UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period endedMarch 31, 2007.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ______.
Commission file number:0-50546
Hendrx Corp.
(Exact name of small business issuer as specified in its charter)
Nevada | 86-0914052 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
2610-1066 West Hastings Street, Vancouver, British Columbia, Canada, V6E 3X2
(Address of Principal Executive Offices) (Zip Code)
1-888-436-3791
(Issuer’s Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
At May 5, 2006, the number of shares outstanding of the registrant's common stock, $0.001 par value (the only class of voting stock), was 37,238,067.
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TABLE OF CONTENTS
2
PART I
ITEM 1. | FINANCIAL STATEMENTS |
As used herein the terms “Hendrx,” “we,” “our,” and “us” refer to Hendrx Corp., a Nevada corporation, unless otherwise indicated. In the opinion of management, the accompanying unaudited interim consolidated financial statements included in this Form 10-QSB reflect all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
3
HENDRX CORP. | ||||||
Consolidated Balance Sheets | ||||||
(Expressed in US Dollars) | ||||||
March 31, | December 31, | |||||
2007 | 2006 | |||||
(Unaudited | (Audited) | |||||
Prepared by | ||||||
Assets | Management) | |||||
Current Assets | ||||||
Cash (Note 2) | $ | 42,796 | $ | 29,198 | ||
Accounts receivable | 261,384 | 340,752 | ||||
Value Added Tax Refundable | 52,449 | 62,151 | ||||
Inventories (Note 4) | 2,027,212 | 1,892,506 | ||||
Due from related parties (Note 9d) | 73,023 | 6,353 | ||||
Prepaid expenses | - | - | ||||
Total Current Assets | 2,456,864 | 2,330,960 | ||||
Property, Plant and Equipment-Net (Note 6) | 5,688,784 | 5,826,460 | ||||
Other assets | ||||||
Long term loan Receivable (Note 16) | 110,075 | 108,903 | ||||
Intangible assets-Net (Note 5) | 2,644,620 | 2,684,427 | ||||
Goodwill (Note 3) | 31,854,137 | 31,854,137 | ||||
Total Other Assets | 34,608,832 | 34,647,467 | ||||
Total assets | $ | 42,754,480 | $ | 42,804,887 | ||
Liabilities and Stockholders' Equity | ||||||
Current Liabilities | ||||||
Accounts payable & Accrued liabilities | ||||||
(Note 8) | $ | 1,029,008 | $ | 969,635 | ||
- | - | |||||
Accrued wage benefits (Note 11) | 33,856 | 35,194 | ||||
Short term bank loans (Note 10) | 2,580,938 | 2,523,991 | ||||
Short term loan | 100,000 | |||||
Due to related parties (Note 9e) | 472,304 | 281,380 | ||||
Total Current Liabilities | 4,216,106 | 3,810,200 | ||||
Contingent LiabilityCommitment (Note 12) | 1,000,000 | 1,000,000 | ||||
Total Liabilities | 5,216,106 | 4,810,200 | ||||
Stockholders' Equity | ||||||
Capital stock (Authorized: 350,000,000) | ||||||
Issued and outstanding: 37,238,067 | ||||||
(December 31, 2005: 37,238,067) | ||||||
Par value $0.001 | 37,238 | 37,238 | ||||
Additional paid in capital | 43,196,066 | 43,196,066 | ||||
Other Comprehensive Income | 634,450 | 652,170 | ||||
Retained (Deficit) Earnings | (6,329,380 | ) | (5,890,787 | ) | ||
Total stockholders’ equity | 37,538,374 | 37,994,687 | ||||
Total liabilities and stockholders’ equity | $ | 42,754,480 | $ | 42,804,887 |
Commitments: Note 3 and 10; Going Concern: Note 1; Guarantees: Note 10
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-1
HENDRX CORP. | ||||||
Consolidated Statements of Operations and Comprehensive Income (Loss) | ||||||
(Expressed in US Dollars) | ||||||
Three Months Ended | ||||||
March 31, | ||||||
2007 | 2006 | |||||
(Unaudited | (Unaudited | |||||
Prepared by | Prepared by | |||||
Management) | Management) | |||||
Revenue | $ | 210,156 | $ | 324,955 | ||
Cost of Goods Sold | 286,237 | 334,319 | ||||
Gross Profit | (76,081 | ) | (9,364 | ) | ||
Selling Expenses | 26,645 | 70,309 | ||||
General and administrative expenses | 172,896 | 179,400 | ||||
Stock Based Compensation Expenses | - | - | ||||
Contract services | 58,953 | 55,396 | ||||
Salaries and wages | 40,713 | 81,006 | ||||
Total Expenses | 299,207 | 386,111 | ||||
Income (Loss) from Operations | (375,288 | ) | (395,475 | ) | ||
Other Income or ( Expense ) | ||||||
Other expense | (18,212 | ) | 2,351 | |||
Interest expenses | (45,093 | ) | (43,468 | ) | ||
Impairment Intangible Assets | - | - | ||||
Litigation losses | - | - | ||||
Profit (Loss) before Income taxes | (438,593 | ) | (436,592 | ) | ||
Income taxes | - | (447 | ) | |||
Net profit (loss) for the year | $ | (438,593 | ) | $ | (436,145 | ) |
Net (Loss) per common shares Basic & | ||||||
Dilutive | (0.01 | ) | (0.01 | ) | ||
Weighted Average Shares Outstanding | 37,238,067 | 37,238,067 | ||||
Other Comprehensive Income | ||||||
Foreign Currency Translation Adjustments | (17,720 | ) | (1,595 | ) | ||
Comprehensive Income (Loss) | $ | (456,313 | ) | $ | (437,740 | ) |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-2
HENDRX CORP. | ||||||
Consolidated Statements of Cash Flows | ||||||
(Expressed in US Dollars) | ||||||
Three Months Ended | ||||||
December 31, | ||||||
2007 | 2006 | |||||
(Unaudited | (Unaudited | |||||
Prepared by | Prepared by | |||||
Management) | Management) | |||||
Operating activities | ||||||
Adjustments to reconcile net income (loss) to net cash | $ | $ | ||||
Net losses | (438,593 | ) | (436,145 | ) | ||
Amortization and depreciation | 186,065 | 165,606 | ||||
Impairment of intangible assets | - | - | ||||
Changes in operating assets and liabilities | ||||||
Accounts receivable | 79,368 | (16,501 | ) | |||
VAT Refundable | 9,702 | 36,310 | ||||
Inventories | (134,706 | ) | (35,580 | ) | ||
Prepaid expenses | - | (28,500 | ) | |||
Accounts payable | 58,035 | (85,689 | ) | |||
Accrued liabilities | - | - | ||||
Contingent liability | - | - | ||||
Total funds from (used in) operating activities | (240,129 | ) | (400,499 | ) | ||
Investing activities | ||||||
Cash paid for note receivable | (1,172 | ) | (757 | ) | ||
Cash paid for Property, plant and equipment | (8,582 | ) | (12,570 | ) | ||
Cash paid for Intangible assets | - | - | ||||
Payment on purchase of subsidiary | - | - | ||||
Total funds from (used in ) investing activities | (9,754 | ) | (13,327 | ) | ||
Financing activities | ||||||
Principal payment on bank loan | 56,947 | 119,682 | ||||
Advances to related parties | (66,670 | ) | 87,316 | |||
Advances from related parties | 190,924 | 12,971 | ||||
Cash received from short term loan | 100,000 | - | ||||
Stock Issue Cost | - | - | ||||
Total funds from (used in) financing activities | 281,201 | 219,969 | ||||
Cash, increase during the year | 31,318 | (193,857 | ) | |||
Foreign exchange | (17,720 | ) | (1,595 | ) | ||
Cash, beginning of the year | 29,198 | 1,733,580 | ||||
Cash, end of the year | $ | 42,796 | $ | 1,538,128 | ||
Supplementary cash flow information | ||||||
Income taxes (refunded) paid | $ | - | $ | (447 | ) | |
Cash paid for interest | $ | 45,093 | $ | 40,619 | ||
Non cash financing and investing transactions: | ||||||
Shares issued for accrued wage benefits | $ | - | $ | - | ||
Stock Based Compensation | $ | - | $ | - | ||
Other Comprehensive Income | $ | (17,720 | ) | $ | (1,595 | ) |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-3
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 1. | ORGANIZATION AND NATURE OF BUSINESS |
Organization
HENDRX Corp. (formerly StarSoft Inc.) (“the Company”) was incorporated under the laws of the State of Nevada on May 4, 1998 (Inception Date) for the purpose of promoting and carrying on any lawful business for which a corporation may be incorporated under the laws of the State of Nevada. The Company operated from May 4, 1998 through approximately October 31, 2000 developing and marketing computer software. The Company had also planned to offer consulting services for software developers but that aspect of the Company business never materialized. Since October 31, 2000, the Company ceased the aforementioned operations and was in the development stage until December 16, 2004, when it acquired 100% of the issued shares of Eastway Global Investment Limited, which included the latter company’s wholly-owned operating subsidiary, Fujian Yuxin Electronic Equipment Co., Ltd.
Organization and Nature of Business of the Wholly Owned Operating Subsidiary
Fujian Yuxin Electronic Equipment Co., Ltd. (“YuXin”) was incorporated under the laws of People’s Republic of China on February 18, 1993.
The principal business of YuXin is to manufacture and distribute water dispenser systems. YuXin owns patents of atmospheric water generation in China and utilizes patents under license that are registered in the United States. Its head office and plant facilities are located in Ron Qiao Economic Development Zone, Fuqing City, Fujian Province, P.R. China.
Going Concern
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America applicable to a going concern which assume that the Company will realize its assets and discharge its liabilities in the normal course of business. The Company has a working capital deficiency of $1,759,242 at March 31, 2007 and a net loss of $438,593 for the quarter then ended. The Company might not have sufficient work capital for the next twelve months and is dependent on financing to continue operation. These factors create substantial doubt as to the ability of the Company to continue as a going concern. Realization values may be substantially different from the carrying values as shown in these financial statements should the Company be unable to continue as a going concern. Management is in the process of identifying sources for additional financing to fund the ongoing development of the Company’s business.
F-4
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated on consolidation.
Basis of presentation
These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“USGAAP”).
Accounting Method
The Company financial statements are prepared using the accrual method of accounting. Property, Plant and Equipment assets are stated at cost. Depreciation and amortization uses the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.
Use of estimates
The preparation of financial statements in conformity with USGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash that is not collateralized and accounts receivable that are unsecured. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.
Cash and cash equivalents
Cash consists of cash on deposit with the Company’s banks.
.
F-5
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Inventories
Inventories consist of the manufacture of finished goods, raw materials used in production and work-in-process, and are stated at the weighted average method, on a first-in, first-out (“FIFO”) basis.
Income taxes
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statement at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB Statement No. 109, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Compensated absences
Employees of the corporation are entitled to paid vacations, sick days and other time off depending on job classification, length of service and other factors and these costs are accrued on a monthly basis.
Stock based compensation
Effective January 1, 2005, the Company adopted revised SFAS No.123(R), “Share-Based Payment” which replaces SFAS No.123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees.” This statement, which requires the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transaction. The statement applies to all awards granted, modified repurchased or cancelled after January 1, 2005, and unvested portion of previously issued and outstanding awards. Stock-based compensation newly issued in 2005 is expensed in accordance with the fair value based method of accounting. The fair value of equity instruments issued to employees is measured on the date of grant and recognized as compensation expense over the applicable vesting period. The Company estimates the fair value of stock options using the Black-Scholes option valuation model.
F-6
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Earnings per Common Share
The Company adopted Financial Accounting Standards (SFAS) No. 128. Earnings Per Share which simplifies the computation of earnings per share requiring the restatement of all prior periods.
Basic earnings per share are computed on the basis of the weighted average number of common shares outstanding during each year.
Diluted earnings per share are computed on the basis of the weighted average number of common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive 350,000 stocks on diluted earnings per share are excluded from the calculation.
Long-lived assets
The Company adopts SFAS 144 “Accounting for the impairment or disposal of long-lived assets.” The Company recognizes an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its expected undiscounted cash flows and measures an impairment loss as the difference between the carrying amount and fair value of the asset.
Capital assets and depreciation
Capital assets are recorded at cost. Depreciation is provided on the straight line method based on the following estimated useful life, with a 10% residual value. Depreciation expense for the quarter ended March 31, 2007 and the year ended December 31, 2006 are $19,545 and $79,917, respectively.
Buildings | 20 years | |
Manufacturing machinery and equipment | 10 years | |
Transportation equipment | 10 years | |
Electronic equipment | 5 years | |
Leasehold Improvement | 10 years | |
Office equipment | 5 years |
Revenue recognition
Hendrx generates revenue through the sale of atmospheric water generation units to wholesale distributors or to individual consumers. Revenues are recognized only when persuasive evidence for a sales arrangement exists i.e., delivery of the product has occurred; the product price is fixed or determinable; and collection of the sale is reasonably assured.
F-7
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Account Receivables
Accounts receivable are uncollateralized customer obligations due under normal trade terms. Management regularly evaluates the need for an allowance for uncollectible accounts by taking into consideration factors such as the type of clients; governmental agencies or credit lines of the client. Management has determined that allowance for bad debt will be based on a percentage of aged receivables. Allowance for bad debt at March 31, 2007 is estimated to be $0.
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Asset Retirement Obligations
Legal obligations associated with the retirement of tangible long-lived assets are recorded as liabilities. The liabilities are calculated using the net present value of the cash flows required to settle the obligation. A corresponding amount is capitalized to the related asset. Asset retirement costs are charged to earnings in a manner consistent with the depreciation, depletion and amortization of the underlying asset. The liabilities are subject to accretion over time for changes in the fair value of the liability through charges to accretion which is included in cost of sales and operating expenses.
It is possible that the Company’s estimates of its ultimate asset retirement obligations could change as a result of changes in regulations, the extent of environmental remediation required, the means of reclamation or cost estimates. Changes in estimate are accounted for prospectively from the period the estimate is revised.
Research and development
Research and development costs, which include the cost of materials and services consumed and salaries and wages of personnel directly engaged in research and development, are expensed as incurred. The costs incurred were $2,414 and $3,844 in the first quarters of 2007 and 2006, respectively.
Intangible assets and amortization
Land use rights
The subsidiary, Fujian Yuxin Electronic Equipment Co., Ltd., entered into an agreement on May 15, 1995 for land use rights with Fujian Fuqing Land Management Bureau for a 50 year period. These rights are recorded at the appraised value at the date of acquisition and amortized over a maximum period of 40 years.
F-8
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Patents
The Company owns patents of atmospheric water generation (“AWG”) registered in the People’s Republic of China under number P200304823. The subsidiary utilizes patents under licenses that are registered in the United States under the numbers 5,106,512, 5,149,466, 5,203,989 and 5,366,705.
The patents are recorded at the appraised value at the date of acquisition and amortized over 15 years.
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Impairment of Goodwill
The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. FAS-142,Goodwill and Other Intangible Assets, requires that goodwill and certain intangible assets be assessed annually for impairment using fair value measurement techniques.
Specifically, goodwill impairment is determined using a two-step process.
The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of Fujian Yuxin Electronic Equipment Co. Ltd (“Yuxin”), with its carrying amount, including goodwill. The estimates of fair value of Yuxin, are determined using various valuation techniques with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s budget and long-term plans. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. Discount rate assumptions are based on an assessment of the risk inherent in the Company. If the carrying amount of Yuxin exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the implied fair value of Yuxin’s goodwill with the carrying amount of that goodwill. If the carrying amount of Yuxin’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
The Board of Directors of the Company have considered the above factors and believed the implied fair value of Yuxin to be in excess of its carrying amount, therefore, the goodwill associated with Yuxin is considered to not be impaired.
F-9
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Financial instruments
The company’s financial instruments consist of cash, accounts receivable and current liabilities. Unless otherwise noted, it is management’s opinion that the company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values.
Note 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d) |
Segmented information
The Company’s identifiable assets are all located in China except cash of $27,765 in Canada and cash of $438 in Switzerland, cash of $835 in Hong Kong and fixed assets of $2,585 in Canada. Revenue on a geographical basis is disclosed in Note 12, below.
Foreign currency translation
The Company’s functional and reporting currency is the United States Dollar. The financial statements of the Company are translated to United States Dollars in accordance with SFAS No.52 “Foreign Currency Translation”. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. Foreign currency transactions are primarily undertaken in RMB. Foreign Currency Translation Adjustments are included in Other Comprehensive Income and disclosed as a separate category of Stockholders’ Equity.
Recent Accounting Pronouncements (Cont’d)
In September 2006, the Financial Accounting Standards Board (the“FASB”) issued Statements of Financial Accounting Standards(“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158”). SFAS 158 requires an employer that sponsors one or more single-employer defined benefit plans to (a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position, (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS 87,“Employers’ Accounting for Pensions”, or SFAS 106,“Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for
F-10
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS 158 is effective for the Corporation’s fiscal
Recent Accounting Pronouncements (Cont’d)
year ending 31 December 2007. This adoption of this statement is not expected to have a significant effect on Hendrx’s future reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). The Statement provides guidance for using fair value to measure assets and liabilities. The Statement also expands disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurement on earnings. This Statement applies under other accounting pronouncements that require or permit fair value measurements. This Statement does not expand the use of fair value measurements in any new circumstances. Under this Statement, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. SFAS 157 is effective for the Corporation for fair value measurements and disclosures made by the Corporation in our fiscal year beginning on 1 January 2008. We are currently reviewing the impact of this statement.
In March 2006, the Financial Accounting Standards Board (the “FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets”, which amends SFAS No. 140. SFAS No. 156 may be adopted as early as 1 January 2006, for calendar year-end entities, provided that no interim financial statements have been issued. Those not choosing to early adopt are required to apply the provisions as of the beginning of the first fiscal year that begins after 15 September 2006 (e.g. 1 January 2007, for calendar year-end entities). The intention of the new statement is to simplify accounting for separately recognized servicing assets and liabilities, such as those common with mortgage securitization activities, as well as to simplify efforts to obtain hedge-like accounting. Specifically, the FASB said SFAS No. 156 permits a service using derivative financial instruments to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute, or fair value. The adoption of SFAS No. 156 is not expected to have a material impact on our financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.”This statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. It establishes a requirement to evaluate interests in securities financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS 155 clarifies which interest only strips and principal only strips are not subject to the requirements Statement 133. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This
F-11
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Hendrx’s results of operations or financial position.
Note 3. | ACQUISITION OF EASTWAY GLOBAL INVESTMENTS LIMITED AND ITS WHOLLY-OWNED OPERATING SUBSIDIARY FUJIAN YUXIN ELECTRONICEQUIPMENT CO., LTD. |
On December 16, 2004, the Company acquired from Mr. Hendrik Tjandra, Eastway Global Investment Limited, a corporation formed under the laws of the British Virgin Islands, a “Holding Company” the latter of which owns a Chinese “Operating company” named FuJian Yuxin Electronic Equipment Co., Ltd.
The Operating Company carries on the business of the design, manufacture and sale of atmospheric water generators from a facility on lands leased by the operating company located in Fujian, China.
The Holding Company was the owner of all of its registered capital of the Operating company, and Mr. Hendrik Tjandra (“Hendrik”) was the owner of all the issued and outstanding shares in the capital of the Holding Company.
David Tjahjadi, the son of Hendrik Tjandra, is also a principal to the agreement as he is an officer and director of the Operating Company.
Hendrik Tjandra and David Tjahjadi are named “the Principals” in the agreement.
Terms and conditions of this agreement are as follows:
(a) | a deposit of $300,000 deposited with the solicitors of Kirin Capital pursuant to a letter Agreement dated October 29, 2004 between Kirin Capital Corp., the Principals and the Operating Company. | |
(b) | The purchase price for the shares is $3,500,000 cash plus the market value of purchase price shares, in (d); below, and in future earn-out shares as computed in (e), below. | |
(c) | The cash purchase price of $3,5000,000, has been paid. | |
(d) | the issuance on closing of 12,720,000 common shares to Hendrik equal to 40% of the issued and outstanding shares of HENDRX Corp., which have been issued, are held in escrow as collateral for the acquisition to insure various terms are ultimately completed before release to Hendrik. | |
(e) | an earn-out bonus to the Principals, in equal shares, the number of shares required to bring the principals’ aggregate holding of shares in the capital of HENDRX Corp. up to 51% within 30 days after the release and publication of HENDRX Corp.’s audited |
F-12
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
financial statements for the first fiscal year in which the gross revenue, on a consolidated basis, exceeds $15,000,000 related to atmospheric water generators.
Note 3. | ACQUISITION OF EASTWAYGLOBAL INVESTMENTS LIMITED AND ITSWHOLLY-OWNED OPERATINGSUBSIDIARY FUJIAN YUXIN ELECTRONICEQUIPMENT CO., LTD. (Cont’d) |
(f) | The payment dates in (c)(iii) and (iv), above, shall have an additional “Grace Period” of 60 days to make any such payment. Interest shall accrue during the Grace Period for Hendrik’s benefit on any unpaid amount at the rate of 18% per annum, compounded monthly. | ||
(g) | A non-compete agreement whereby the Principals agree not to compete with the Businesses carried on by HENDRX Corp. and /or the Operating company or any affiliates or related companies, anywhere in the world, for a period of 2 years from the closing date. | ||
(h) | Funding commitment by HENDRX Corp. as follows: | ||
(i) | to raise financing or dedicate existing financing and resources, of $1,500,000 for further development of the Business, within 30 days after the closing date; and | ||
(ii) | after closing, HENDRX Corp. shall formalize with Hendrik an irrevocable marketing commitment and strategy for marketing the business and for increasing market and investor awareness of the Business, whereby HENDRX Corp. shall use its best commercial efforts to raise financing, or to dedicate existing financing and/or resources, of $2,000,000 to be allocated therefrom as to (a) $1,000,000 to market the operating company and promote the Business, market and product strategy, and (b) $1,000,000 to increase brand and product awareness through video, digital print and electronic media, endorsements, sponsorship and media campaigns. | ||
The market price of 12,720,000 common shares issued for this acquisition was $2.68 per common share for total stock consideration of $34,090,200 plus cash payments of $3,500,000 on the terms, as outlined above, for total consideration of $37,590,200. |
Note 3. | ACQUISITION OF EASTWAYGLOBAL INVESTMENTS LIMITED AND ITSWHOLLY-OWNED OPERATINGSUBSIDIARY FUJIAN YUXIN ELECTRONICEQUIPMENT CO., LTD. (Cont’d) |
There is goodwill on the acquisition, computed as follows:
F-13
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Assets Acquired | ||||
Current Assets | $ | 1,973,259 | ||
Fixed Assets | 5,071,568 | |||
Intangible Assets | 3,069,352 | |||
Total Assets | 10,114,179 | |||
Liabilities Assumed | ||||
Current Liabilities | 4,378,116 | |||
Net Equity | 5,736,063 | |||
Consideration issued, as above | 37,590,200 | |||
Goodwill, on acquisition | $ | 31,854,137 |
The acquisition agreement was signed on December 16, 2004. Net profit from the operations of the subsidiary of Fujian Yuxin Electronic Equipment Co., Ltd. is included in these financial statements from the date of acquisition.
Note 4. INVENTORIES
March 31 | December 31 | ||||||
2007 | 2006 | ||||||
Finished goods | $ | 302,972 | $ | 379,674 | |||
Raw materials | 833,025 | 815,442 | |||||
Work-in-process | 891,215 | 697,390 | |||||
Total | $ | 2,027,212 | $ | 1,892,506 |
Note 5. INTANGIBLE ASSETS AND ACCUMULATED AMORTIZATION
March 31, 2007 | Accumulated | Net Book | ||||||||
Cost | Amortization | Figures | ||||||||
Land use rights | $ | 1,772,490 | $ | 350,884 | $ | 1,421,606 | ||||
Patents | 2,065,759 | 842,745 | 1,223,014 | |||||||
Total | $ | 3,838,249 | $ | 1,193,629 | $ | 2,644,620 |
F-14
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
December 31, 2006 | Accumulated | Net Book | ||||||||
Cost | Amortization | Figures | ||||||||
Land use rights | $ | 1,788,410 | $ | 342,076 | $ | 1,446,334 | ||||
Patents | 2,060,759 | 822,666 | 1,238,093 | |||||||
Total | $ | 3,849,169 | $ | 1,164,742 | $ | 2,684,427 |
Amortization expenses for the quarter ended March 31, 2007 and the years ended December 31, 2006 are $46,873 and $177,787 respectively.
Note 6. PROPERTY, PLANT AND EQUIPMENT
March 31, 2007 | Accumulated | |||||||||
Cost | Depreciation | Net | ||||||||
Buildings | $ | 2,961,322 | $ | 734,882 | $ | 2,226,440 | ||||
Manufacturing machinery and equipment | 4,557,219 | 1,340,619 | 3,216,600 | |||||||
Transportation equipment | 310,721 | 119,533 | 191,188 | |||||||
Electronic equipment | 90,529 | 74,540 | 15,989 | |||||||
Leasehold improvement | 18,376 | 3,173 | 15,203 | |||||||
Office equipment | 79,421 | 56,057 | 23,364 | |||||||
Construction in progress | - | - | - | |||||||
Total | $ | 8,017,588 | $ | 2,328,804 | $ | 5,688,784 |
December 31, 2006 | Accumulated | |||||||||
Cost | Depreciation | Net | ||||||||
Buildings | $ | 3,015,392 | $ | 700,834 | $ | 2,314,558 | ||||
Manufacturing machinery and equipment | 4,413,280 | 1,232,346 | 3,180,934 | |||||||
Transportation equipment | 302,267 | 113,548 | 188,719 | |||||||
Electronic equipment | 96,449 | 74,884 | 21,565 | |||||||
Leasehold improvement | 18,377 | 2,714 | 15,662 | |||||||
Office equipment | 76,336 | 54,028 | 22,309 | |||||||
Construction in progress | 82,714 | - | 82,714 | |||||||
Total | $ | 8,004,814 | $ | 2,178,354 | $ | 5,826,460 |
Depreciation expenses for the quarter ended March 31, 2007 the years ended December 31, 2006 are $19,545 and $79,917, respectively.
F-15
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 7. COMMON STOCK BASED COMPENSATION
Authorized
350,000,000 voting common shares at par value of $0.001 per share
Net Loss Per Share
Basic and diluted weighted average numbers of shares outstanding for the year ended December 31, 2006 are as follows:
Three Months Ended | Year Ended | |||||||||
March 31, | December 31, | |||||||||
2007 | 2006 | 2006 | ||||||||
Numerator-Basic / Diluted | ||||||||||
Net loss available for common stock | 438,593 | 436,145 | 2,974,186 | |||||||
Weighted average number of shares | ||||||||||
(after forward split) | ||||||||||
Basic | 37,238,067 | 37,238,067 | 37,238,067 | |||||||
Diluted | 37,238,067 | 37,238,067 | 37,238,067 | |||||||
Net Profit (Loss) per share | ||||||||||
Basic | $ | 0.01 | $ | 0.01 | $ | (0.08 | ) | |||
Diluted | $ | 0.01 | $ | 0.01 | $ | (0.08 | ) |
350,000 Stock Options outstanding at March 31, 2007 are excluded from fully diluted Net Profit (Loss) per share due to anti-dilution.
Note 7. COMMON STOCK (Cont’d)
Stock Options / Stock Based Compensation
Stock options outstanding at March 31, 2007:
Options Outstanding | |||||
Weighted- | |||||
Number | Average | Number | Number | ||
Outstanding at | Remaining | Exercisable at | Exercisable at | ||
March 31, | Contractual | Exercise | March 31, | March 31, | |
2007 | Life (years) | Price | 2007 | 2006 | |
350,000 | 3 | $1.50 | -- | -- |
F-16
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
The fair value of these options was determined using the Black-Scholes option pricing model, recognizing forfeitures as they occur, using the following assumptions:
Options outstanding | 350,000 | |
Stock price | $5.80 | |
Risk free interest rate | 4.50% | |
Expected volatility | 745% | |
Expected dividend yield | $0 |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. The Company’s stock options are not transferable and cannot be traded. The Black-Scholes model also requires an estimate of expected volatility. The Company uses historical volatility rates of the Company to arrive at an estimate of expected volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore do not necessarily provide a reliable measure of the fair value of the Company’s stock options.
Stock based compensation expensed for the year ended December 31, 2005 was $1,764,000 and is also disclosed as contributed surplus. There were no options granted by March 31, 2007.
Note 8. ACCOUNTS PAYABLE
March 31, | December 31, | ||||||
2007 | 2006 | ||||||
Accounts payable - trade | $ | 919,362 | $ | 887,609 | |||
Other payables | 109,646 | 82,026 | |||||
Total | $ | 1,029,008 | $ | 969,635 |
Note 9. RELATED PARTY TRANSACTIONS
(a) During the three months ended March 31, 2007, sales to related parties are as follows:
F-17
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Three Months Ended | Three Months Ended | ||||||
March 31, | March 31, | ||||||
Related Parties | 2007 | 2006 | |||||
Hendrik Tjandra | 258 | 4,230 | |||||
Total | $ | 258 | $ | 4,230 |
(b) | During the three months ended March 31, 2007, purchases from related parties are as follows: |
Three Months Ended | Three Months Ended | ||||||
December 31, | December 31, | ||||||
Related Parties | 2007 | 2006 | |||||
Fuqing Huanyu plastic products Co., Ltd. | |||||||
controlled by sister of Mr. Hendrik Tjandra | $ | 11,050 | $ | - | |||
Mr. Hendrik Tjandra | - | ||||||
Total | $ | 11,050 | $ | - |
(c) | During the three months ended March 31, 2007, the Company paid or accrued total consulting services of $58,953 to officers and directors. | |
(d) | Balances due from related parties, are as follows: |
March 31, | December 31, | ||||||
2007 | 2006 | ||||||
Fujian Tienyu Steel Products Co.,Ltd. | |||||||
owned by Mr Hendrik Tjandra | 66,603 | - | |||||
Fuzhou sales Department | 1,330 | 1,316 | |||||
Fuqing Yuongxian Pringting Co.,Ltd | 5,090 | 5,037 | |||||
controlled by sister of Mr Hendrik Tjandra | |||||||
Total | $ | 73,023 | $ | 6,353 |
F-18
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 9. RELATED PARTY TRANSACTIONS (Cont’d)
(e) | Balances due to related parties, are as follows |
M arch 31, | December 31, | ||||||
2007 | 2006 | ||||||
Fujian Tiansheng Agricultrual Stock Holding Co. | 323,750 | 155,266 | |||||
Controlled by brother of Mr Hendrik Tjandra | |||||||
PT.Galakst Perkasa | 12,427 | 30,430 | |||||
Controlled by Mr Hendrik Tjandra | |||||||
Fuqing Huanyu Plastic Products. Co.Ltd | 17,627 | 25,683 | |||||
Controlled by sister of Mr Hendrik Tjandra | |||||||
George Solymar | 105,000 | 70,000 | |||||
CEO & director of the Company | |||||||
Nadir Walji | 13,500 | ||||||
Director of the Company | |||||||
Total | $ | 472,304 $ | 281,380 |
Note 10. SHORT TERM BANK LOANS/GUARANTEES
Short-term loans are borrowing from banks. The terms of these short term loans are summarized as follows:
Three Month Ended | Year Ended | |||||||||
Interest Rate | March 31 | December 31 | ||||||||
(Per Year) | 2007 | 2006 | ||||||||
Agricultural Bank of China, | ||||||||||
Fuqing Branch | 5.55% to 7.344% | $ | 2,162,653 | $ | 2,139,627 | |||||
XingYie Bank, | ||||||||||
Fuqing Branch | 7.61% | 418,285 | 384,364 | |||||||
Total | $ | 2,580,939 | $ | 2,523,991 |
These short-term loans are secured by the Company’s assets and guaranteed by Fujian Tianyu Steel Products Co., Ltd. owned by Mr Hendrik Tjandra. Bank interests for the three months ended March 31 2007 and the years ended December 31, 2006 are $45,093 and $183,365, respectively.
F-19
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
The Company also provides guarantees of bank loans of, Fujian Tianyu Steel Products Co., Ltd., owned by the Chairman of Hendrx Corp, in the amount of $4,338,250 (RMB33,500,000) at March 31, 2007 and December 31, 2006 and $4,292,020.
Bank guarantees and bank loans of Fujian Tianyu Steel Products Co., Ltd., as borrower from the banks, are below:
Note 10. SHORT TERM BANK LOANS/GUARANTEES (Cont’d)
Bank Loan Payable | Maximum Amount | ||||||||||||
Balance at | of Guarantee at | ||||||||||||
March 31, 2007 | March 31, 2007 | ||||||||||||
RMB | US$ | RMB | US$ | ||||||||||
Fuqing Agriculture Bank | 23,500,000 | $ | 3,043,250 | 23,500,000 | $ | 3,043,250 | |||||||
Communication Bank | 10,000,000 | 1,295,000 | 10,000,000 | 1,295,000 | |||||||||
TOTAL | 33,500,000 | $ | 4,338,250 | 33,500,000 | $ | 4,338,250 |
These loans are secured by general security on all of the assets of Fujian Tianyu Steel Products Co., Ltd.
Bank Loan Payable | Maximum Amount | ||||||||||||
Balance at | of Guarantee at | ||||||||||||
December 31, 2006 | December 31, 2006 | ||||||||||||
RMB | US$ | RMB | US$ | ||||||||||
Fuqing Agriculture Bank | 23,500,000 | $ | 3,010,820 | 23,500,000 | $ | 3,010,820 | |||||||
Communication Bank | 10,000,000 | 1,281,200 | 10,000,000 | 1,281,200 | |||||||||
TOTAL | 33,500,000 | $ | 4,292,020 | 33,500,000 | $ | 4,292,020 |
These loans are secured by general security on all of the assets of Fujian Tianyu Steel Products Co., Ltd.
Note 11. PENSION AND EMPLOYMENT LIABILITIES
The Company does not have any liabilities as at March 31, 2007, for pension, post-employment benefits or post-retirement benefits. The Company does not have a pension plan.
Note 12. GEOGRAPHIC INFORMATION
(a) Revenue from customers
F-20
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Three Months Ended | Three Months Ended | ||||||||||||
March 31, 2007 | March 31, 2006 | ||||||||||||
Countries | $ | % | $ | % | |||||||||
China | 31,066 | 14.78% | 16,774 | 5.16% | |||||||||
Israel | (76,508 | ) | -36.41% | (23,443 | ) | -7.21% | |||||||
Lebanon | 76,796 | 36.54% | 182,283 | 56.09% | |||||||||
Saudi Arabia | - | 0.00% | 55,172 | 16.98% | |||||||||
United States | 1,146 | 0.55% | 78,552 | 24.17% | |||||||||
Malaysia | 120,080 | 57.14% | - | 0.00% | |||||||||
France | 19,471 | 9.27% | - | 0.00% | |||||||||
Others | 38,105 | 18.13% | 15,617 | 4.81% | |||||||||
Total | 210,156 | 100.00% | $ | 324,955 | 100.00% |
Note 13. PATENTS
In 2003, Mr. Hendrik Tjandra transferred his patents of atmospheric water generation (“AWG”) to the wholly-owned subsidiary, Fujian Yuxin Electronic Equipment Co., Ltd. These patents are registered in the People’s Republic of China under the number P200304823. The subsidiary utilizes patents under licenses that are registered in the United States under the numbers 5,106,512, 5,149,466, 5,203,989 and 5,366,705.
Based on the appraisal report dated May 20, 2003 by Fujian Huayi Assets Appraisal Co., Ltd., these patents are valued at $2,068,390 (RMB 17,090,000 Yuan) and have been amortized by $324,935 to December 31, 2005.
On December 15, 2006, the Company received an independent appraisal of the patents. The appraiser gave his opinion of the value based on a 5 year projected cashflow analysis, and determined the value to be $1,238,093 (RMB 10,400,000). The net book value was higher than the fair value at December 31, 2006 and was therefore impaired. The company expensed $358,350 as an impairment of the patent to bring the book value in line with the appraisal value.
Note 13. PATENTS (Cont’d)
The following table represents the total estimated amortization of the Patents for the five succeeding years:
For the Year Ending December 31 | Estimated Amortization Expense | |||
2007 | $ | 141,118 | ||
2008 | $ | 141,118 | ||
2009 | $ | 141,118 | ||
2010 | $ | 141,118 | ||
2011 | $ | 141,118 |
F-21
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Note 14. TAXES
The Company has incurred an operating loss in the year ended December 31, 2006 that may be available to offset future taxable income. The Company has adopted Financial Accounting Standards No. 109, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
Components of deferred tax assets as of March 31, 2007 and 2006 respectively are as follows:
As of | |||||||
March 31 | December 31 | ||||||
2007 | 2006 | ||||||
Net operating loss carry forward | $ | 0 | $ | 0 | |||
Valuation allowance | $ | 0 | $ | 0 | |||
Net deferred tax asset | $ | 0 | $ | 0 |
The components of current income tax expense as of March 31, 2007 and 2006 respectively are as follows:
As of December 31 | |||||||
March 31 | December 31 | ||||||
2007 | 2006 | ||||||
Current federal tax expense | $ | - | $ | - | |||
Current state tax expense | $ | - | $ | - | |||
Change in NOL benefits | $ | 0 | $ | 0 | |||
Change in valuation allowance | $ | 0 | $ | 0 | |||
Income tax expense | $ | - | $ | - |
The Company has operations in China and Canada, neither of which allow for carryfoward of tax losses.
Note 15. SALES DISTRIBUTORS
F-22
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
The Company has entered into agreements with a number of entities that will act as sales distributors for the Company. These parties are either independent third parties or related parties. Terms and conditions with these sales distributors may vary, but they essentially require the sales distributor to commit to buy finished products from the Company, to sell these products to their customers and to provide technical support to their customers as ongoing follow-up of sales.
Note 16 LONG TERM LOAN RECEIVABLE
As atMarch 31, 2007, a subsidiary of the Company has a loan of RMB850,000 or US$ 110,075 (as at December 31, 2004, the loan was RMB950,000 or US$ 114,952) receivable from Hengxing Trading Company. The loan was arranged in August 2002 by the subsidiary in China for business development purposes. This amount is unsecured, yields no interest, with no specific terms of repayment. This loan has been reclassified as a long-term loan as it has been outstanding since 2002. Management expects this loan to be paid in full and accordingly; no allowance for doubtful accounts has been recorded.
Note 17 COMMITMENTS AND CONTINGENTS
Our principal executive offices are located at Suite #2610-1066 West Hastings Street in Vancouver, British Columbia, Canada. The office space is comprised of approximately 1000 square feet for which we pay $2,257 per month on a two months lease.
Worldwide Water, LLC
Legal proceedings were initiated on January 18, 2006 by Worldwide Water, LLC (“WWL”) against a number of defendants, including Hendrx, in the Superior Court for the County of Los Angeles, State of California, case no SC088178 for contractual fraud and patent infringement. The complaint alleges that an agreement between WWL and AirWater Corporation (“AirWater”) was contravened when AirWater contracted with Fujian Yuxin Electronic Equipment Co. Ltd., a wholly owned subsidiary of Hendrx, to manufacture atmospheric water generators (“AWGs”), on an original equipment manufacturer (OEM) basis, that allegedly infringe WWL’s patents. WWL’s suit seeks damages of $1,000,000 from the defendants, including Hendrx, in addition to accrued interest and costs. Hendrx did not enter an appearance in this action. On March 17, 2006 a default judgment was entered against Hendrx. As at the date of this filing this judgment has not been set aside. Hendrx is attempting to retain and instruct counsel to have the default judgment vacated or to Hendrx denies that it is culpable. Hendrx cannot give any assurance that it will be successful in its opposition to the plaintiffs claim and may be compelled to pay all or part of any judgment against it. Even if Hendrx is a successful in having the default judgment set aside or the case reopened it will face the cost of litigation and may ultimately be unsuccessful. The Company has recorded a $1,000,000 contingent liability to account for the judgment.
Seymour Water, Inc.
F-23
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
Legal proceedings were initiated on June 2, 2006 by Seymour Water, Inc. (“Seymour”) against Hendrx, in the Supreme Court of British Columbia, Vancouver Registry, Action No. S063600 for an alleged breach of contract purportedly instigated by Yuxin. The complaint alleges that an agreement between Seymour and Yuxin was contravened when Yuxin delivered equipment to Seymour that was unfit for the purpose of intended use. Seymour’s suit seeks damages of approximately $100,000 from Hendrx in addition to accrued interest and costs. Hendrx denies any culpability or liability in this matter and has filed pleadings and motions in response to the complaint that it believes will ultimately cause Hendrx to succeed in defending this position.
H2O Liquidair of Florida, LLC
Legal proceedings were initiated, and the Company was served on December 28, 2006 by H2OLiquidair of Florida, LLC, a Florida LLC, (“H2L”) against a number of defendants, including Fujian Yuxin Electronic Equipment Co., Ltd (“Yuxin”) a wholly owned subsidiary of Hendrix and Hendrx Corp. in the United States District Court for the Southern District of Florida, Miami Division, Case No. 06-cv-22591-Seitz, for breach of contract, defective products and interfering by competing in its territory. The complaint alleges that several agreements entered between H2L and Yuxin during the years 2001 and 2002 to manufacture atmospheric water generators, on an original equipment manufacturer basis, that allegedly failed to perform when delivered in 2002. H2L’s suit seeks monetary damages from the defendants, including Hendrx, in addition to accrued interest and costs. Hendrx did not enter an appearance in this action. On January 23, 2007 a default judgment was entered against Hendrx and its subsidiary Fujian Yuxin Electronic Equipment Co., Ltd. As at the date of this filing this judgment has not been set aside. A final order of default has not been entered. Hendrx has retained and instructed counsel and is attempting to have the default judgment vacated or to reopen the case and respond to the allegations on their merits. Hendrx denies any culpability or liability in this matter. Hendrx cannot give any assurance that it will be successful in its opposition to the plaintiffs claim and may be compelled to pay all or part of any judgment against it. Even if Hendrx is successful in having the default judgment set aside or the case reopened it will face the cost of litigation and may ultimately be unsuccessful. The default judgment was not quantified; therefore, the potential liability is not estimable. Management believes the amount recorded for contingencies is adequate for all potential claims.
The Company provides a one-year product warrantee for service on our product sales. The company’s policy regarding product warrantees is to estimate the liability associated with costs to repair or replace units received on product warrantees. The companies past history of costs associated with warrantee repairs or replacements have not been material. In the future as sales increase, the warrantee liability will become material and the company will record the proper liability.
During the 2005 and 2006 year, Mr.Tjandra authorized various lending and borrowing transaction with companies and individuals who were related to him. These transactions were done without the approval of the board of directors of Hendrx, Corp. These financial statements do not account
F-24
HENDRX CORP. |
Notes to Consolidated Financial Statements |
March 31, 2007 |
(Expressed in US Dollars) |
for any potential contingencies that may arise from these unauthorized transactions. Also the shares being held in escrow in the name of Mr Tjandra from the acquisition of the Fujian Yuxin operation pending various actions to be performed by Mr Tjandra, may be compromised due to non-performance. If these shares are returned to treasury, the recorded value of goodwill could be virtually eliminated.
F-25
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS |
This Management's Discussion and Analysis and other parts of this report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsections entitled "Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition" and "Risk Factors" below. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this report. Our fiscal year end is December 31.
Description of Business
Hendrx is engaged in the research and development, manufacture, marketing and world wide distribution of water generation, filtration, ionization, desalinization, and purification devices. Our main product lines include Atmospheric Water Generation (“AWG”) units, Alkaline Calcium Ionic Water Dispensers, and Reverse Osmosis (“RO”) systems.
Mission Statement
Our mission is to design and manufacture highly reliable atmospheric water generators and water-purification appliances at affordable prices, allowing consumers to obtain high-quality, yet economical, purified drinking water, regardless of their geographical location or economic conditions.
Vision Statement
Our vision is for Hendrx to become the premier worldwide supplier of high-quality, purified drinking water through the use of unique, revolutionary and innovative technologies, and provide a complete solution to the world’s drinking water needs.
Goals and Objectives
Our goals and objectives are as follows:
Increase overall market share, remain a “Market Leader” in the atmospheric water industry, and attain business plan targets.
Hendrx will implement the following strategies pursuant to this goal:
• | Increase revenues through sales; |
• | Increase revenues through higher profit margins; |
• | Acquire companies with existing distribution networks and healthy revenue stream, thereby immediately owning the infrastructure; |
• | Expand Hendrx horizontally through joint ventures or acquisition of companies with unique and/or revolutionary technologies or products; and |
• | Implement an aggressive, yet carefully developed and well-conceived marketing campaign to create brand and product awareness. |
4
Manufacture defect and trouble free equipment.
An important reason for the failure of many AWG companies is defects that have continued to plague the industry. The concept of producing water from the air is not a new one, however, using the water for drinking purposes is. Typical air conditioning or dehumidification companies have the ability to manufacture appliances that produce water from the air but they do not have the expertise and “knowhow” to purify the water and maintain purity of the water. On the other hand, some water filtration/purifier appliance manufacturers have the knowledge to purify and/or filter water, but they do not have the capability to ensure trouble-free operations of water machines.
At this time, it is crucial for Hendrx to manufacture only reliable, trouble-free water machines. The ability to have a truly “plug and play” machine without service calls and technical problems is crucial to us.
Become financially stable.
Numerous atmospheric water companies have failed because they ran out of funds, either before they could successfully produce machines or before they could enter the market. Hendrx must ensure that we have sufficient funds to move forward in pursuit of our goals and objectives.
Be highly profitable to our shareholders.
We aim to create an extraordinary value to our shareholders through advanced research and development of new, innovative, safe and highly effective products that help people around the world live healthier, happier and longer lives.
Help establish a professional industry image.
One problem which has continuously plagued the infant atmospheric water industry is the lack of professionalism by the players, most of which have been small operations attempting to enter into a multi billion water industry. Often, small companies represented products that were manufactured by factories with little or no knowledge in building atmospheric water generators. As a result, many consumers ended up with products that did not work well if at all.
Our intent is to erase the “garage industry” mentality from the atmospheric water industry and build a professional industry image in which the players value quality, reliability, and place a high emphasis on fostering a professional relationship with their network of distributors, agents and dealers by ensuring protection and support necessary to build a lasting and mutually profitable business.
Reaching Our Goals and Objectives
To reach the above goals and objectives, Hendrx has fully formulated and has begun implementation of a series of strategies which we refer to as our “10-Step” plan, as follows:
1. | Restructure Corporation and Management | |
2. | Improve and Rectify Manufacturing Processes | |
3. | Establish Additional Assembly Facility (United States) | |
4. | Establish Research and Development Facility | |
5. | Develop and Launch New Products | |
6. | Establish Regional Offices | |
7. | Increase Number of Distributors |
5
8. | Develop and Implement Support Systems for Distributors | |
9. | Restructure Finances and Debt | |
10. | Consolidate the Industry |
Additionally, our marketing strategy, not fully in place at this time, will focus on the following:
- To determine ideal geographical markets;
- To obtain and sign as many distributors as possible in the selected geographical targets;
- To develop as sound marketing plan;
- To increase Hendrx’s brand and product awareness;
- To saturate the market;
- To increase revenues through sale and acquisitions; and
- To develop a retail market campaign.
Further, we have begun developing comprehensive national and international sales campaigns as well as taken steps to improve customer satisfaction with after sales service.
Quantitative and Qualitative Disclosures of Various Risks
Historically Hendrx has not been able to generate sufficient cash flow to expand marketing, manufacturing capacity and fund necessary research and development. Accordingly, there can be no assurance that our business strategy will provide sufficient cash flows to accomplish those objectives defined by management for future growth. Should we be unable to generate sufficient cash flow from the sale of our products, we will be required to seek financing from alternative sources such as additional sales of our common stock or incurring additional debt in order to accomplish our current marketing, manufacturing and research and development objectives. Hendrx can provide no assurance that such efforts, if necessary, would be successful.
Hendrx’s business development strategy is prone to significant risks and uncertainties which can have an immediate impact on efforts to increase net cash flow and deter future prospects of revenue growth. Our financial condition and results of operations depend primarily on revenue generated from the sale of AWG units and our ability to control expenses. Hendrx has a limited history of generating revenue which should not be viewed as an indication of continued growth and a historical record of incurring losses. Should we be unable to consistently generate revenue and reduce or stabilize expenses to the point where it can maintain net cash flow, such failure will have an immediate impact on the its ability to continue its business operations.
The directors of the Company through the financial statements have become aware of certain actions taken by Hendrik Tjandraand his management of the affairs of FuJian Yuxin Electronic Equipment Co., Ltd. The CEO and other directors have made inquiries of Mr. Tjandra concerning the accounting policies of the subsidiary, the transfer of money to a related parties (see Auditor’s note #17) and the subsidiary’s compliance with the terms of the share purchase agreement ( see Auditor’s notes # 9 and 10). It appears that Mr.Tjandra has resigned as chairman of the board, at least in part, as a response to these inquiries.
RESULTS OF OPERATIONS
Hendrx’s financial statements are stated in U.S. dollars in accordance with US GAAP and are consolidated with the financial statements of Eastway and Yuxin for the periods ended March 31, 2007 and 2006.
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During the period ended March 31, 2007, Hendrx was engaged in the research and development, manufacturing and marketing of AWG units from Fujian, China. Hendrx expects that during 2007 we will embark on a comprehensive marketing plan for the sale of AWG units while focusing on innovation through research and development.
During the period ended March 31, 2007, Hendrx realized a net loss of $438,593 from operations.
Three month periods ended March 31, 2007 and 2006
Gross Revenue
Revenue for the three month period ended March 31, 2007 was $210,156 as compared to $324,955 for the three month period ended March 31, 2006, a decrease of 35%. Revenue in the three month periods is based almost entirely on the sale of AWG units, which sales have dropped off significantly in the current period due to product complaints and the return of shipped product. Product modifications are now being tested to address these complaints. Hendrx expects to increase gross revenue over the next twelve months as we manufacture an improved product and focus on the implementation of our marketing plan.
Cost of Goods Sold
Cost of goods sold for the three months period ended March 31, 2007 was $286,237 as compared to $334,319 for the three month period ended March 31, 2006, a decrease of 14%. Cost of goods sold can be attributed primarily to the purchase of components used in the AWG units. The decrease in cost of goods sold reflects the corresponding decrease in revenue over the periods. However, the cost of goods sold remains high as we have not realized maximum production capacity from our manufacturing facility which negatively impacts our cost for each unit produced. Hendrx expects that the cost of goods sold will continue to fluctuate as a percentage of revenue decreasing on a per unit basis relative to production increases.
Expenses
Selling expenses for the three month period ended March 31, 2007 were $26,645 as compared to $70,309 for the three month period ended March 31, 2006, a decrease of 62%. Hendrx anticipates that selling expenses will increase over the next twelve months as a comprehensive marketing strategy is launched to increase sales of our AWG units.
General and administrative expenses for the three month period ended March 31, 2007 were $272,562 as compared to $315,802 for the three month period ended March 31, 2006, a decrease of 14%. General and administrative expenses include personnel costs, consulting fees, professional advice, accounting expenses, auditing fees, public reporting and travel. Hendrxanticipates that general and administrative will keep to decrease in future periods.
Net Losses
Net losses for the three month period ended March 31, 2007 decreased to $438,593 from $436,145 for the comparable three month period ended March 31, 2006, a decrease of 1%. Net losses in the current three month period can be primarily attributed to general and administrative expenses and the decrease in revenues. Hendrx expects that net losses will continue to decrease in future periods in relation to
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anticipated increases in revenue and decreases in both our general and administrative costs and the cost of goods sold.
Liquidity and Capital Resources
Cash flow used for operations in the three month period ended March 31, 2007 was $240,129 as compared to cash flow used for operations of $400,499 for the three month period ended March 31, 2006. Cash flow used for operations for the current three month period can be primarily attributed to net losses. Hendrx expects that a decrease in net losses in future periods will produce cash flow from operations.
Cash flow provided by financing activities for the three month period ended March 31, 2007 was $281,201, as compared to cash flow provided by financing of $219,969 for the three month period ended March 31, 2006. Cash flow provided by financing activities in the current three month period can be attributed to short term bank loans and advances from related parties. Hendrx expects to produce additional cash flow from financing activities during 2007.
Cash flow used in investing activities for the three month period ended March 31, 2007 was $9,754 as compared to the decrease of $13,327 for the three month period ended March 31, 2006. Cash flow used in investing activities in the current three month period can be primarily attributed to the purchase of capital assets.
Capital Deficit
Hendrx had a working capital deficit of $1,759,242 as of March 31, 2007 and has funded its cash needs since inception from revenue in combination with debt and equity financing provided by banks and other related and unrelated parties. Hendrx anticipates that cash flow from revenues and anticipated equity placements will be sufficient to fund operations in 2007. However, there can be no assurance that Hendrx will generate sufficient cash flows from revenue or debt or equity placements to fund current operations. Since any earnings, if realized, are anticipated to be reinvested in operations, cash dividends are not expected to be paid in the foreseeable future. Commitments for future capital expenditures will be primarily funded by future equity financings.
Loans
Hendrx’s bank loans of $2,580,938 are all guaranteed by Fujian Tienyu Steel Products Co., Ltd., (“Tienyu”) a company owned by the chairman of the board of directors of Hendrx. In return, Hendrx, through its subsidiary Yuxin, has guaranteed Tienyu’s bank loans. Based on the financial results of Tienyu, Hendrx believes that Tienyu will be able repay its loans on a consistent basis. Nonetheless, Hendrx intends to reduce these mutual guarantees gradually over time.
The Company entered into a financing arrangement with First Capital Invest Corp., a Swiss Corporation. Pursuant to the terms of the financing arrangement First Capital Invest Corp. agreed to provide up to $1 million in exchange for:
1. | A Convertible, Secured, Revolving Promissory Note; | |
2. | A Bridge Loan and Representation Agreement | |
3. | A security interest secured by the assets of the company |
The company intends to use the credit facility provided under this financing arrangement to fund its operations while it implements its business strategy.
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On Jan. 09, 2007 the company used funds from the credit facility to supplement a shortfall in profit. To date the company has received $10,000 from the credit facility.
Under the terms of the Bridge Loan and Representation Agreement First Capital Invest Corp. agreed to use its best efforts to raise an additional $3.5 million in financing for the company.
Compensation Plan
Hendrx adopted a Stock Option and Compensation Plan (“Plan”) on March 12, 2005. Under the Plan, Hendrx may issue stock, stock appreciation rights, or grant options to acquire Hendrx's common stock to employees of Hendrx or its subsidiaries. The board of directors, at its own discretion may also issue stock, stock appreciation rights or grant options to other individuals, including consultants or advisors, who render services to Hendrx or its subsidiaries. Hendrx granted 350,000 options with an exercise price of $1.50 for a period of five years to all members of the board of directors as of March 12, 2005. As of March 31, 2007, none of the options had been exercised.
Hendrx, except in respect to the grant of stock options, has no defined benefit plan or contractual commitment with any of its officers or directors. However, Hendrx, intends to create a benefit plan and engage in contractual obligations with its officers and directors.
Equipment and Employees
Hendrx has no current plans to make any significant purchases of equipment but has plans to make significant changes in the number of employees as necessary.
Income Tax Expense (Benefit)
Hendrx recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The deferred tax liability associated with any net earnings will be offset by deferred tax assets related to Hendrx’s the net operating loss carryforwards. A valuation allowance has been recorded for the remaining amount of net deferred tax asset due to the uncertainty surrounding its ultimate realization.
Impact of Inflation
Hendrx believes that inflation has had a negligible effect on operations over the past three years. Hendrx believes that it can offset inflationary increases in component costs by increasing revenue and improving operating efficiencies.
Critical Accounting Policies
In Note 2 to the unaudited consolidated financial statements for the period ended March 31, 2007 and 2006 included in this Form 10-QSB, Hendrx discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. Hendrx believes that the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America.
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The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, management evaluates these estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. Hendrx bases its estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Hendrx generates revenue through the sale of AWG, reverse osmosis, and ionic units and other related products whether to wholesale distributors or to individual consumers. Revenues are recognized only when (a) persuasive evidence for a sales arrangement exists, (b) delivery of the product has occurred, (c) the product fee is fixed or determinable, and (d) collection of the fee is reasonably assured. Revenue derived from the sale of services is initially recorded as deferred revenue on the balance sheet. The amount is recognized as income over the term of the contract.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in sections titled “Management’s Discussion and Analysis”, with the exception of historical facts, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These forward looking statements include, but are not limited to, statements concerning:
- our anticipated financial performance and business plan;
- the sufficiency of existing capital resources;
- our ability to raise additional capital to fund cash requirements for future operations;
- uncertainties related to the acceptance of Hendrx’s current and future products;
- the ability of Hendrx to achieve and maintain sufficient revenues to fund operations;
- the volatility of the stock market and;
- general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that could cause our actual results to differ materially from those discussed or anticipated, including the factors set forth in the section entitled “Risk Factors” below. We also wish to advise readers not to place any undue reliance on the forward looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other that is required by law.
Risk Factors
We have a history of significant operating losses and such losses may continue in the future.
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Since our inception in 1998, our expenses have significantly exceeded our revenue, resulting in continuing losses and an accumulated deficit of $5,890,787 at December 31, 2006. During fiscal 2006 we recorded a net loss of $2,974,186. We believe that may continue to incur operating losses until such time as we realize the benefits of our recently revamped marketing and sales plans.
Hendrx competes against companies with larger and better-financed corporations.
Hendrx operates in a highly competitive market with financial rewards pending on market performance. Some of our competitors are multi-million enterprises with more resources for research and development as well as marketing. If any of these competitors focused upon the AWG market, we would be at a significant disadvantage in reaping our markets’ financial rewards.
Hendrx may fail to adequately manage growth.
The strategic plan being implemented by Hendrx is expected to yield significant growth. This growth requires infrastructure and personnel, as well as expanded operations, and needs to be properly managed. Should we fail to adequately manage our growth potential, our operations could be significantly impaired.
We are dependent upon key personnel who would be difficult to replace.
Hendrik Tjandraa director and chairman of the board of Hendrx since 16 December, 2004 resigned as a director on March 30, 2007. But remained as head of operations of the company in China as he has since 1992. Our continued operation will be largely dependent upon the efforts, knowledge and abilities of our management team. A loss of management’s strategic vision and the core of the team would be a hindrance to our prospects and success. Our future success also will depend in large part upon Hendrx’s ability to identify, attract and retain other highly qualified managerial, technical and sales and marketing personnel. Competition for these individuals is intense. The inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel could make it more difficult for us to maintain our operations and meet key objectives.
We have an integral dependence on marketing.
Hendrx has an ambitious vision and has developed a well conceived plan to reach its objectives. The scope of the plan will require high profile marketing, including the possibility of joint marketing campaigns with compatible companies. Failure to initiate and successfully implement excellent marketing efforts could adversely affect our capacity to execute our plan.
Our business is largely dependent on a limited number of customers
For the year ended December 31, 2006, one customer, Librex Group S.A.L., accounted for approximately 33% of our net sales. We do have a contract with this customer though all of sales to them are made through purchase orders for OEM product. The loss of this customer, including through an acquisition, other business combination or their loss of business from their customers could have a substantial and adverse effect on our business. We have in the past, and may in the future, lose our major customers or a substantial portion of our business with one or more major customers. If we do not sell products to customers in the quantities anticipated, or if a major customers reduces or terminates its relationship with us, market perception of our products and technology, growth prospects, and financial condition and results of operations could be harmed. Any termination of our relationship with, or significant reduction or modification of the products we manufacture for Librex would materially reduce our revenue.
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The market for our stock is limited and our stock price may be volatile.
The market for our common stock has been limited due to low trading volume and the small number of brokerage firms acting as market makers. Because of the limitations of our market and volatility of the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day.
We may incur significant expenses as a result of being quoted on the Over the Counter Bulletin Board, which may negatively impact our financial performance.
We incur significant legal, accounting and other expenses as a result of being listed on the Over the Counter Bulletin Board. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission has required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. As a result, there may be a substantial increase in legal, accounting and certain other expenses in the future, which would negatively impact our financial performance and could have a material adverse effect on our results of operations and financial condition.
Our internal controls over financial reporting may not be considered effective, which could result in a loss of investor confidence in our financial reports and in turn have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual report for the year ending December 31, 2007, we may be required to furnish a report by our management on our internal controls over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by management. The report will also contain a statement that our independent registered public accounting firm has issued an attestation report on management's assessment of internal controls. If we are unable to assert that our internal controls are effective as of December 31, 2007, or if our independent registered public accounting firm is unable to attest that our management's report is fairly stated or they are unable to express an opinion on our management's evaluation or on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline.
Going Concern
Hendrx’s auditor expressed concern as to Hendrx’s ability to continue as a going concern as a result of recurring losses, limited revenue-generating activities and working capital deficiency of $1,710,742 as of March 31, 2007, and may not have sufficient working capital for the next twelve months. Hendrx’s ability to continue as a going concern is subject to the ability of Hendrx to realize net income and obtain funding from outside sources. Management’s plan to address Hendrx’s ability to continue as a going concern, include: (1) obtaining funding from private placement sources; (2) obtaining additional funding from the sale of Hendrx’s securities; (3) generating sufficient revenues to sustain operations; and (4) obtaining loans and grants from various financial institutions, where possible. Although management believes that it will be able to obtain the necessary funding to allow Hendrx to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.
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ITEM 3. | CONTROLS AND PROCEDURES |
Hendrx’s chief executive officer and chief financial officer are responsible for establishing and maintaining disclosure controls and procedures for the Hendrx.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2007. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our chief executive officer and chief financial officer, in a manner that allowed for timely decisions regarding disclosure.
(b) Changes in Internal Controls
During the period ended March 31, 2007, there has been no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
The Company’s management, including the chief executive officer and chief financial officer, does not expect that its disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control. The design of any systems of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Individual persons perform multiple tasks which normally would be allocated to separate persons and therefore extra diligence must be exercised during the period these tasks are combined.
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PART II
ITEM 1. | LEGAL PROCEEDINGS |
Worldwide Water, LLC
Legal proceedings were initiated on January 18, 2006 by Worldwide Water, LLC (“WWL”) against a number of defendants, including Hendrx, in the Superior Court for the County of Los Angeles, State of California, case no SC088178 for contractual fraud and patent infringement. The complaint alleges that an agreement between WWL and AirWater Corporation (“AirWater”) was contravened when AirWater contracted with Fujian Yuxin Electronic Equipment Co. Ltd., a wholly owned subsidiary of Hendrx, to manufacture atmospheric water generators (“AWGs”), on an original equipment manufacturer (OEM) basis, that allegedly infringe WWL’s patents. WWL’s suit seeks damages of $1,000,000 from the defendants, including Hendrx, in addition to accrued interest and costs. Hendrx did not enter an appearance in this action. On March 17, 2006 a default judgment was entered against Hendrx. As at the date of this filing this judgment has not been set aside. Hendrx is attempting to retain and instruct counsel to have the default judgment vacated or to reopen the case and respond to the allegations on their merits. Hendrx denies that it is culpable. Hendrx cannot give any of assurance that it will be successful in its opposition to the plaintiffs claim and may be compelled to pay all or part of any judgment against it. . Even if Hendrx is a successful in having the default judgment set aside or the case reopened it will face the cost of litigation and may ultimately be unsuccessful.
Seymour Water, Inc.
Legal proceedings were initiated on June 2, 2006 by Seymour Water, Inc. (“Seymour”) against Hendrx, in the Supreme Court of British Columbia, Vancouver Registry, Action No. S063600 for an alleged breach of contract purportedly instigated by Yuxin. The complaint alleges that an agreement between Seymour and Yuxin was contravened when Yuxin delivered equipment to Seymour that was unfit for the purpose of intended use. Seymour’s suit seeks damages of approximately $100,000 from Hendrx in addition to accrued interest and costs. Hendrx denies any culpability or liability in this matter and has filed pleadings and motions in response to the complaint that it believes will ultimately cause Hendrx to succeed in defending this position.
H2O Liquidair of Florida, LLC
Legal proceedings were initiated, and the Company was served on December 28, 2006 by H2OLiquidair of Florida, LLC, a Florida LLC, (“H2L”) against a number of defendants, including Fujian Yuxin Electronic Equipment Co. Ltd. (“Yuxin”) a wholly owned subsidiary of Hendrx and Hendrx Corp., in the United States District Court for the Southern District of Florida, Miami Division, Case No. 06-cv-22591-Seitz, for breach of contract, defective products and interfering by competing in its territory. The complaint alleges that several agreements entered between H2L and Yuxin during the years 2001 and 2002 to manufacture atmospheric water generators, on an original equipment manufacturer basis, that allegedly failed to perform when delivered in 2002. H2L’s suit seeks monetary damages from the defendants, including Hendrx, in addition to accrued interest and costs.. Hendrx did not enter an appearance in this action. On January 23, 2007 a default judgment was entered against Hendrx and its subsidiary Fujian Yuxin Electronic Equipment Co., Ltd. As at the date of this filing this judgment has not been set aside. A final order of default has not been entered. Hendrx has retained and instructed counsel to have the default judgment vacated or to reopen the case and respond to the allegations on their merits. Hendrx denies any culpability or liability in this matter. Hendrx cannot give any assurance that it will be successful in its opposition to the plaintiffs claim and may be compelled to pay all or part of any
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judgment against it. Even if Hendrx is a successful in having the default judgment set aside or the case reopened it will face the cost of litigation and may ultimately be unsuccessful.
ITEM 2. | CHANGES IN SECURITIES |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM5. | OTHER INFORMATION |
ITEM6. | EXHIBITS |
Exhibits required to be attached by Item 601 of Regulation S-B are listed in the Index to Exhibits on page 33 of this Form 10-QSB, and are incorporated herein by this reference.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, this 11thday of May, 2007.
Hendrx Corp. | ||
/s/ George Solymar | ||
Name: | George Solymar | |
Title: | Chief Executive Officer | |
/s/ Cherry Cai | ||
Name: | Cherry Cai | |
Title: | Chief Financial Officer and Principal Accounting Officer |
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INDEX TO EXHIBITS
EXHIBIT | PAGE | |
NO. | NO. | DESCRIPTION |
3(i)(a) | * | Articles of Incorporation of Hendrx adopted May 4, 1998 (incorporated by reference to the Form 10-SB filed with the Securities and Exchange Commission (“Commision”) on January 12, 2004). |
3(i)(b) | * | Amendment to the Articles of Incorporation dated March 28, 2005 (incorporated by reference to the Form 10-KSB filed with Commision on April 15, 2005). |
3(ii) | * | Bylaws of Hendrx adopted May 4, 1998 (incorporated by reference to the Form 10-SB filed with the Commission on January 12, 2004). |
10 | * | Share Purchase Agreement dated December 16, 2004 (incorporated by reference to the Form 8-K filed with the Commission on December 20, 2005). |
31(a) | ||
31(b) | ||
32(a) | ||
32(b) | ||
99 | * | Stock Option Plan adopted March 12, 2005 (incorporated by reference to the Form 10-KSB filed with the Commission on April 15, 2005). |
* | Incorporated by reference from previous filings of Hendrx. |
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