Annual Report — Small Business — Form 10-KSB Filing Table of Contents
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Issuer's Telephone Number, including
Area Code: 212-232-0120
Securities Registered Pursuant to
Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock, $.01 par value per share
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. □
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or 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
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes____ No X
State the
issuer’s revenues for its most recent fiscal year: $ 7,449,370.
State 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 ask prices of such common equity, as of a
specified date within the past 60 days.
The
aggregate market value of the Registrant’s common stock, $.01 par value, held by
non-affiliates as of May 5, 2008 was $ 6,427,709.
As of May2, 2008 the number of shares outstanding of the Registrant’s common stock was
15,000,712 shares, $.01 par value.
Transitional
Small Business Disclosure Format:
Yes____
No X
DOCUMENTS INCORPORATED BY
REFERENCE: None
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1 -
FORWARD-LOOKING STATEMENTS: NO
ASSURANCES INTENDED
In
addition to historical information, this Annual Report contains forward-looking
statements, which are generally identifiable by use of the words “believes,”“expects,”“intends,”“anticipates,”“plans to,”“estimates,”“projects,” or
similar expressions. These forward-looking statements represent Management’s
belief as to the future of China Huaren Organic Products. Whether
those beliefs become reality will depend on many factors that are not under
Management’s control. Many risks and uncertainties exist that could
cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Risk
Factors That May Affect Future Results.” Readers are cautioned not to place
undue reliance on these forward-looking statements. We undertake no obligation
to revise or publicly release the results of any revision to these
forward-looking statements.
PART 1
Item
1. Business
China Huaren Organic Products, Inc. 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 owns
100% of the 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.
Jilin Huaren was founded in 2002 by
Fang Jinzhong and Zhang Changcai. In the following years,
Messrs. Fang and Zhang have contributed to Jilin Huaren its initial capital, as
well as their expertise in organic farming and agricultural
manufacturing. The result is that Jilin Huaren today is an enterprise
engaged in organic food and cosmetics production that controls the entire
industry chain, from production through manufacturing to marketing.
The label
“organic” identifies food and other agricultural products that are produced and
processed through organic agricultural production systems. In
general, organic foods are produced without use of any synthetic materials,
including pesticides, chemical fertilizers, or any form of
genetically-engineered animals or seeds. The standards that determine
what can be called “organic” are generally set at the national level, with
reference to international standards adopted by agreement among
countries.
In China,
the Organic Food Development Center and Organic Food Certification Center
(“OFDC”), a division of the State Environmental Protection Administration sets
the standards for organic certification. The OFDC is the only organic
certification association in China that has been recognized by the International
Federation of Organic Agriculture Movements
(IFOAM). OFDC-certification is honored not only in China, but also in
Korea, Hong Kong and Macao. In addition, OFDC has established close cooperative
relations with organic certification agencies in the EU, Japan and USA, and
maintains mutual recognition terms with more than 20 other IFOAM accredited
certification agencies in the EU, Japan and the US.
Organic certification by the OFDC
provides organic food with an authentication tag, usually in the form of symbols
or graphs. In 2004 Jilin Huaren obtained both the organic land certificate and
the organic foodstuff certification from OFDC, which signifies that Huaren is an
independent manufacturer with its own organic farms and processing
factories.
During 2007 Jilin Huaren produced and
marketed the following categories of organic agricultural products:
A.
Organic rice and
grains:
These products are marketed under the
Huaren brand name.
B.
Organic
foods. 31 Series,
including:
1.
organic
corn-based cakes, which come in a variety of flavors (corn flavored,
buttermilk flavored, egg white
flavored)
2.
low-sugar
organic wheat biscuits
3.
organic
grain fiber powders
4.
organic
grain sugar wafers
5.
organic
bean rice crackers
C. Organic nutritional
supplements:
1. Spirulina
supplements (tablet form), classified as blue-green algae or as blue green
bacteria. Spirulina is a rich source of protein and contains chlorophyll,
carotenoids, minerals, and gamma-linolenic acid (GLA). Spirulina is taken
as a protein supplement, in addition to protecting against various types
of allergic reactions, antibiotic-related illnesses, and liver
disorders.
2.
Gingko leaf extract supplements (tablet form). These extracts
from the gingko tree are used to treat a variety of ailments, including
asthma, bronchitis, fatigue, and
tinnitus.
D. Cosmetics
These
products are skin creams that reduce damage associated with the sun. These
products are moisturizers, which were formulated to help balance the
skin's moisture level and restore its moisture balance. The antioxidant
rich, non-greasy formula helps improve the overall smoothness of the skin,
soothes the skin and protects the skin from free radical attack. The
cosmetics are sold in five series: Organic Shiyimei series, Ajiaoshu
series, the Peach-blossom series, the Kasidina series and the
Kaidimisha series.
- 2
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Production
Jilin Huaren acquires its organic crops
from independent farmers, who have contracted to sell the produce to Jilin
Huaren. This produce forms the raw materials for all of Jilin
Huaren’s products.
After harvest, Jilin Huaren consigns
its produce to organic manufacturing facilities that have entered into consigned
production agreements with Jilin Huaren. The facilities hold the
produce, and manufacture it to Jilin Huaren’s order, which is determined by
contemporaneous market demands. To date, Jilin Huaren has utilized
the following manufacturing facilities:
1. Organic rice: Jilin
Wanchang Rice Co., Ltd.
2. Organic food: Jilin Jigu Fiber Food Technology Development
Company
3. Cosmetics:
Shiyimei
series: Beijing DYYH Science & Technology, Inc.
Jilin Huaren markets its products
through a multi-level distribution network, consisting of 90 “branch companies”
and 140 “specialty stores” that take product direct from Jilin
Huaren. The branch companies and specialty stores are
independently-owned and each has been assigned a specific geographic area in
which to develop the market for Jilin Huaren’s products. Within that
area, the branch companies and specialty stores either market direct to beauty
salons and supermarkets, or appoint distributors that employ salesmen to
approach the salons and markets. Jilin Huaren personnel maintain
surveillance over all points in this network, providing training and guidance
where needed, as well as being responsible for on-time delivery and
service. Jilin Huaren is also responsible for the nation-wide
advertising and promotion program, whose goal is to make Jilin Huaren the
leading organic food brand in China.
Jilin Huaren’s principal target market
is the rapidly developing urban class in China. The concept of
organic food and cosmetics is new to China and the size of the industry remains
small, relative to other large countries. However, as China’s urban
population expands and the pressures of urban existence increase, there is a
growing awareness in China of the need for a healthier lifestyle. For
example, a recent survey by the Sub-health Studies Center of the Shanghai
Academy of Social Studies found that only 16% of the population of Shanghai met
the criteria set by the study for “healthy.” 70% were classified as
“sub-healthy,” and 14% as “non-healthy.” At the same time, the
economic well-being of the Chinese urban population has increased substantially
in recent years, which enables them to focus resources on improving their
lifestyles. As a result, the demand for organic agricultural products
is growing.
Currently, the organic food and
cosmetics industry in China is highly fragmented. There is no market
participant that controls more than a small fraction of the market, and most
focus their marketing efforts in a limited geographic
range. Currently there is no large scale organic food supplier in
Jilin Province other than Jilin Huaren.
Growth
Jilin Huaren’s strategy for growth is
premised on the success of its program of brand promotion. Assuming
that its promotion program is successful in stirring nationwide demand for Jilin
Huaren products, management has planned the following development strategy to
meet the demand:
·
Acquiring
more organic soil resources by various means: acquisition,
cooperation and tenancy. Management currently plans to invest
10 million RMB ($1.2mil) to acquire rights to 1000 hectares of organic
land in the Changbai Mountain. Jilin Huaren will use the new
area to plant Chinese herbal medicines, utilizing the local natural herbal
medicines resources. The herbal medicines will be used as raw materials
for organic healthcare products. Management also plans to
invest another 10 million RMB ($1.2mil) to obtain rights to 1000 hectares
of organic land in the Shandong, Xinjiang, Henan areas, where
Jilin Huaren will plant cotton, which will be used as raw materials for
organic garments.
·
Developing
a captive source of nitraria (“white thorn”), the principal component of
many of Jilin Huaren’s cosmetic products. Towards that end, the
Company has entered into a written agreement with the Baicheng Forestry
Bureau, which contemplates that they will each develop 500,000 acres of
nitraria production, and that the Company, with the assistance of the
Baicheng Forestry Bureau, will develop a processing factory for nitraria
in Baicheng. The agreement includes covenants by the Baicheng
Forestry Bureau to facilitate working capital loans for the Company as
well as preferential policies.
·
Strengthening
research and development of organic products, and developing organic
health products, organic cosmetics, organic costumes,
etc.
·
Continual
expansion of the marketing network by bringing in more branch stores,
specialty stores and distributors.
·
Purchasing
and acquiring organic food processing factories and organic product
processing factories, to obtain greater control over the production
segment.
- 3
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Personnel
Jilin Huaren currently employs 40
individuals, all on a full-time basis. Among those employees are 34
individuals with college or university degrees. None of Jilin
Huaren’s employees belongs to a collective bargaining unit. Besides
our two officers, 16 of our employees are engaged in management activities and
16 are engaged in managing our sales force.
The sales personnel who market Jilin
Huaren’s products throughout China are employed by independent distributors, and
are not employees of Jilin Huaren. Management estimates that
approximately 20,000 individuals have been involved in the distribution of Jilin
Huaren products.
Item
2. Properties
Jilin Huaren’s executive offices are
located in a 15,000 square foot facility that it leases. Since the
end of 2005 Jilin Huaren has also leased a 200 hectare farm, which it has begun
to use as a source of raw materials for its products. Jilin Huaren’s
lease commitment for 2008 totals $182,233.
The Company is party to a land lease
with the City of Baicheng. The Company obtained 500,000 acres of land
suitable for planting nitraria, and pays an annual rental fee of 1,000,000 RMB
(approx. $137,000).
During
2005 we contracted to purchase an office building for our
operations. We have deposited $1,389,876 (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 we have occupied the building as a lessee since
2005, but have paid no rent. We expect to sell this building in the
near future, since it exceeds our needs.
On March1, 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 $2,303,074 (equivalent to RMB
16.8 million) to the village on a refundable basis. We do not know
when the land use right will be formally transferred to Jilin
Huaren.
Item
3. Legal
Proceedings
None.
Item
4. Submission
of Matters to a Vote of Security Holders
Not
applicable.
- 4
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PART II
Item
5.
Market
for Registrant's Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity
Securities
(a)
Market Information
The
Company’s common stock is quoted on the OTC Bulletin Board under the symbol
“CHRN.OB.” Set forth below are the high and low bid prices for each
of the eight quarters in the past two fiscal years. All prices have been
adjusted to reflect the 1-for-39 reverse stock split implements in January
2007. The reported bid quotations reflect inter-dealer prices without
retail markup, markdown or commissions, and may not necessarily represent actual
transactions.
Our
shareholders list contains the names of 199 registered stockholders of record of
the Company’s Common Stock.
(c) Dividends
The
Company has never paid or declared any cash dividends on its Common Stock and
does not foresee doing so in the foreseeable future. The Company
intends to retain any future earnings for the operation and expansion of the
business. Any decision as to future payment of dividends will depend
on the available earnings, the capital requirements of the Company, its general
financial condition and other factors deemed pertinent by the Board of
Directors
(d) Sale
of Unregistered Securities
None.
(e)
Repurchase of Equity Securities
The
Company did not repurchase any of its equity securities that were registered
under Section 12 of the Securities Act during the 4th quarter
of 2007.
- 5
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Item
6
Management’s
Discussion and Analysis
Results
of Operations
Jilin Huaren commenced its marketing
operations in March of 2005. The growth of our business continued to
the end of 2005, then came to a halt. During the winter of 2005, the
government of China required that enterprises engaged in multi-level product
distribution substantially revise the arrangements they had with their
distribution network. Therefore, during the first quarter of fiscal
2006, we had revenues of only $103,309 – as we spent the quarter rebuilding our
distribution network to achieve compliance with China’s
regulations. We completed that rebuilding process in time to return
to an almost-full marketing effort by mid-year, and reported revenues of
$2,188,146 for the entirety of 2006.
Our supply-to-distribution system
continued to experience inefficiencies entering 2007, however. In the
Spring of both 2006 and 2007 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 $5,295,971 (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.
During
2007, we introduced many new organic corps such as rice soybean, corns, and
maize, which represented approximately 96% of our total revenue for the second
quarter and 89% of our total revenue for the third quarter. On those
sales we realized gross profit in the range of 40% to 45%. Our plan
was to achieve gross margin in the range of 40% to 50%, except when affected by
distress sales to distributors, as in the first quarter of both 2007 and
2006.
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 quarter of 2008 our revenue was
nominal. For this reason we intend to terminate the management
agreement, and will appoint new managers later in May 2008, as discussed in the
“Management” section below.
Despite our relatively low level of
profitable sales, our operations in 2007 were profitable due to our low level of
expenses. Our net income for 2007 was $211,940, compared to a net income of
$420,581 in 2006. The fact that we are able to operate profitably,
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 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 2007
our general and administrative expense equaled less than 3.8% of our
revenue. In 2007 our depreciation expense – often a major
factor in agribusiness operations – was only $11,888, 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 2007
the unrealized gain on foreign currency translations added $576,680 to our
accumulated other comprehensive income.
Our prospects for the future will
depend on the success of our new managers, who will assume 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
December 31, 2007 we had working capital of $5,199,729, $1,573,383 less than on
December 31, 2006. We had no long-term
liabilities. However, our working capital consisted primarily of the
account receivable from Yushi Wanli Co., Ltd. (on which we have received no
payments since September 2007), inventory and prepaid expenses, which are mostly
advances for future inventory. Since there remains a growing market
for our organic products, we expect to be able to liquidate the inventory as
soon as new management revives our marketing operations. Accordingly,
we believe that we have sufficient capital resources to fund our business, but
lack the cash resources necessary to make our distribution network more
efficient.
During
2005 we contracted to purchase an office building for our
operations. We have deposited $1,389,876 (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.” Our plan is to dispose
of the building in 2008. 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 $2,303,074 (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 two factors that make our business
particularly profitable (the independent distribution network and the outsourced
manufacturing) also have an adverse effect on our cash flow. Maintaining our
distribution network requires that we tolerate receivables aging that would not
be acceptable if we sold direct to the stores. At the same time, the
fact that we maintain substantial inventories of raw materials and work in
process on consignment at our manufacturing contractors requires that we carry
inventory levels that exceed those that our own manufacturing facilities would
require. Nevertheless, during 2007, we sold a significant amount of
organic crops that had been recorded as inventory at the end of 2006. In
addition, we have delayed payment of taxes on our operations, resulting in
a $421,251 increase in our taxes payable. These factors enabled us to
obtain $2,061,454 in cash from operations during 2007. We used the
entirety of that amount to fund the deposit we made to purchase land rights in
Jilin.
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.
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Application
of Critical Accounting Policies
In
preparing our financial statements we are required to formulate working policies
regarding valuation of our assets and liabilities and to develop estimates of
those values. In our preparation of the financial statements for
2007, there were two estimates made which were (a) subject to a high degree of
uncertainty and (b) material to our results. The first was our
determination, explained in Note 4c to the Financial Statements, that we should
increase our allowance for doubtful accounts to $45,668. We made that
determination based on the good payment record of our distributor and our
expectation that we will recover our current receivables in full. The
second estimate was our determination, detailed in Note 4(h) to the Financial
Statements, that we had no need of a reserve for warranty costs. The
primary reason for the determination was the fact that we have received minimal
warranty claims to date.
We made
no material changes to our critical accounting policies in connection with the
preparation of financial statements for 2006.
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.
Risk Factors That May Affect Future
Results
You should carefully consider the risks
described below before buying our common stock. If any of the risks
described below actually occurs, that event could cause the trading price of our
common stock to decline, and you could lose all or part of your
investment.
Our new management may be unable to
revive our marketing network.
In the past six months our marketing
program has all-but-terminated. We realized only $134,778 in revenue
in the 4th quarter
of 2007 and nominal revenue in the first quarter of 2008. The
individuals who will take control of the company in May 2008 will be challenged
to revive our marketing network. If they are incapable of doing so,
our business will fail.
There is no assurance that the market
for organic foods and cosmetics will grow in China.
The concept of organic foods and
organic cosmetics is relatively new in China. In order for the market
for organic agricultural products to develop, it will be necessary for a portion
of the Chinese population to become willing to pay the extra cost or organic
products in order to obtain the benefits of organic
products. Although the economy of China is growing, the average
income of the Chinese population remains far below that of the European and
American countries where organic products have developed a
clientele. If a sufficient portion of the Chinese population is not
willing to pay the extra cost of organic products, our business is likely to
fail.
We may not be able to increase
production to the level necessary to meet demand.
Until recently we obtained all of our
raw materials from independent farmers. Recently we acquired 200
hectares of land on which we have initiated organic farming
operations. If our program for promoting our brand is successful,
those resources may be inadequate to provide the raw materials that we will
need. We will then have to obtain additional hectares of organic
soil. There are few large areas of organic soil available, and there
is considerable competition to acquire them. On the other hand, it
takes over three years to convert soil that has been used for non-organic
farming into soil useable in organic agriculture. If, therefore, we
are unable to produce sufficient raw materials to meet the demand for our
products, the negative effect may offset the benefits of our marketing program,
and our business will fail.
We are subject to the risk of
natural disasters.
We produce all of our raw materials,
and have not developed alternative sources for raw materials. If our
crops are destroyed by drought, flood, storm, blight, or the other woes of
farming, we will not be able to meet the demands of our distribution network,
and the network is likely to atrophy. This could have a long-term
negative effect on our ability to grow our business, in addition to the
near-term loss of income.
If we lost control of our distribution
network, our business would fail.
We depend on our distribution network
for the success of our business. Competitors may seek to pull our
distribution network away from us. In addition, if dominant members
of our distribution network become dissatisfied with their relationship with
Jilin Huaren, a concerted effort by the distribution network could force us to
accept less favourable financial terms from the distribution
network. Either of these possibilities, if realized, would have an
adverse effect on our business.
A recession in China could
significantly hinder our growth.
The success of our efforts to introduce
organic foods into the urban diet in China will depend on continuation of recent
improvements in the Chinese economy and the amount of disposable income
available to the Chinese population. If money becomes tight,
individuals will be less willing to pay extra for the benefits of organic
food. Many financial commentators expect a recession to occur in
China in the near future. The occurrence of a recession could
significantly hinder our efforts to implement our business plan.
Our business and growth will suffer if
we are unable to hire and retain key personnel that are in high
demand.
Our future success depends on our
ability to attract and retain highly skilled marketing personnel and
agricultural technicians. Qualified individuals are in high demand in
China, and there are insufficient experienced personnel to fill the
demand. Therefore we may not be able to successfully attract or
retain the personnel we need to succeed.
We may have difficulty establishing
adequate management and financial controls in China.
The People’s Republic of China has only
recently begun to adopt the management and financial reporting concepts and
practices that investors in the United States are familiar with. We
may have difficulty in hiring and retaining employees in China who have the
experience necessary to implement the kind of management and financial controls
that are expected of a United States public company. If we cannot
establish such controls, we may experience difficulty in collecting financial
data and preparing financial statements, books of account and corporate records
and instituting business practices that meet U.S. standards.
- 7
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Government regulation may hinder our
ability to function efficiently.
The national, provincial and local
governments in the People’s Republic of China are highly
bureaucratized. The day-to-day operations of our business require
frequent interaction with representatives of the Chinese government
institutions. The effort to obtain the registrations, licenses and
permits necessary to carry out our business activities can be
daunting. Significant delays can result from the need to obtain
governmental approval of our activities. These delays can have an
adverse effect on the profitability of our operations. In addition,
compliance with regulatory requirements applicable to organic farming and
production may increase the cost of our operations, which would adversely affect
our profitability.
Capital outflow policies in China
may hamper our ability to pay dividends to shareholders in the United
States.
The People’s Republic of China has
adopted currency and capital transfer regulations. These regulations require
that we comply with complex regulations for the movement of capital. Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of RMB into foreign currency for current account items,
conversion of RMB into foreign exchange for capital items, such as foreign
direct investment, loans or securities, requires the approval of the State
Administration of Foreign Exchange. We may be unable to obtain all of the
required conversion approvals for our operations, and Chinese regulatory
authorities may impose greater restrictions on the convertibility of the RMB in
the future. Because most of our future revenues will be in RMB, any inability to
obtain the requisite approvals or any future restrictions on currency exchanges
will limit our ability to pay dividends to our shareholders.
Currency fluctuations may adversely
affect our operating results.
Jilin Huaren generates revenues and
incurs expenses and liabilities in Renminbi, the currency of the People’s
Republic of China. However, as a subsidiary of China Huaren Organic
Products, Inc., it will report its financial results in the United States in
U.S. Dollars. As a result, our financial results will be subject to
the effects of exchange rate fluctuations between these
currencies. From time to time, the government of China may take
action to stimulate the Chinese economy that will have the effect of reducing
the value of Renminbi. In addition, international currency markets
may cause significant adjustments to occur in the value of the
Renminbi. Any such events that result in a devaluation of the
Renminbi versus the U.S. Dollar will have an adverse effect on our reported
results. We have not entered into agreements or purchased instruments
to hedge our exchange rate risks.
We have limited business insurance
coverage.
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. Moreover, while business disruption
insurance is available, we have determined that the risks of disruption and cost
of the insurance are such that we do not require it at this time. Any business
disruption, litigation or natural disaster might result in substantial costs and
diversion of resources.
China Huaren is not likely to hold
annual shareholder meetings in the next few years.
Management does not expect to hold
annual meetings of shareholders in the next few years, due to the expense
involved. The current members of the Board of Directors were
appointed to that position by the previous directors. If other
directors are added to the Board in the future, it is likely that the current
directors will appoint them. As a result, the shareholders of China
Huaren have no effective means of exercising control over the operations of
China Huaren.
Item
7. Financial Statements
The Company’s financial statements,
together with notes and the Independent Auditors’ Report, are set forth
immediately following Item 14 of this Form 10-KSB.
- 8
-
Item
8.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
Applicable
Item
8A. Controls and Procedures
(a) Evaluation of disclosure controls and
procedures.
The term “disclosure controls and
procedures” (defined in SEC Rule 13a-15(e)) refers to the 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 under the Securities
Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and
reported within required time periods. The Company’s management, with the
participation of the Chief Executive Officer and the Chief Financial Officer,
has evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by this annual report (the
“Evaluation Date”). Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that, as of the Evaluation
Date, such controls and procedures were effective.
(b) Changes in internal
controls.
The term “internal control over
financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a
company that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company’s management, with the participation of the Chief
Executive Officer and Chief Financial Officer, has evaluated any changes in the
Company’s internal control over financial reporting that occurred during the
fourth quarter of the year covered by this annual report, and they have
concluded that there was no change to the Company’s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
(c) Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. We have assessed the effectiveness
of those internal controls as of December 31, 2007, using the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control –
Integrated Framework as a basis for our assessment.
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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 and procedures may deteriorate. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
A
material weakness in internal controls is a deficiency in internal control, or
combination of control deficiencies, that adversely affects the Company’s
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with accounting principles generally accepted in the
United States of America such that there is more than a remote likelihood that a
material misstatement of the Company’s annual or interim financial statements
that is more than inconsequential will not be prevented or detected. In the
course of making our assessment of the effectiveness of internal controls over
financial reporting, we identified three material weaknesses in our internal
control over financial reporting. These material weaknesses consisted
of:
a. Inadequate staffing and supervision
within the accounting operations of our company. The
relatively small number of employees who are responsible for accounting
functions prevents us from segregating duties within our internal control
system. The inadequate segregation of duties is a weakness because it
could lead to the untimely identification and resolution of accounting and
disclosure matters or could lead to a failure to perform timely and effective
reviews.
b. Lack of expertise in U.S accounting
principles among the personnel in our Chinese
headquarters. Our books are maintained and our financial
statements are prepared by the personnel employed at our executive offices in
China. None of our employees has substantial experience or
familiarity with U.S accounting principles. The lack of personnel in
our China office who are trained in U.S. accounting principles is a weakness
because it could lead to improper classification of items and other failures to
make the entries and adjustments necessary to comply with U.S.
GAAP.
Management
is currently reviewing its staffing and their training in order to remedy the
weaknesses identified in this assessment. To date, we are not aware
of significant accounting problems resulting from these weaknesses; so we have
to weigh the cost of improvement against the benefit of strengthened
controls. However, because of the above conditions, management’s
assessment is that the Company’s internal controls over financial reporting were
not effective as of December 31, 2007.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Item
8B. Other Information
None.
- 9
-
PART III
Item
9.
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange
Act.
The Board
of Directors has arranged to replace current management as soon as this Annual
Report is filed. Currently, the officers and directors of the Company
are:
Directors hold office until the annual
meeting of the Company’s stockholders and the election and qualification of
their successors. Officers hold office, subject to removal at any
time by the Board, until the meeting of directors immediately following the
annual meeting of stockholders and until their successors are appointed and
qualified.
Fang Jinzhong joined
Mr. Zheng in founding Jilin Huaren in 2002. He has served as its
Chairman and Chief Executive Officer since then. Prior to forming
Jilin Huaren, Mr. Fang had been engaged since 1978 in the business of
agricultural production, agricultural product processing, marketing of
agricultural products and agricultural technology. Mr. Fang was
awarded a Bachelor’s Degree from the Jilin Financial College in 1978, where he
majored in Agricultural Industrial Operations.
Zhang Chengcai joined
Mr. Fang in founding Jilin Huaren in 2002. He has served as its
Deputy Chairman and Director of Marketing. From 1998 to 2002 Mr.
Zhang was a sales representative for Amway China, from whom he received the
Emerald Award. From 1987 to 1998 Mr. Zhang was employed in the
radiology department of Jilin Medical College Hospital, where he conducted
research on agricultural products and supervised testing of organic
foods. Mr. Zhang was awarded a Bachelor’s Degree from the Jilin
Medical College in 1978, where he majored in Radiology.
Zhou
Huakang. Since 1993 Zhou Huakang has been employed as chairman
of the board of Warner Technology and Investment Corp. a New Jersey corporation
that he organized in 1993. Warner Technology provides international training and
market consulting services. Warner is licensed by the People’s Republic of China
to serve as an official host for Chinese government officials and business
executives in the US. As part of the hosting process Warner also provides
training programs to assist visiting Chinese officials and business executives
with the transition to doing business in the US. Mr. Zhou holds a
Ph.D. degree in Operations Research that was awarded in 1989 by the Polytechnic
University of New York.
Promptly after this Annual Report is
filed, Mr. Fang and Mr. Zhang will resign from their positions in the Company’s
management. The new management will be:
Name
Position with the
Company
Cao
Yushu
Chairman,
Chief Executive Officer, Chief Financial Officer,
Director
Zhou
Huakang
Director
Cao
Yushu. Since 2000 Mr. Yushu has been employed as
President of Heilongjiang Futian Clean Fuel Co., Ltd. Prior to that
appointment, Mr. Yushu was employed in the fuel industry as a manager, and in a
government position as an accountant.
Zhou
Huakang. See
above.
Audit Committee;
Compensation Committee
The Board of Directors has not yet
appointed an Audit Committee or a Compensation Committee, due to the small size
of the Board. The Board of Directors does not contain an audit
committee financial expert, again due to the small size of the
Board.
Code of
Ethics
The
Company does not have a written code of ethics applicable to its executive
officers. The Board of Directors has not adopted a written code of
ethics because there are so few executive officers of the Company.
None of
the officers, directors or beneficial owners of more than 10% of the Company’s
common stock failed to file on a timely basis the reports required by Section
16(a) of the Exchange Act during the year ended December 31, 2007.
- 10 -
Item
10. Executive Compensation
The
following table sets forth all compensation awarded to, earned by, or paid by
China Huaren and its subsidiaries to Fang Jinzhong, its Chief Executive Officer,
for services rendered in all capacities to the Company during the years ended
December 31, 2006, 2005 and 2004. There were no executive officers
whose total salary and bonus for the fiscal year ended December 31, 2006
exceeded $100,000.
Year
Salary
Bonus
Stock
Awards
Option
Awards
Other
Compensation
Fang
Jinzhong
2007
$10,000
2006
$10,000
2005
$10,000
Employment
Agreements
All of
our employment arrangements with our executives are on an at will
basis.
Equity
Grants
The
following tables set forth certain information regarding the stock options
acquired by the Company’s Chief Executive Officer during the year ended December31, 2007and those options held by him on December 31, 2007.
Option Grants in the Last
Fiscal Year
Potential
realizable value
at assumed annual
rates of appreciation
for
option term
Number
of
securities
underlying
option
granted
Percent
of
total
options
granted
to
employees
in
fiscal
year
Exercise
Price
($/share)
Expiration
Date
5%
10%
Fang
Jinzhong
--
--
--
--
--
--
The
following tables set forth certain information regarding the stock grants
received by the executive officers named in the table above during the year
ended December 31, 2006 and held by them unvested at December 31,2007
Unvested Stock Awards in the
Last Fiscal Year
Number
of
Shares
That
Have
Not
Vested
Market
Value
of
Shares That
Have
Not
Vested
Fang
Jinzhong
0
--
Remuneration of Directors
None of
the members of the Board of Directors received remuneration for service on the
Board during 2007
Item
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters
The
following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of the date of this prospectus by
the following:
·
each
shareholder known by us to own beneficially more than 5% of our common
stock;
·
Fand
Jinzhong, our Chief Executive
Officer
·
each
of our directors; and
·
all
directors and executive officers as a
group.
- 11
-
There are
15,000,712 shares of our common stock outstanding on the date of this
report. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below have sole voting power and investment
power with respect to their shares, subject to community property
laws where applicable. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission.
In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, we include shares of common stock subject to options
or warrants held by that person that are currently exercisable or will become
exercisable within 60 days. We do not, however, include these “issuable” shares
in the outstanding shares when we compute the percent ownership of any other
person.
(1) Except
as otherwise noted, the address of each shareholder is 648 Weihai Road,
Changchun, Jilin Province, P.R.
China.
(2) Except as otherwise noted, all shares are owned of
record and beneficially.
(3) Represents
shares held of record by Warner Technology & Investment Corp., of
which Mr. Zhou is the President and controlling
shareholder.
Equity
Compensation Plan Information
The
information set forth in the table below regarding equity compensation plans
(which include individual compensation arrangements) was determined as of
December 31, 2007.
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
Weighted
average exercise price of outstanding options, warrants and
rights
Number
of securities remaining available for future issuance under equity
compensation plans
Equity
compensation plans approved by security holders.......
0
0
Equity
compensation plans not approved by security holders......
0
0
Total..............
0
0
Item
12. Certain Relationships and Related Transactions
Neither Mr. Fang nor Mr. Zhang has
engaged in any transaction with China Huaren, China Organic or Jilin Huaren
during the past fiscal year or the current fiscal year that had a transaction
value in excess of $60,000.
- 12 -
Item
13. Exhibit List
(a)
Financial Statements
Report of
Independent Registered Public Accounting Firm
Articles
of Incorporation, and 1989 amendment. - filed as an exhibit to the
Company’s Registration Statement on Form SB-2 (33-85218 C) and
incorporated herein by reference.
By-laws.
- filed as an exhibit to the Company’s Registration Statement on Form SB-2
(33-85218 C) and incorporated herein by
reference.
10-a
Intention
Agreement on Construction On One Million Acres of White Thorn Deep
Processing Based Between Baicheng Forestry Bureau and China Huaren Organic
Products Inc.
21
Subsidiaries
– China Organic Health Products,
Inc.
Jilin
Huaren Organic Health Products Co.,
Ltd.
31
Rule
13a-14(a) Certification
32
Rule
13a-14(b) Certification
- 13
-
Item
14. Principal Accountant Fees and Services
Audit Fees
MS Group CPA LLC billed $
65,000.00 in connection with the audit of the Company’s financial
statements for the year ended December 31, 2007 and review of the financial
statements included in our 2007 10-QSB filings. MS Group CPA LLC
billed $45,000 in connection with the audit of the Company’s financial
statements for the year ended December 31, 2006.
All Other Fees
MS Group CPA LLC has not billed the
Company for any other services.
It is the policy of the Company
that all services other than audit, review or attest services must be
pre-approved by the Board of Directors. No such services have been
performed by MS Group CPA LLC.
Consolidated
Statements of Operations for the Years Ended December 31, 2007 and
2006
F - 5
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the Years
Ended December 31, 2007 and 2006
F - 6
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
F - 7 to F -
14
F
- 1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of
China
Huaren Organic Products Inc. and Subsidiary
We have
audited the accompanying consolidated balance sheet of China Huaren Organic
Products Inc. and Subsidiary as of December 31, 2007, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the two-year period ended
December 31, 2007. The management of China Huaren Organic Products Inc. and
Subsidiary is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company is not required to have nor were we engaged to perform, and audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing as opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Huaren Organic
Products Inc. and Subsidiary as of December 31, 2007, and the results of its
operations and its cash flows for each of the years in the two-years period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company’s subsidiary incurred a significant loss from
operations in the fourth quarter of year 2007 and had no sales revenue in 2008.
These events raise substantial doubt about the Company’s ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 2. The consolidated financial statements did not include any adjustments
that might result from the outcome of this uncertainty.
SUPPLEMENT
SCHEDULE OF NON-CASH INVESTING AND FINANCING
Other
receivable decreased for inventories transfer in
$
-
$
(5,211,843)
See
notes to consolidated financial
statements.
F
- 6
China
Huaren Organic Products Inc. and Subsidiary
Notes
to Financial Statements
1.
Organization and Nature of Business
China
Huaren Organic Products Inc. (“the Company”) through its indirect
wholly-owned subsidiary, Jilin Huaren Organic Product Co., Ltd. ("Jilin
Huaren ") develops, produces, and sells a wide array of organic foods and
healthcare and cosmetic products.
In
November 2006, the Company acquired all the ownership interest in China Organic
Health Products Inc. (“China Organic”), a Delaware corporation organized in
January 2006. The Company acquired China Organic in exchange for shares of
common stock and shares of Series C Preferred Stock of the Company. The
capitalizations are described in further detail in Note 15 to the accompanying
consolidated financial statements.
China
Organic was organized under the laws of Delaware in January 2006. It never
initiated any business activity. Most of the Company's activities are conducted
through its 100% equity ownership in Jilin Huaren established in the People's
Republic of China. 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 China.
Jilin
Huaren is a domestic enterprise incorporated in the Jilin district of People
Republic of China (“PRC”) in February 2000. The Company was formerly known as
Jilin KangJian Technology Trade Center (Jilin KangJian) and changed its name to
Jilin Huaren Organic Product Co., Ltd. in December 23, 2004.
Jilin
KangJian remained inactive and incurred minor administrative expenses prior to
December 31, 2003. It was only in March 2004 that Jilin KangJian began its
business operation as a wholesaler of organic agricultural products, nutritional
health food products, and cosmetics related merchandises in PRC. The company is
selling the cosmetics products under the “Huaren” brand name.
2.
Net loss during Transaction Period and Management Plans
During
the fourth quarter of 2007, the sales revenue of Jilin Huaren dropped down
significantly and incurred net loss. In addition, Jilin Huaren had no sales
revenue in the first three months of 2008. As of December 31, 2007, the Company
had $76,658 cash and equivalents and $4,521,106 of net trade receivables to fund
short-term working capital requirements, but these net trade receivables are all
owed by one debtor and had been outstanding for more than nine
months.
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 better business, and to raise capital
in the near term to (1) satisfy its current obligations, and (2) the successful
wide scale development and marketing of its high profit 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.
3.
Basis of Presentation Basis of Preparing Accounting Statement
The
accompanying consolidated financial statements present the financial position,
results of operations and cash flows of the Company and all entities in which
the Company has a controlling voting interest. The consolidated financial
statements also include the accounts of any variable interest entities in which
the Company is considered to be the primary beneficiary and such entities are
required to be consolidated in accordance with accounting principles generally
accepted in the United States (“US GAAP”). These consolidated financial
statements include the financial statements of China Huaren Organic Products
Inc. and its subsidiary. All significant inter-company transactions and balances
are eliminated in consolidation.
The
accompanying consolidated financial statements are prepared in accordance with
US GAAP. This basis of accounting differs from that used in the statutory
accounts of some of the Company’s subsidiary, which were prepared in accordance
with the accounting principles and relevant financial regulations applicable to
enterprises with foreign investment in the PRC (“PRC GAAP”). Necessary
adjustments were made to the Subsidiary’s statutory accounts to conform to US
GAAP to be included in these consolidated financial statements.
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.
Cash and cash equivalents
Cash and
cash equivalents include cash on hand, demand deposits and highly liquid
instruments with a maturity of three months or less at the time of
purchase.
c.
Accounts Receivable
Accounts
receivables are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. The Company provides an allowance for doubtful
accounts equal to the estimated losses that will be incurred in the collection
of all receivables. The estimated losses are based on a review of the current
status of the existing receivables. The allowance for doubtful accounts as of
December 31, 2007 and 2006 were $45,668, and $ 2,549, respectively.
d.
Inventories
F - 7
Inventories
are stated at the lower of cost or market value. Estimated obsolescence and any
excess of carrying costs over market are provided for through valuation
reserves.
e.
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation on
property and equipment is determined using the straight-line method over the
estimated useful life of the assets, the office equipments and vehicles have
estimated useful lives of 5 years. Repairs and maintenance expenditures which do
not extend the useful lives of the related assets are expended as incurred,
whereas significant renewals and betterments are capitalized.
The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statements
of operations.
f.
Research and Development Costs
Research
and development cost are charged to expenses as incurred. The Company incurred
$52,603 and $76,142 research and development expenses for the years ended
December 31, 2007 and 2006, respectively.
g.
Long-Lived Assets
The
Company accounts for long-lived assets in accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Impairments are written off when events or
circumstances indicate the carrying amount exceeds the recoverability or the
estimated future cash flows expected from these assets. For long lived assets to
be disposed, impairment is written off when the carrying amount exceeds the fair
market value of the asset less the cost of disposal.
h.
Warranties
The
Company offers a commercial warranty on its products. Based on historical
returns, an estimated return reserve is accrued for in the period revenue is
recognized. The experience for costs and expenses in connection with such
warranties had been minimal and through December 31, 2007 and 2006, no amount
had been reserved.
i.
Fair Value of Financial Instruments
The
carrying amounts of cash and equivalents, accounts receivable, inventories,
prepaid expenses, other current assets, accounts payable, accrued liabilities,
customer deposits, taxes payable, and other current liabilities approximate
their fair value because of the immediate or short-term maturity of these
financial instruments.
j.
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 by
us exist and collectibility is reasonably assured. All revenues for the years
ended December 31, 2007 and 2006 were products sales revenue recorded net of
value added taxes.
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.
k.
Advertising and Marketing Costs
Advertising
and marketing costs, except for costs associated with direct-response
advertising and marketing, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period during
which future benefits are expected to be received. Advertising and marketing
expense were
$18,822
and $2,724 for the fiscal year ended December 31, 2007 and 2006,
respectively.
l.
Employee Welfare Benefit
The
Company established an employee welfare plan in accordance with Chinese law and
regulations. The Company makes an annual pre-tax contributions of 14% of all
employees’ salaries. Starting from when the Chinese subsidiary became foreign
fully owned company in June 2006, the Company’s Chinese subsidiary has expensed
all employee welfare benefit as incurred. The total expense for the above plan
amounted to $7,966 and $7,787 for the years ended December 31, 2007 and 2006,
respectively.
m.
Foreign Currency Translation
The
Company’s reporting currency is the U.S. dollar. The functional currencies of
the Company's subsidiary 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.
n.
Income Taxes
The
Company and its U.S. subsidiary will file consolidated federal income tax return
and file the Delaware state franchise tax returns individually. 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.
F -
8
o.
Comprehensive Income
SFAS 130,
Reporting Comprehensive
Income, defines comprehensive income to include all changes in equity
except those resulting from investments by owners and distributions to owners
and requires that the period’s comprehensive income, its components and
accumulated balances be disclosed. Among other disclosures, SFAS
130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
financial statements. The Company’s only current component of comprehensive
income is the foreign currency translation adjustment.
p.
Segment Reporting
SFAS 131,
Disclosure about Segments of
an Enterprise and Related Information, requires disclosure of reportable
segments used by management for making operating decisions and assessing
performance. Reportable segments are categorized by products and services,
geography, legal structure, management structure, or any other manner in which
management disaggregates a company. SFAS 131 has no effect on the Company’s
financial statements as substantially all of the Company’s operations and
management is under a single operating segment.
q.
Recent Pronouncements
In
December 2007, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment
of ARB No.51" which clarifies that a noncontrolling 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 noncontrolling 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 noncontrolling
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, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
141R (revised 2007), “Business Combinations” which replaces FASB Statement No.
141, “Business Combinations”. The Statement 141R retains the fundamental
requirements in Statement 141 that the acquisition method of accounting (which
Statement 141 called the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. The
Statement 141R defines the acquirer as the entity that obtains control of one or
more businesses in the business combination and establishes the acquisition date
as date that the acquirer achieves control. Statement 141 did not define the
acquirer, although it included guidance on identifying the acquirer, as does in
Statement 141R. The scope of Statement 141R is broader than that of Statement
141, which applied only to business combinations in which control was obtained
by transferring consideration. By applying the same method accounting – the
acquisition method- to all transactions and other events in which on entity
obtains control over one or more other businesses, the Statement 141R improves
the comparability of the information about business combinations provided in
financial reports. SFAS No.141R applies prospectively to business combinations
for which that acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply it before that date. The Company is currently in the process of evaluating
the effect, if any, for the future acquisition and combinations.
In
February 2007, the Financial Accounting Standard Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No. 115” which permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent
reporting date. SFAS No. 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November15, 2007, provided the entity also elects to apply the provisions of FASB
Statement No. 157, “Fair Value Measurements”. The Company is currently in the
process of evaluating the effect, if any, the adoption of SFAS No 159 and 157
will have on its consolidated results of operations, financial position, and
cash flows.
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 March15, 2007 increased the Company’s accounts receivable by approximately $5,526,387
(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 December 31, 2007, the outstanding balance due from Yushu was
$4,566,774 (equivalent to RMB 33,312,786). It represented all of
the Company’s gross accounts receivable balance as of December 31,2007.
Employee
travel and operation advance consists of prepaid travel and operation fee
advances to the Company’s employees. These amounts are unsecured, non-interest
bearing and are due on demand.
Advance
to related parties incurred in year 2006, the Company’s subsidiary in China,
Jilin Huaren, deposited a portion of its daily cash revenue into a related
individual's personal bank account, and withdraw cash for the Company’s regular
operations if necessary. This behavior could cause ambiguity of the Company’s
financial records. Accordingly, in the first quarter of 2007 all such amounts
were repaid, and this practice was terminated.
9.
Property and Equipment, Net
Property
and equipment at cost, less accumulated depreciation, consists of the
following:
Depreciation
expenses charged to operations were $11,888 and $12,463 for the years ended
December 31, 2007 and 2006, respectively. Loss on disposal of fixed assets for
the years ended December 31, 2007 and 2006 was $25,050 and $3,244,
respectively.
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10.
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 purchases price
was $1,028,158 (equivalent to RMB7,500,000) and fix up construction cost was
$361,718 (equivalent to RMB2,638,593). During 2006 and 2007, all these cost had
been paid to the seller by Jilin Huaren, but the title to the property has not
transferred. Jilin Huaren had occupied the property since year 2005 without
paying any rent. Accordingly, Jilin Huaren recognized $17,043 (equivalent to
RMB129,600) of rent expenses per year since October 1, 2005, and also recognized
an offsetting amount of interest income imputed to the deposit that Jilin Huaren
paid to the seller in 2005. Management estimated the value of the contribution
items and expected to get fully refund $1,389,876 (equivalent to RMB10,138,593)
if the purchase does not go through.
On March1, 2007, the Company 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 the Company has deposited $2,303,074
(equivalent to RMB16,800,000) to the village as of December 31, 2007. In
addition, the title to the land
use rights has not passed to the Company as of December 31,2007.
Accordingly,
the total deposits for purchase of fixed assets consist of the
following:
The
Company leases its office space, and certain farm and plant lands under
operating lease agreements.
The
following was a schedule of future minimum rental payments required under
operating leases that had initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 2007.
Rent
expenses amounted to $411,492 and $274,729 for the years ended December 31, 2007
and 2006, respectively.
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12.
Taxation
a.
Corporation Income Tax (“CIT”)
The
Company and its U. S. subsidiary will file consolidated federal income taxes
return and file Delaware state franchise tax individually. 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 a 33% tax rate during 2007.
b.
Value Added Tax (“VAT”)
The
Company is subject to VAT on merchandises sales in PRC. For the years ended
December 31, 2007 and 2006, a small scale tax rate of 4% was
applicable.
c.
Business Tax (“BT”)
The
Company is also subject to Business Tax, which is charged on service income at a
rate of 5% in accordance with the tax law in Jilin District of PRC.
Substantially
all of the Companies' operations are carried out through its subsidiary located
in the PRC. Accordingly, the Companies' business, financial condition and
results of operations may be influenced by the political, economic and legal
environments in the PRC. The Companies' 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
December 31, 2007 and 2006, the Company's PRC subsidiaries established and
segregated in retained earnings an aggregate amount of $259,244 and$224,275
respectively, for the Statutory Surplus Reserve and the Statutory Common Welfare
Fund.
14.
Concentration of Business
a.
Financial Risks
The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
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b.
Major Customers
The
following summarizes sales to major customers (each 10% or more of
sale):
Sales
to
Number
of
Percentage
Year
Ended
Major
Customers
Customers
of Total
2007
$
5,097,508
1
68.43%
2006
$
594,363
2
26.59%
c.
Major Suppliers
The
following summarized purchases from major suppliers (each 10% or more of
purchases):
Purchases
from
Number
of
Percentage
Year
Ended
Major
Suppliers
Suppliers
of Total
2007
$
798,509
2
92.09%
2006
$
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15.
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, the Company changed
its name to "China Huaren Organic Products, Inc. from Ultradata Systems, Inc. "
In addition, the Company announced 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, and there were 14,699,853 common shares
issued and outstanding, par value $0.01 on December 31, 2007.
16.
Subsequent Events
On
February 28, 2008, certain individuals converted all of the outstanding Series C
Preferred Stock into 299,997 shares of the Company’s common stock. Therefore the
Company had 15,000,712 common shares issued and outstanding, par value $0.01 on
February 28, 2008.
F
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SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
In
accordance with the Exchange Act, this Report has been signed below on May 9,2008 by the following persons, on behalf of the Registrant and in the capacities
and on the dates indicated.