
payable
|
|
|
-
|
|
423,251
|
|
Other
current liabilities
|
|
|
(4,675)
|
|
642
|
Net
Cash (Used in) Provided by Operating Activities
|
|
(77,815)
|
|
1,428,857
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
Proceeds
from repayment of related party advance
|
|
-
|
|
37,441
|
|
Payment
for deposit of purchase of fixed assets
|
|
-
|
|
(1,513,948)
|
Net
Cash Used in Investing Activities
|
|
-
|
|
(1,476,507)
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
Proceeds
from officers/shareholders loans
|
|
72,896
|
|
2,202
|
|
Payment
for loan to officers/shareholders
|
|
(74,937)
|
|
1,885
|
Net
Cash (Used in) Provided by Financing Activities
|
|
(2,041)
|
|
4,087
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Equivalents
|
|
(79,856)
|
|
(43,563)
|
Effect
of Exchange Rate Changes on Cash
|
|
17,706
|
|
(3,026)
|
Cash
and Equivalents, at Beginning of Period
|
|
76,660
|
|
86,266
|
Cash
and Equivalents, at End of Period
|
$
|
14,510
|
$
|
39,677
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
HUAREN ORGANIC PRODUCTS INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Basis of Preparing Accounting Statement
The
accompanying unaudited consolidated financial statements of China Huaren Organic
Products Inc. and subsidiary (the "Company") have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and pursuant to the requirements for reporting on Form
10-Q. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for annual financial statements. However, the information included in
these interim financial statements reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the consolidated financial position and
the consolidated results of operations. Results shown for interim periods are
not necessarily indicative of the results to be obtained for a full year. The
consolidated balance sheet information as of December 31, 2007 was derived from
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-KSB. These interim financial statements should be read in
conjunction with that report.
2.
Organization and Nature of Business
China
Huaren Organic Products Inc. (“the Company”) is a holding company with one
subsidiary: China Organic Health Products Inc. (“China Organic”). China Organic
was incorporated in 2006 as a Delaware corporation. China Organic is a holding
company that owned 100% of registered capital of Jilin Huaren Organic Health
Products Co., Ltd. ("Jilin Huaren "), a corporation organized under the laws of
The People’s Republic of China (“PRC”).
In
November 2006, the Company acquired China Organic in exchange for shares of
common stock and shares of Series D Preferred Stock of the Company. The
capitalizations are described in further detail in Note 13 to the accompanying
consolidated financial statements.
China
Organic never initiated any business activity. Most of the Company's activities
are conducted through its 100% owned subsidiary Jilin Huaren. Jilin Huaren is
engaged in the business of research, development, production and sale of organic
foods and healthcare products. All of Jilin Huaren’s business is currently
in PRC.
Jilin
Huaren is a domestic enterprise incorporated in Jilin district of PRC in
February 2000. Jilin Huaren was formerly known as Jilin KangJian Technology
Trade Center (Jilin KangJian) and changed its name to Jilin Huaren Organic
Health Products Co., Ltd. in December 23, 2004.
3.
Net loss during Transition Period and Management Plans
During
the fourth quarter of 2007, the sales revenue of Jilin Huaren had dropped down
significantly and the Company incurred a net loss. During the first six months
of 2008, the sales revenue was none. As of June 30, 2008, the Company had
$14,510 cash and equivalents and $4,808,161 of net trade receivables to fund
short-term working capital requirements. But these net trade receivables have
been outstanding for more than one year.
The
Company’s ability to continue as a going concern and its future success is
dependent upon its ability to find a better management team to handle the
Company’s business in China, to merge with a better business, and to raise
capital in the near term to (1) satisfy its current obligations, and (2) fund
the successful wide scale development and marketing of its
products.
The
Company presently has ongoing discussions and negotiations with a number of
additional financing alternatives and merger targets. However, the Company has
no definitive agreements to provide funding at this time. In addition, the
Company has no firm commitment with any merger target.
The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4.
Summary of Significant Accounting Policies
a.
Use of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
b.
Revenue Recognition
Revenue
is recognized at the date of shipment to customers, and when the price is fixed
or determinable, the delivery is completed, no other significant obligations of
us exist and collectibles is reasonably assured. All revenues for the six months
ended June 30, 2007 were product sales revenue recorded net of value added
taxes. There were no sales during the first six months of 2008.
Sales
transactions not meeting all the conditions of the full accrual method are
accounted for using the deposit method of accounting. Under the deposit method,
all costs are capitalized as incurred, and payments received from the buyer are
recorded as a customer deposits.
c.
Foreign Currency Translation
The
Company’s reporting currency is the U.S. dollar. The functional currencies of
the Company's subsidiaries are local currencies, primarily the Chinese Renminbi.
The financial statements are translated into U.S. dollars using period-end rates
of exchange for assets and liabilities and average rates of exchange for the
period for revenues and expenses. Translation adjustments resulting from the
process of translating the local currency financial statements into U.S. dollars
are included in other comprehensive income or loss of statements of operations
and comprehensive income (loss).
CHINA
HUAREN ORGANIC PRODUCTS INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.
Summary of Significant Accounting Policies (Continued)
d. Income Taxes
The
Company and its U. S. subsidiary will file consolidated federal income tax
returns and individual state franchise tax returns. The Company’s PRC subsidiary
files income tax returns under the Income Tax Law of the People's Republic of
China concerning Foreign Investment Enterprises and Foreign Enterprises and
local income tax laws.
The
Company follows Statement of Financial Accounting Standards No. 109 - Accounting
for Income Taxes, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
e.
Recent Pronouncements
In May
2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.162, “The Hierarchy of Generally
Accepted Accounting Principles”. SFAS 162 indicates the entity (not its auditor)
that is responsible for selecting accounting principles for financial statements
that are presented in conformity with GAAP. Accordingly, the GAAP hierarchy
should reside in the accounting literature established by the FASB and is
issuing SFAS 162 to achieve that result. SFAS 162 also identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company is in the process of evaluating the new disclosure
requirements under SFAS 162.
In March
2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.161,"Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133" ("SFAS 161").
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format;(2) the
disclosure of derivative features that are credit risk-related; and
(3)cross-referencing within the footnotes. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 (that is, January 1, 2009, for entities with calendar year-ends), with
early application encouraged. The Company is in the process of
evaluating the new disclosure requirements under SFAS 161.
In
December 2007, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
160, “Non-controlling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51” which clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. This statement also
changes the way the consolidated income statement is presented. It requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. In addition,
it requires disclosure, on the face of the consolidated statement of income, of
the amounts of consolidated net income attributable to the parent and to the
non-controlling interest.
SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal years
beginning on or after December 15, 2008 (that is, January 1, 2009, for entities
with calendar year-ends). Earlier adoption is prohibited. The company is
currently in the process of evaluating the effect, if any, the adoption of SFAS
No. 160 will have on its consolidated results of operations, financial position,
and financial disclosure.
In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions. This replaces SFAS 141's cost-allocation process,
which required the cost of an acquisition to be allocated to the individual
assets acquired and liabilities assumed based on their estimated fair values.
SFAS 141R also requires the acquirer in a business combination achieved in
stages (sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquiree, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS 141R). SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). An
entity may not apply it before that date. The Company is currently evaluating
the impact that adopting SFAS 141R will have on its financial statements.
5.
Accounts receivable
During
the first quarter of 2007, the Company, facing an imminent expiration date on
organic crops that it had received from Wancheng, sold those crops at cost to
Yushu Wanli Co., Ltd (“Yushu”) pursuant to a sales contract. This sale on March
15, 2007 increased the Company’s accounts receivable by approximately $5,877,270
(equivalent to RMB 40,312,786), which included the merchandise price plus VAT
and other sales taxes. Yushu Wanli Co., Ltd. is a non-related third party. Based
upon the sales contract, Yushu started to pay the amount due to the Company in
May 2007. As of June 30, 2008, the outstanding balance due from Yushu was
$4,856,728 (equivalent to RMB 33,312,786). It represented all of
the Company’s gross accounts receivable balance as of June 30,
2008.
6.
Inventories
Inventories
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
|
|
|
Unaudited
|
|
Audited
|
Finished
goods
|
$
|
258,038
|
$
|
242,633
|
Work
in process
|
|
-
|
|
480,532
|
Packaging
materials and other
|
|
42,335
|
|
39,807
|
|
|
|
|
|
|
Total
|
|
$
|
300,373
|
$
|
762,972
|
|
|
|
|
|
|
7. Prepaid
Expenses
Prepaid
expenses consist of the following:
|
|
|
June
30, 2008
|
|
December
31, 2007
|
|
|
|
Unaudited
|
|
Audited
|
Prepaid
office rent
|
$
|
379
|
$
|
267
|
Prepaid
lease fee for the right to use lands
|
|
1,572,121
|
|
1,591,685
|
|
|
$
|
1,572,500
|
$
|
1,591,952
|
Total
|
|
|
|
|
|
8.
Property and Equipment, Net
Property and equipment at cost, less
accumulated depreciation, consists of the following:
|
Estimated
Life
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Office
equipments
|
5
years
|
|
$ |
23,322 |
|
|
$ |
21,930 |
|
Subtotal
|
|
|
|
23,322 |
|
|
|
21,930 |
|
Less:
Accumulated depreciation
|
|
|
|
14,111 |
|
|
|
11,260 |
|
Total
|
|
|
$ |
9,211 |
|
|
$ |
10,670 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expenses charged to operations were $2,076 and $6,145 for the six months ended
June 30, 2008 and 2007, respectively.
9.
Deposit for Purchase of Fixed Assets
Starting
from late 2005, the subsidiary in China, Jilin Huaren, has intended to purchase
an office building from an unrelated company in P. R. China. The purchase price
was $1,093,438 (equivalent to RMB 7,500,000) and fix up construction cost was
$384,685 (equivalent to RMB 2,638,593). During 2006 and 2007, all these
cost had been paid to the seller by Jilin Huaren, but the title to the property
has not been transferred. Jilin Huaren had occupied the property since 2005
without paying any rent. Accordingly, Jilin Huaren has recognized $18,359
(equivalent to RMB 129,600) of rent expenses per year since October 1,
2005, and has recognized an equal amount of interest income imputed on the
payments that Jilin Huaren made to the seller since 2005. Management has
estimated the value of the contribution items, and expects to get a full refund
of $1,478,123 (equivalent to RMB 10,138,593) if the purchase does not go
through.
On March
1, 2007, Jilin Huaren signed a letter of intent with a village in Jilin
P.R.China to purchase a land use right from the village. This letter of intent
did not list the total purchase price, but Jilin Huaren had deposited $2,449,301
(equivalent to RMB16,800,000) to the village as of June 30, 2008. In addition,
the title to the land use rights has not passed to Jilin Huaren yet as of June
30, 2008.
The Company’s total deposits
for purchase of fixed assets, therefore, consist of the
following:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Deposit
for purchase office building
|
|
$ |
1,478,123 |
|
|
$ |
1,389,876 |
|
Deposit
for purchase land use right from village
|
|
|
2,449,301 |
|
|
|
2,303,074 |
|
Total
|
|
$ |
3,927,424 |
|
|
$ |
3,692,950 |
|
|
|
|
|
|
|
|
|
|
10.
Operating lease commitments
The
Company leases office space and plant lands under operating lease
agreements.
The
following is a schedule of future minimum rental payments required under
operating leases that had initial or remaining non-cancelable lease terms
beyond June 30, 2008.
Quarter
Ending June 30,
|
|
|
|
2009
|
|
$ |
147,308 |
|
2010
|
|
|
145,792 |
|
2011
|
|
|
145,792 |
|
2012
|
|
|
145,792 |
|
2013
|
|
|
145,792 |
|
Thereafter
|
|
|
6,281,193 |
|
Total minimum payments required
|
|
$ |
7,011,669 |
|
|
|
|
|
|
Rent
expenses amounted to $81,203 and $202,194 for the six months ended June 30, 2008
and 2007, respectively.
11.
Taxation
a.
Corporation Income Tax (“CIT”)
The
Company and its US subsidiary will file consolidated federal and
individual state franchise tax returns. The Company’s PRC subsidiary files
income tax returns under the Income Tax Law of the People's Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and local
income tax laws.
In
accordance with the relevant PRC tax laws and regulations, the Company’s PRC
subsidiary was subject to CIT at 33% and 25% tax rate before and after January
1, 2008, respectively.
b.
Value Added Tax (“VAT”)
The
Company is subjected to VAT on merchandise sales in PRC. For the six months
ended June 30, 2008 and 2007, a small scale VAT tax rate of 4% was
applicable.
c.
Business Tax (“BT”)
The
Company is also subject to Business Tax, which is charged on the service
income at a rate of 5% in accordance with the tax law in Jilin District of
PRC.
d.
Taxes Payable
As of
June 30, 2008 and December 31, 2007, tax payable consists of the
following:
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Value-added
tax
|
|
$ |
593,229 |
|
|
$ |
557,813 |
|
Income
tax
|
|
|
1,025,806 |
|
|
|
964,564 |
|
Delaware
franchise taxes
|
|
|
30,654 |
|
|
|
21,186 |
|
Individual
income tax withholdings
|
|
|
6,515 |
|
|
|
6,126 |
|
City
construction, education, and other taxes
|
|
|
21,685 |
|
|
|
20,389 |
|
Total
|
|
$ |
1,677,889 |
|
|
$ |
1,570,078 |
|
|
|
|
|
|
|
|
|
|
12.
Foreign Subsidiary
a. Operations
Substantially
all of the Company’s operations are carried out through its subsidiary located
in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal
environments in the PRC. The Company’s business may be influenced by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency fluctuation and remittances and methods of
taxation, among other things.
b. Dividends
and Reserves
Under
laws of the PRC, net income after taxation can only be distributed as dividends
after appropriation has been made for the following: (i) cumulative prior years'
losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at least
10% of net income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's registered capital;
(iii) allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory Common Welfare
Fund", which is established for the purpose of providing employee facilities and
other collective benefits to employees in China; and (iv) allocations to any
discretionary surplus reserve, if approved by shareholders.
As
of June 30, 2008 and as of December 31, 2007, the Company’s PRC
subsidiaries established and segregated in retained earnings an aggregate amount
of $259,244 respectively, for the Statutory Surplus Reserve and the Statutory
Common Welfare Fund.
13.
Stockholders Equity
On
November 13, 2006, the Company acquired all of the outstanding capital
stock of China Organic Health Products, Inc. (“China Organic”). In
connection with the closing of the acquisition (the “Share Exchange”), the
Company issued to the shareholders of China Organic (a) 27,486,175 shares of
common stock and (b) Series D Preferred Stock, which was convertible into
469,760,000 shares of common stock. As a part of the merger, we changed our
corporate name to "China Huaren Organic Products,
Inc. from Ultradata Systems, Inc. " In addition, the Company brought
into effect a 1:39 reverse split of its outstanding common shares and an
increase in the number of authorized shares of common stock from 50,000,000
shares, par value $0.01 to 100,000,000 shares, $0.01 par value. After
recapitalization, the Series D Preferred Stock was converted into 12,045,128
common shares. As a result, there were 14,699,853 common shares
issued and outstanding, par value $0.01 on June 30,
2008.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following analysis of our
consolidated financial condition and results of operations for the six months
ended June 30, 2008 and 2007, should be read in conjunction with the
consolidated financial statements, including footnotes, and other information
presented in our annual report on Form 10-KSB for the year ended December 31,
2007, as filed with the Securities and Exchange Commission on May 9,
2008.
Results
of Operations
Jilin
Huaren commenced its marketing operations in March of 2005. In the
spring of both 2006 and 2007, however, we found ourselves with large
inventories of perishable goods that we were unable to sell before their
expiration dates. So at both times we transferred the goods to
another distributor at cost. The transaction in 2007 involved a sale
to Yushu Wanli Co., Ltd. of foodstuffs for $5,877,270 (equivalent at that time
to RMB 40,312,786) (including tax) under a contract that called for
payments to begin in cash in May 2007. This transaction relieved us of the
problem of perishable inventory. But the result was that we realized
only $251,319 in gross profit on the transaction. This gross margin is
inadequate to provide the funds we need for more than a minimal level of
operations.
The
problem with the Yushu Wanli transaction was compounded when Yushu Wanli stopped
making payments on the account. During the second and third quarters of 2007, we
received $934,227 from this client. Since that time we have received
nothing. We believe that the account is good, and that it will
eventually be paid in full. But we do not know when payment will be
received.
Due to
the slow growth of sales and low margins achieved, in the fall of 2007 we
transferred operational control over Jilin Huaren to a group of experienced food
supplies managers. Our contract with the management group provided
that they would receive all net earnings from Jilin Huaren in excess of
specified amounts: 3 million RMB in the period from August to December 2007, 14
million RMB in 2008, etc. Unfortunately, the transfer of control to this new
group brought sales to a halt. In the fourth quarter of 2007 we
realized only $134,778 in revenue; in the first six months of 2008 we had no
revenue. For this reason we have terminated the management agreement,
and have appointed new managers, who assumed their positions in late May
2008.
Our
operations during the first six months of 2008 produced only a low level of
operating expenses. For the three and six month periods ended June
30, 2008, our operating expenses were $50,112 and $66,747, respectively, with
the second quarter being somewhat higher than the first quarter due to the
arrival of new managers in May 2008. Those amounts likewise
represented our loss from operations for those periods, since we had no
revenue. By comparison, during the three and six month periods ended
June 30, 2007, during which our company had profitable operations, we incurred
operating expenses of $102,814 and $237,134, respectively. Our
operating expenses for the future will depend in large part on the level of
operations that our new managers are able to
achieve.
During
the six months ended June 30, 2008, we incurred a net loss of
$681,086. The greater portion of this loss was caused by a loss
on disposal of inventory in amount of $542,937. The loss on
disposal of inventory occurred as we were unable to process the organic grains
and raw materials into final packaged goods for sale to the end-user consumers.
As a result, the perishable foodstuffs became unusable and subsequently marked
as a loss on the disposal of inventory. Excluding the loss on disposal of
inventory, our net loss for the three months ended June 30, 2008 was $91,129, as
“other expenses” of $41,017 were added to our loss from
operations.
If our new managers are able to revive our business operations, our
business plan should provide an opportunity for those operations to be
profitable. By way of example, in the first six months of 2007,
despite the relatively low margin realized on our sales, our operations were
profitable due to our low level of expenses. Our net income for the first six
months of 2007 was $335,446. The fact that we are able to operate profitably in
the first six months of 2007, despite low gross profit, is attributable to two
essential characteristics of our business model:
·
|
There
are thousand of individuals involved in selling our products – but we
incur no payroll obligation for them. They are owners or employees of the
companies that distribute for us. So our selling expenses were
less than 2% of revenue in the first six months of 2007 and have been less
than 4% of our revenue since we began operations in
2005.
|
·
|
Our
manufacturing activity is completely outsourced to enterprises dedicated
to organic agricultural manufacturing. As a result, during the
first six months of 2007 our general and administrative expense equaled
less than 2.5% of our revenue. During the first six months of
2008 and 2007 our depreciation expense – often a major factor in
agribusiness operations – were only $2,076 and 6,145, respectively, since
we own no manufacturing equipment.
|
Our
business operates entirely in Chinese Renminbi, but we report our results in our
SEC filings in U.S. Dollars. The conversion of our accounts from RMB
to Dollars results in translation adjustments, which are reported as a middle
step between net income and comprehensive income. The net income is added to the
retained earnings on our balance sheet; while the translation adjustment is
added to a line item on our balance sheet labeled “accumulated other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our
business. During the first six months of 2008 and 2007, the
unrealized gain on foreign currency translations added $547,180, and
$209,474 to our accumulated other comprehensive income.
Our
prospects for the future will depend on the success of our new managers, who
assumed control of Jilin Huaren in May 2008. We believe that our
business plan, if properly implemented by competent management, can be
successful and that we have put in place most of the resources necessary to
permit the plan to be implemented. But the new management will have
to revive the Company’s operations almost completely. Whether they
will be able to overcome the inertia of recent stagnancy in our operations will
be known only with the passage of time.
Liquidity and Capital
Resources
On June
30, 2008 we had working capital of $4,832,699, $367,030 less than on
December 31, 2007. The reduction was primarily the result of the loss we
sustained in the first six months of 2008. We had no long-term
liabilities. However, our working capital consisted primarily of the account
receivable from Yushu Wanli Co., Ltd. (on which we have received no payment
since September 2007) and prepaid expenses, which are mostly advances for lease
fees of land on which we will plant our future crops. Since the market for our
organic products continues
to grow, we do not anticipate any difficulty in liquidating the inventory.
However, we lack the cash necessary to make our distribution network more
efficient, having had only $14,510 in cash and equivalents as of June 30,
2008. To obtain the necessary cash, we expect make more effort in
collecting our account receivable. We will also be seeking to acquire
the necessary funds from outside sources or majority shareholders in the next
quarter of 2008.
During
2005 we contracted to purchase an office building for our operations. We have
deposited $1,478,123 (equivalent to RMB 10,138,593) with the seller to cover the
cost of the building and certain improvements that we require. Title
to the building has not passed to us yet, however. So our investment
is recorded on the balance sheet as a “deposit for purchase of fixed
assets.” In addition, on March 1, 2007 we signed a letter of intent
with a village in Jilin, P.R.China to purchase a land use right from the
village. This letter of intent did not list the total purchase price, but we
have deposited $2,449,301 (equivalent to RMB16.8 million) to the village. This
sum represents the remainder of the “deposit for purchase of fixed assets” on
our balance sheet.
The cash
demands of our business mean that in order to make capital improvements we will
require additional capital from external sources. Our plan is to
acquire additional organic soil resources in the near future, and to invest in
manufacturing capability over the longer term. To fund those
additions to our balance sheet, we intend to sell equity. At the
present time, however, we have received no commitments from any
source.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
Item
3. Quantitative
and Qualitative Disclosures about Market Risk
A smaller reporting company is not
required to provide the information required by this Item.
Item
4T. Controls
and Procedures
Evaluation of Disclosure Controls
and Procedures.
Our Chief
Executive Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of June 30, 2008.
Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934, “disclosure controls and
procedures??means controls and other procedures that are designed to insure that
information required to be disclosed by China Huaren in the reports that it
files with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the time limits specified in the Commission’s
rules. “Disclosure controls and procedures” include, without
limitation, controls and procedures designed to insure that information China
Huaren is required to disclose in the reports it files with the Commission is
accumulated and communicated to our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding required
disclosure. Based on his evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that China Huaren’s system of disclosure
controls and procedures was effective as of June 30, 2008 for the purposes
described in this paragraph.
Changes in Internal Control over Financial Reporting
During the six months ended June 30,
2008, there has been no change in our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II ‑ Other Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
|
|
|
|
A
smaller reporting company is not required to provide the information
required by this Item.
|
|
|
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
3.
|
|
Defaults
upon Senior Securities
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number Description
31
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has caused
his report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA HUAREN ORGANIC PRODUCTS,
INC.
Date:
August 19, 2008
|
By:
/s/ Yushu
Cao
|
|
Mrs.
Yushu Cao, Chief Executive Officer
|
|
and Chief Financial Officer
|