U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the three-month period ended September 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER: 000-33195
XINHUA CHINA LTD.
______________________________________________
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 88-0437644
_________________________________ ___________________
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7A-11CHANWAI MEN PROPERTY TRADE
CENTER OFFICE BUILDING
NO. 26 CHAOYANMEN WEI STREET
CHAOYANG DISTRICT, BEIJING
PEOPLE'S REPUBLIC OF CHINA
________________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
86-10-85656588
___________________________
(ISSUER'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION NAME OF EACH EXCHANGE ON WHICH
12(b) OF THE ACT: REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.000025 PAR VALUE
(TITLE OF CLASS)
Indicate by checkmark whether the issuer: (1) has 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 checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS.
N/A
Indicate by checkmark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding Outstanding as of November
of each of the issuer's classes of common 12, 2007
stock, as of the most practicable date:
Class
Common Stock, $0.00025 par value 54,638,890
-2-
XINHUA CHINA LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION 5
Item 1. Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Discloses About Market Risk 13
Item 4. Controls and Procedures 14
Item 4T. Controls and Procedures 14
PART II - OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 1A. Risk Factors 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
-3-
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Xinhua China Ltd. files annual, quarterly, current reports, proxy statements,
and other information with the Securities and Exchange Commission (the
"Commission"). You may read and copy documents referred to in this Quarterly
Report on Form 10-Q that have been filed with the Commission at the Commission's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov.
-4-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XINHUA CHINA LTD.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
-5-
XINHUA CHINA LTD.
CONTENTS PAGES
Report of Registered Independent Public Accounting Firm F-1
Consolidated Balance Sheet F-2-3
Consolidated Statement of Income F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to the Financial Statements F-7-20
-6-
Board of Directors and Stockholders
Xinhua China Ltd.
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We have reviewed the accompanying interim consolidated Balance Sheets of Xinhua
China Ltd. ("the Company") as of September 30, 2007 and June 30, 2007, and the
related statements of income, stockholders' equity, and cash flows for the
three-months ended September 30, 2007 and 2006. These interim consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California Samuel H. Wong & Co., LLP
November 3, 2007 Certified Public Accountants
F-1
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2007 AND JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 9/30/2007 6/30/2007
__________ __________
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 4 $ 3,262 2,733
Accounts Receivable, NET 210,709 185,246
Receivable from trustee 5 - -
Note receivable 6 1,000,000 1,000,000
Other receivables and prepayments 7 204,054 201,186
__________ __________
Total Current Assets $1,418,025 1,389,165
LONG-TERM ASSETS
Property, Plant & Equipment, NET 8 11,133 14,094
Note receivable, long-term portion 6 625,000 625,000
Distribution network right, NET - -
Goodwill, NET - -
__________ __________
Total Long-term Assets 636,133 639,094
__________ __________
Total Assets $2,054,158 $2,028,259
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities 9 732,602 693,207
Deferred revenue 59,659 73,427
Current portion of loans payable 10 1,787,643 1,787,643
Due to related parties - -
__________ __________
Total Current Liabilities 2,579,904 2,554,277
LONG-TERM LIABILITIES
Loans Payable 10 1,058,261 1,058,261
Loans from shareholders 11 5,144,231 5,080,430
__________ __________
Total Long-term Liabilities 6,202,492 6,138,691
Total Liabilities 8,782,396 8,692,968
__________ __________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-2
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2007 AND JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 2007 2006
____________ ____________
Minority Interest - -
STOCKHOLDERS' EQUITY
Common Stock $0.0001 Par Value
500,000,000 Shares Authorized;
54,638,890 issued and outstanding at
September 30, 2007 and June 30, 2007 546 546
Additional Paid in Capital 10,520,506 10,423,526
Accumulated Other Comprehensive
Income 9,774 8,749
Accumulated Deficit (17,259,064) (17,097,530)
____________ ____________
Total Stockholders' (Deficit)/Equity (6,728,238) (6,664,709)
____________ ____________
____________ ____________
Total Liabilities & Stockholders' Equity $ 2,054,158 $ 2,028,259
============ ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-3
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2007 AND 2006
(STATED IN US DOLLARS)
NOTE 2007 2006
__________ ____________
REVENUE
Revenue, NET $ - $ 50,220
Revenue, NET - related parties - -
COST OF SALES
Cost of Sales, NET - 45,449
Cost of Sales, NET - related parties - -
__________ ____________
Gross Profit - 4,771
OPERATING EXPENSES
Selling, General, and Administrative
Expenses 78,301 461,431
Stock-based Compensation - 68,665
__________ ____________
Total Operating Expense 78,301 530,096
__________ ____________
Loss from Operations (78,301) (525,325)
__________ ____________
OTHER INCOME
Interest Income 11 476
OTHER EXPENSES
Interest Expense 83,243 771,076
__________ ____________
Loss before minority interest and income (161,534) (1,295,925)
Minority interest in net loss of
consolidated subsidiaries - -
__________ ____________
Loss before Income Tax (161,534) (1,295,925)
Income Tax - -
__________ ____________
Net Loss $ (161,534) $ (1,295,925)
========== ============
__________ ____________
Net Loss per common share- $ -0.01 $ -0.03
Basic & Diluted Earnings Per Share
__________ ____________
Weighted Average Shares Outstanding 57,723,668 52,779,765
__________ ____________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-4
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AS OF SEPTEMBER 30, 2007 AND JUNE 30, 2007
(STATED IN US DOLLARS)
NO. ADDITIONAL OTHER
OF COMMON PAID IN COMPREHENSIVE COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL INCOME(LOSS) INCOME(LOSS) DEFICIT TOTAL
___________ _____ __________ ___________ _______ ___________ __________
Balance, July 1, 2006 61,779,765 618 9,684,907 (16,470,021) 19,478 (16,489,500) (6,784,497)
Additional Paid-in Capital 738,619 738,619
Cancellation of outstanding
shares (10,000,000) (100) (100)
Issuance of shares to Highgate 2,859,125 28 28
Foreign Currency translation (10,729) (10,729) (10,729)
Net Loss for year (608,030) (608,030) (608,030)
___________ _____ __________ ___________ _______ ___________ __________
Balance, June 30, 2007 54,638,890 546 10,423,526 (17,088,780) 8,749 (17,097,530) (6,664,709)
=========== ===== ========== =========== ======= =========== ==========
Balance, July 1, 2007 54,638,890 546 10,423,526 (17,088,780) 8,749 (17,097,530) (6,664,709)
Additional Paid-in Capital:
o Imputed interest from
Shareholder 83,281 83,281
o Deferred Revenue
amortized as interest 13,699 13,699
__________ ___________
96,980 96,980
Foreign Currency translation 1,025 1,025 1,025
Net Loss for year (161,534) (161,534)
___________ _____ __________ ___________ _______ ___________ __________
Balance, September 30, 2007 54,638,890 546 10,520,506 (17,249,289) 9,774 (17,259,064) (6,728,238)
=========== ===== ========== =========== ======= =========== ==========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-5
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE QUARTER ENDED SEPTEMBER 30, 2007 AND 2006
(STATED IN US DOLLARS)
9/30/2007 6/30/2007
____________ ____________
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $ (161,534) $ (1,295,925)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 822 12,182
Stock-based compensation - 68,665
Net gain on deconsolidation of a subsidiary - -
Amortization of deferred imputed interest 13,768 677,898
Imputed interest expense 83,213 93,178
Allowance for doubtful accounts - -
Loss on Vancouver office discontinuation - -
Changes in assets and liabilities:
Decrease/(Increase) Accounts receivable (25,463) -
Decrease/(Increase) Note Receivable - -
Decrease/(Increase) Other receivables and prepayments (2,868) (232,870)
Decrease/(Increase) Accounts Payable and accrued liabilities 39,395 19,183
Decrease/(Increase) in Deferred Revenue Inventory (13,768) -
____________ ____________
Net Cash Used in Operating Activities (2,908,974) (657,689)
____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with acquisition of Xinhua C&D - -
Deposits received from disposal of a subsidiary - 252,982
Advances to trustee - -
Purchase of plant and equipment - (9,681)
____________ ____________
Net Cash Used in Investing Activities - 243,301
____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from minority interests of Xinhua C&D - -
Common Stocks issued for cash - -
Proceeds from convertible debenture - -
Repayment of Loan Payable - -
Loans from shareholders 63,801 498,665
____________ ____________
Net Cash Provided by Financing Activities 63,801 498,665
____________ ____________
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR THE YEAR 529 82,562
EFFECT OF CURRENCY TRANSLATION (3,163) (1,715)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 2,733 224,192
____________ ____________
CASH & CASH EQUIVALENTS AT END OF YEAR $ 3,262 $ 306,754
============ ============
Cash paid for interest expenses 30 -
============ ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-6
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
1. ORGANIZATION AND BUSINESS BACKGROUND
Xinhua China Ltd. (the "Company", formerly Camden Mines Limited) was
incorporated in the State of Nevada, United States of America, on September
14, 1999. Until September 2004, the Company was a non-operating shell
company and considered as a development stage enterprise since its
inception. Effective from October 12, 2004, the Company changed to its
current name. The Company established an office in Vancouver, Canada;
however, this office was closed down in December 2006. The Company
established its principal executive office at A-11 Chaowai Men Property
Trade Center Office Building, No. 26 Chaoyangmen Wai Street, Chaoyang
District, Beijing, 100020, People's Republic of China.
On September 22, 2004, the Company's subsidiaries, Pac-Poly Investment Ltd.
("Pac-Poly") and Beijing Boheng Investments and Management Co., Ltd.
("Boheng") jointly entered into an Investment Agreement ("Investment
Agreement") with Xinhua Bookstore (Main Store) ("Xinhua Bookstore") to
acquire a 57.67% interest in publication distribution business in the
People's Republic of China ("PRC"). Pursuant to the Investment Agreement,
Xinhua Bookstore transferred the publication distribution business into a
newly formed Chinese company, called Xinhua C&D. Pac-Poly and Boheng agreed
to contribute $20.9 million (RMB173 million) in cash in exchange for 57.67%
interest in Xinhua C&D. 20% of $20.9 million is payable within two months
of closing the transaction and the remaining is payable within six months
of closing. The eight other founding member corporations ("Other Investors
Group") agreed to contribute $800,000 (RMB 7 million) in cash in exchange
for 2.33% interest in Xinhua C&D. 20% of $800,000 is payable within two
months of closing the transaction and the remaining is payable within six
months of closing. As of June 30, 2005, a total of $4.34 million was paid
by Pac-Poly, Boheng and the other investors group in accordance with the
payment schedule. The due date for the remaining cash contribution of 80%
amounting to $17.36 million originally expired on August 1, 2005 has been
extended to July 31, 2006. Pursuant to a letter of confirmation dated
October 7, 2005, Xinhua Bookstore has agreed to reduce the long-term loan
it extended to Xinhua C&D should any receivables acquired by Xinhua C&D
become uncollectible. The acquisition was completed on February 1, 2005.
As of May 31, 2006, the Company reduced its equity interest in Xinhua C&D
from 56.14% to 7.98% (note 4). Subsequent to the deconsolidation of Xinhua
C&D, the Company commenced the internet book distribution business through
Beijing Joannes Information Technology Co., Ltd. ("Joannes"). Details of
the Company's subsidiaries as of September 30, 2007 are described below: -
PLACE OF
INCORPORATION PARTICULARS OF EFFECTIVE
AND KIND OF PRINCIPAL ACTIVITIES ISSUED/REGISTERED INTEREST
NAME LEGAL ENTITY AND PLACE OF OPERATION SHARE CAPITAL HELD
___________________________ _______________________ ______________________ _________________ _________
Pac-Poly Investment Ltd. British Virgin Islands, Investment holding,PRC 10,000,000 ordinary 100%
a company with limited shares of US$1 par
liability value
Beijing Joannes Information PRC, a company with Sales and distribution Registered capital 100%
Technology Co., Ltd. limited liability of books, PRC US$1,250,000
F-7
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
2. GOING CONCERN UNCERTAINTIES
These consolidated financial statements have been prepared assuming that
Company will continue as a going concern, which contemplates the
realization of assets and the discharge of liabilities in the normal course
of business for the foreseeable future.
As of September 30, 2007, the Company had no working capital but current
liabilities exceeding current assets by $1,161,879, a negative operating
cash flow of $66,435 and an accumulated deficit of $17,259,064 due to the
fact that the Company continued to incur losses over the past several
years. Management has taken certain action and continues to implement
changes designed to improve the Company's financial results and operating
cash flows. The actions involve certain cost-saving initiatives and growing
strategies, including (a) reductions in headcount and corporate overhead
expenses; and (b) development of e-commerce business. Management believes
that these actions will enable the Company to improve future profitability
and cash flow in its continuing operations through June 30, 2008. As a
result, the financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the outcome of the Company's ability to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A.) BASIS OF PRESENTATION
These accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP").
(B.) USE OF ESTIMATES
In preparing these consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets
and liabilities in the balance sheets and revenues and expenses during
the year reported. Actual results may differ from these Estimates.
(C.) BASIS OF CONSOLIDATION
The interest of the Company in the subsidiaries was acquired by means
of exchange of shares in the Company pursuant to a share exchange
agreement on September 14, 2004. The transaction is considered a
transfer between entities under common control, within the meaning of
US GAAP. Accordingly, the assets and liabilities transferred have been
accounted for at historical cost or at their "fair value" at the date
of their original acquisition and have been included in the foregoing
financial statements as of the beginning of the periods presented.
The consolidated financial statements include the financial statements
of the Company and its subsidiaries. Subsidiaries are those entities
in which the Company, directly or indirectly, controls more than one
half of the voting power; has the power to govern the financial and
F-8
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
operating policies; to appoint or remove the majority of the members
of the board of directors; or to cast majority of votes at the meeting
of directors. All significant inter-company balances and transactions
within the Company have been eliminated on consolidation.
(D.) INVESTMENTS IN UNCONSOLIDATED ENTITIES
The investments in and the operating results of 50%-or-less-owned
entities not required to be consolidated are included in the
consolidated financial statements on the basis of the equity method of
accounting or the cost method of accounting, depending on specific
facts and circumstances.
The Company has an investment in a privately held entity in the form
of equity instruments that are not publicly traded and for which fair
values are not readily determinable. The Company records its
investment in a private entity under the cost method of accounting and
assesses the net realizable value of this entity on a quarterly basis
to determine if there has been a decline (other than temporary) in the
fair value of the entity, under Statement of Financial Accounting
Standards ("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES".
(E.) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried at cost and represent cash on
hand, demand deposits placed with banks or other financial
institutions and all highly liquid investments with an original
maturity of three months or less as of the purchase date of such
investments.
(F.) ACCOUNTS RECEIVABLE, NET
Accounts receivable are recorded at the invoiced amount and do not
bear interest. The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated risks
by performing credit checks and actively pursuing past due accounts.
An allowance for doubtful accounts is established and determined based
on managements' assessment of known requirements, aging of
receivables, payment history, the customer's current credit
worthiness, and the economic environment.
(G.) INVENTORIES, NET
Inventories consist primarily of books and are stated at the lower of
cost or net realizable value, with cost being determined on a weighted
average basis. A majority of the inventories carry the right of return
to publishers. An allowance for slow-moving inventories and
obsolescence is an estimate amount based on an analysis of current
business and economic risks, the duration of the inventories held,
whether the inventories carry the right of return to publishers and
other specific identifiable risks that may indicate a potential loss.
The allowance is reviewed regularly to ensure that it adequately
provides for all reasonable expected losses.
F-9
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
(H.) PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment are stated at cost less accumulated
depreciation and accumulated impairment losses, if any. Depreciation
is calculated on the straight-line basis over the following expected
useful lives from the date on which they become fully operational.
ASSET CLASSIFICATION DEPRECIABLE LIFE
____________________ ________________
Land use right 50 years
Buildings 50 years
Equipment and machinery 5 - 8 years
Motor vehicles 8 - 10 years
Leasehold improvement 2 years
Expenditure for maintenance and repairs is expensed as incurred. The
gain or loss on the disposal of property, plant, and equipment is the
difference between the net sales proceeds and the carrying amount of
the relevant assets and is recognized in the consolidated statement of
operations.
(I.) NATIONAL DISTRIBUTION RIGHT
The national distribution right enables the Company, through its
former subsidiary, Xinhua C&D, to distribute books and publications in
all provinces in The PRC without the need to obtain individual
provincial approval. The intangible asset is acquired as part of the
acquisition of Xinhua C&D at fair value. Management expects the right
will be renewed indefinitely for nominal periodic renewal costs.
Hence, the fair value of the national distribution right is not
amortized but will be evaluated annually in accordance with SFAS No.
142 "GOODWILL AND OTHER INTANGIBLE ASSETS", ("SFAS 142"). If facts or
circumstances suggest that the Company's intangible asset is impaired,
an impairment loss would be recognized in that period for the
difference between the carrying value of the intangible asset and its
estimated fair value based on discounted net future cash flows or
quoted market prices. There have been no impairment losses recognized
to date.
(J.) GOODWILL
The Company's goodwill is deemed to have an indefinite life and is no
longer amortized under SFAS No.142, but is subject to annual
impairment tests. If facts or circumstances suggest that the Company's
goodwill is impaired, the Company assesses the fair value of the
goodwill and reduces it to an amount that results in book value
approximating fair value. Under SFAS 142, goodwill impairment is
deemed to exist if the net book value of a reporting unit exceeds its
estimated fair value.
F-10
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
(K.) IMPAIRMENT OF LONG-LIFE ASSETS
In accordance with SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF', a
long-lived assets and certain identifiable intangible assets held and
used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For the purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived
assets. The Company reviews long-lived assets, if any, to determine
the carrying values are not impaired.
(L.) REVENUE RECOGNITION
Sales revenue is recognized when persuasive evidence of an arrangement
exists, the price is fixed and final, delivery has occurred and there
is reasonable assurance of collection of the sales proceeds. The
Company generally obtains purchase authorizations from its customers
for a specified amount of products at a specified price and considers
delivery to have occurred when the customer takes possession of the
products. The net sales incorporate offsets for discounts and sales
returns. Revenue is recognized upon delivery, risk and ownership of
the title is transferred and a reserve for sales returns is recorded
even though invoicing may not be completed. The Company has
demonstrated the ability to make reasonable and reliable estimates of
products returns in accordance with SFAS No. 48, "REVENUE RECOGNITION
WHEN RIGHT OF RETURN EXISTS".
Shipping and handling fees billed to customers are included in sales.
Costs related to shipping and handling are part of selling, general,
and administrative expenses in the consolidated statements of
operations. EITF No. 00-10, "ACCOUNTING FOR SHIPPING AND HANDLING FEES
AND COSTS" allows for the presentation of shipping and handling
expenses in line items other than cost of sales. For the quarter ended
September 30, 2007, there were no shipping and handling costs included
in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(M.) COST OF SALES
Cost of sales includes depreciation of property, plant, and equipment
and purchase costs to publishers.
(N.) VALUE-ADDED TAX
The Company is subject to value added tax ("VAT") imposed by the PRC
on sales. The output VAT is charged to customers who purchase books
from the Company and the input VAT is paid when the Company purchases
books from publishers. The VAT rate is 13%. The input VAT can be
offset against the output VAT.
F-11
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
(O.) ADVERTISING EXPENSES
The Company expenses advertising costs as incurred in accordance with
the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-7, "REPORTING FOR ADVERTISING COSTS". For the
year ended September 30, 2007, advertising expenses amount to zero.
(P.) COMPREHENSIVE INCOME
SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", establishes standards
for reporting and display of comprehensive income, its components, and
accumulated balances. Comprehensive income as defined includes all
changes in equity during a period from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of
changes in owners' equity consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.
(Q.) INCOME TAXES
The Company accounts for income tax using SFAS No. 109 "ACCOUNTING FOR
INCOME TAXES", which requires the asset and liability approach for
financial accounting and reporting for income taxes. Under this
approach, deferred income taxes are provided for the estimated future
tax effects attributable to temporary differences between financial
statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from
loss carry-forwards and provisions, if any. Deferred tax assets and
liabilities are measured using the enacted tax rates expected in the
years of recovery or reversal and the effect from a change in tax
rates is recognized in the statement of operations and comprehensive
(loss) income in the period of enactment. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of the
deferred tax assets will not be realized.
(R.) LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No. 128,
"EARNINGS PER SHARE". Basic loss per share is computed by dividing the
net loss by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common stock equivalents had been issued and if the
additional common shares were dilutive. The effect of outstanding
stock options, stock purchase warrants and convertible debenture,
which could result in the issuance of 54,638,890 shares of common
stock at September 30, 2007 is anti-dilutive. As a result, diluted
loss per share data does not include the assumed exercise 7f
outstanding stock options, stock purchase warrants, or conversion of
convertible debenture and has been presented jointly with basic loss
per share.
F-12
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
(S.) FOREIGN CURRENCIES TRANSLATION
The functional and reporting currency of the Company is the United
States dollars ("U.S. dollars"). The accompanying consolidated
financial statements have been expressed in U.S. dollars.
The functional currency of the Company's foreign subsidiaries is the
Renminbi Yuan ("RMB"). The balance sheet is translated into United
States dollars based on the rates of exchange ruling at the balance
sheet date. The statement of operations is translated using a weighted
average rate for the year. Translation adjustments are reflected as
cumulative translation adjustments in stockholders' equity.
EXCHANGE RATES 9/30/2007 9/30/2006
_________ _________
Period end RMB : US$ exchange rate 7.5176 7.9168
Average period RMB : US$ exchange rate 7.6757 7.9771
(T.) SEGMENT REPORTING
SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" establishes standards for reporting information about
operating segments on a basis consistent with the Company's internal
organization structure as well as information about geographical
areas, business segments and major customers in financial statements.
The Company operates in one principal reportable segment.
(U.) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which
include cash and cash equivalents, accounts receivables, other payable
and accrued liabilities, approximate their fair values due to the
short-term maturity of these instruments.
(V.) RELATED PARTIES
For the purposes of these financial statements, parties are considered
to be related if one party has the ability, directly or indirectly, to
control the party or exercise significant influence over the party in
making financial and operating decisions, or vice versa, or where the
Company and the party are subject to common control or common
significant influence. Related parties may be individuals or other
entities.
(W.) EQUITY-BASED COMPENSATION
The Company adopts SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" using the fair value method.
The Company uses the Black-Scholes Option Pricing Model to estimate
the fair value of options.
F-13
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
The Company has issued stock options to directors, officers,
employees, and consultants. As such, the Company records compensation
expense for stock options and awards only if the exercise price is
less than the fair market value of the stock on the measurement date.
Detailed movement of stock-based compensation has been disclosed in
the note 14 to consolidated financial statements. No options were
granted during the three months ended September 30, 2007.
(X.) CONVERTIBLE DEBENTURE ISSUED WITH STOCK PURCHASE WARRANTS
The Company accounts for the issuance of and modifications to the
convertible debt issued with stock purchase warrants in accordance
with APB No. 14, ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH
STOCK PURCHASE WARRANTS , EITF No. 98-5, ACCOUNTING FOR CONVERTIBLE
SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS, and EITF No. 00-27, APPLICATION OF ISSUE
NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS and SFAS No. 15,
ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS.
Due to the indeterminate number of shares, which might be issued under
the embedded convertible host debt conversion feature of these
debentures, the Company is required to record a liability relating to
both the detachable warrants and embedded convertible feature of the
notes payable (included in the liabilities as a "derivative
liability").
The accompanying consolidated financial statements comply with current
requirements relating to warrants and embedded derivatives as
described in SFAS 133 as follows: -
o The Company treats the full fair market value of the
derivative and warrant liability on the convertible secured
debentures as a discount on the debentures (limited to their
face value). The excess, if any, is recorded as an increase
in the derivative liability and warrant liability with a
corresponding increase in loss on adjustment of the
derivative and warrant liability to fair value.
o Subsequent to the initial recording, the change in the fair
value of the detachable warrants, determined under the
Black-Scholes option pricing formula and the change in the
fair value of the embedded derivative (utilizing the
Black-Scholes option pricing formula) in the conversion
feature of the convertible debentures are recorded as
adjustments to the liabilities as of September 30, 2006.
o The expense relating to the change in the fair value of the
Company's stock reflected in the change in the fair value of
the warrants and derivatives is included in interest expense
in the accompanying consolidated statements of operations.
F-14
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
(Y.) RECENTLY ISSUED ACCOUNTING STANDARD
In May 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND
ERROR CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20 AND FASB
STATEMENT NO. 3" ("SFAS 154"). SFAS 154 changes the requirements for
the accounting for and reporting of a change in accounting principle.
These requirements apply to all voluntary changes and changes required
by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS
154 is effective for fiscal years beginning after December 15, 2005.
As such, the Company has adopted these provisions, if any, at the
beginning of the fiscal year ended December 31, 2006.
In February 2006, the FASB issued SFAS Statement No. 155, "ACCOUNTING
FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS--AN AMENDMENT OF FASB
STATEMENTS NO. 133 AND 140" ("SFAS 155"). This Statement amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement
resolves issues addressed in Statement 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets." This Statement permits fair value
re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not
subject to the requirements of Statement 133, establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative
requiring bifurcation, clarifies that concentrations of credit risk in
the form of subordination are not embedded derivatives and 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. SFAS 155 is effective for all financial
instruments acquired or issued for the Company for fiscal year begins
after September 15, 2006. The adoption of this standard is not
expected to have a material effect on the Company's results of
operations or financial position.
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in
Income Taxes--an Interpretation of FASB Statement No. 109, which
clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognizes in its
consolidated financial statements the impact of a tax position if that
position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are
effective for the Company on January 1, 2007, with the cumulative
effect of the change in accounting principle, if any, recorded as an
adjustment to opening retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value
measurements, where fair value is the relevant measurement attribute.
The standard does not require any new fair value measurements. SFAS
157 is effective for financial statements issued for fiscal year
beginning after November 15, 2007, and interim periods within those
fiscal years.
F-15
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an
Amendment of SFAS 115" (SFAS No. 159), which allows for the option to
measure financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. The objective of SFAS 159
is to provide opportunities to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply hedge accounting provisions. SFAS
159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS No. 159 on our consolidated financial
statements.
The Company does not anticipate that the adoption of the above
standards will have a material impact on these consolidated financial
statements.
4. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following for the purposes of the
cash flow statement:
9/30/2007 9/30/2006
_________ _________
Cash at banks $ 3,262 $ 2,733
========= =========
5. RECEIVABLE FROM A TRUSTEE
On February 28, 2006, the Company entered an entrustment agreement (the
"Agreement") with Asia-Durable Investments (Beijing) Co. Ltd.
("Asia-Durable"), a company incorporated in the PRC. In accordance with the
Agreement, the Company agreed to entrust Asia-Durable on its behalf to
invest, set up, hold, and administer its interest of a company registered
in the PRC (the "Project Company"). The Company also provided a sum of $1.5
million (RMB 12 million) to Asia-Durable being the investment capital of
the Project Company in April 2006. The sum of $1.5 million is refundable at
the Company's option within one year from the date of the Agreement. As of
September 30, 2006, the effectiveness of the Project Company is subject to
the approval of Chinese government to enter into co-publishing arrangements
with foreign publishers.
The balance is unsecured, interest-free, and repayable within twelve
months. Eventually this account proves to be irrecoverable after pursuing
collection. An allowance for loss of $1,500,000 was provided in the
financial statements of September 30, 2007.
F-16
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
6. NOTE RECEIVABLE
The amount represents the sales proceeds receivable from the disposal of
Boheng. Pursuant to the Disposal Agreement the sales proceeds are
receivable in 5 installments and are due in full, no later than July 31,
2008.
SCHEDULED RECEIPT DATE APPROXIMATELY EQUAL TO RMB
______________________ _____________ ____________
March 10, 2007 $ 250,000 2,000,000
September 30, 2007 375,000 3,000,000
October 31, 2007 375,000 3,000,000
January 31, 2008 250,000 2,000,000
July 31, 2008 625,000 5,000,000
___________ __________
Total $ 1,875,000 15,000,000
Less: Paid (250,000) (2,000,000)
___________ __________
Balance at September 30, 2007 $ 1,625,000 13,000,000
___________ __________
The schedule payment of $375,000 on June 30, 2007 was still unpaid through
September 30, 2007. The balance is unsecured and interest-free. The Company
calculated the imputed interest income of $87,195 at the current effective
rate of 4.82% per annum and reduced from the gain on disposal of a
subsidiary. The amount is recognized as deferred revenue and will be
amortized as interest income over the terms of repayment period.
7. OTHER RECEIVABLES AND PREPAYMENT
9/30/2007 6/30/2007
___________ __________
Advances to employee $ - $ -
Goods and service tax receivable - -
Other receivables - -
Prepayments 204,054 201,186
_________ _________
$ 204,054 $ 201,186
========= =========
The carrying amounts of other receivables approximate their fair value.
F-17
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
8. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consist of the following:
9/30/2007 6/30/2007
_________ _________
Land Use Right $ - $ -
Buildings - -
Equipment and machinery 36,789 38,928
Motor vehicles - -
Leasehold Improvement - -
_________ _________
36,789 38,928
Less: Accumulated Depreciation 25,656 24,834
_________ _________
$ 11,133 $ 14,094
========= =========
Depreciation expense for the quarter ended September 30, 2007, was $822.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 2007 consist
of the following:
9/30/2007 6/30/2007
_________ _________
Accounts payable $ 732,602 $ 693,207
_________ _________
$ 732,602 $ 693,207
========= =========
10. LOANS PAYABLE/CONVERTIBLE DEBENTURE
On November 23, 2005, the Company entered into a debt financing agreement
(the "Agreement") with an institutional investor, and on March 23, 2006,
the Agreement was modified to include an additional institutional investor,
who is an affiliate of the original institutional investor (both
institutional investors collectively referred to as "the Investors"). The
Investors committed to purchase up to $4,000,000 of a secured convertible
debenture ("the debenture") that shall be convertible into shares of the
Company's common stock.
After two closings on December 13, 2005 and March 23, 2006, the Company
received gross proceeds of $3,250,000 (net proceeds $2,989,460) for the
secured convertible debenture. The Company and debenture-holders entered
into a Forbearance and Settlement Agreement on December 29, 2006 because of
default in debt service, whereby the Company agreed to make cash payment
and to grant rights to the creditors to cashless purchase the Company's
common stock by exercising the warrant at 200,000 shares in every three
month period beginning on December 29, 2006 according to the following
payment plan:
F-18
CONVERSION OF
PAYMENT DATE CASH PAYMENT DEBENTURE
__________________ ____________ _____________
March 10, 2007 $ 250,000 250,000
September 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
____________ _________
$ 1,875,000 1,875,000
============ =========
As of September 30, 2007, the Company paid $250,000 for the payment due
March 10, 2007 and the creditors exercised 100,000 shares and 125,000
shares on March 1, 2007 and April 18, 2007 respectively Loans Payable
outstanding as of September 30, 2007 amount to $2,845,904 of which
$1,787,643 and $1,058,261 attributed to current portion and long-term
respectively.
11. LOANS FROM SHAREHOLDERS
The outstanding amounts represent cash advanced from shareholders of the
Company.
These shareholders' loans are unsecured and not repayable within the next
twelve months. For the quarter ended September 30, 2007, there was $83,213
imputed interest recorded.
12. INCOME TAX
The Company is subject to US taxes at 35%. Pac-Poly is a BVI company and is
not subject to income taxes. Xinhua C&D and Boheng are subject to income
taxes in The PRC. Pursuant to the PRC Income Tax Laws, the subsidiaries are
generally subject to enterprise income tax ("EIT") at a statutory rate of
33% (30% national income tax plus 3% local income tax).
Neither the Company nor its subsidiaries had any assessable income for the
period and so neither provision nor benefit for EIT was recorded for the
quarter ended September 30, 2007.
Subject to the approval of the relevant tax authorities, the Company had
tax losses carry-forward against future years' taxable income.
As of September 30, 2007, valuation allowance of $873,110 was provided to
the deferred tax assets due to the uncertainty surrounding their
realization.
F-19
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
(STATED IN US DOLLARS)
13. CHINA CONTRIBUTION PLAN
Full-time employees of the Company are entitled to staff welfare benefits
including medical care, welfare subsidies, unemployment insurance and
pension benefits through a China government-mandated multi-employer defined
contribution plan. The Company is required to pay for these benefits based
on certain percentages of the employees' salaries. The total contributions
made for such employee benefits were $ 6,483 for the quarter ended
September 30, 2007.
14. STATUTORY RESERVES
The Company is required to make appropriations to reserves funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on after-tax net income determined in
accordance with generally accepted accounting principles of the People's
Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net income determined in
accordance with the PRC GAAP until the reserve is equal to 50% of the
Company's registered capital. Appropriation to the statutory public welfare
fund is 10% of the after-tax net income determined in accordance with the
PRC GAAP. Appropriations to the discretionary surplus reserve are made at
the discretion of the Board of Directors. The statutory public welfare fund
is established for providing employee facilities and other collective
benefits to the employees and is non-distributable other than in
liquidation. The Company made no appropriations to the statutory reserve,
as it did not have a pre-tax profit.
15. CONCENTRATION OF RISK
(A.) Major Customers and Vendors
100% of the Company's revenues were derived from customers located in
the PRC, and there are no customers and vendors who account for 10% or
more of revenues and purchases. The Company's assets are all located
in the PRC.
(B.) Credit Risk
There are no concentrations of credit risk because the Company, while
in operation, entered into large number of cash sale transactions
without deploying financial instruments, which may potentially drive
to significant concentrations.
16. COMMITMENT AND CONTINGENCIES
The Company leases an office premise under a non-cancelable operating
lease. The cost incurred under this operating lease is recorded as rental
expense and totaled $18,084 for the quarter ended September 30, 2007.
Future minimum rental payments due under a non-cancelable operating lease
until termination at November 30, 2007 are $12,052.
F-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS DEVELOPMENT
Xinhua China Ltd. was incorporated September 14, 1999 under the laws of the
State of Nevada as Camden Mines Limited ("Camden"). On October 12, 2004, Camden
changed its name from "Camden Mines Limited" to its current corporate name
"Xinhua China Ltd." The change in corporate name reflected our anticipation of
acquiring an interest in the Chinese book distribution giant" Xinhua Circulation
& Distribution ("Xinhua C&D").
As of the date of this Quarterly Report, we are a company establishing ourselves
as a leader in the digital media industry. As discussed below, we have refocused
our strategic business operation plans to maximize our strategic position in the
publishing industry. Please note that throughout this Quarterly Report, and
unless otherwise noted, the words "we," "our," "us," or the "Company" refer to
Xinhua China Ltd.
SUBSIDIARIES
PAC-POLY INVESTMENTS LIMITED
As of the date of this Quarterly Report, we hold of record 100% of the total
issued and outstanding shares of Pac-Poly Investments Limited ("Pac-Poly"),
which is our wholly-owned subsidiary. Pac-Poly is an investment holding company.
We maintain a 7.98% effective interest in Xinhua C&D through Pac-Poly.
BEIJING JOANNES INFORMATION TECHNOLOGY CO. LT.
On May 9, 2006, we formed Beijing Joannes Information Technology Co. Lt.
("Beijing Joannes"), as our Chinese wholly owned subsidiary, to launch a digital
media content initiative. We held of record 100% of the total issued and
outstanding shares of Beijing Joannes. Beijing Joannes was formed for the
purpose of launching a digital media content initiative with the web site
branded www.geepip.com. The business focus is building online communities with
connectivity to an ecommerce engine, which allows for the online purchase of
e-books, e-audio, and computer games. Hard copies of books can also be purchase
through the portal. A unique customer loyalty program and digital redemption or
trade-in strategy will be a market differentiator.
RECENT BUSINESS OPERATIONS
DIVESTURE OF INTEREST IN XINHUA CIRCULATION & DISTIRBUTION
Pursuant to the terms and provisions of an investment agreement (the "Investment
Agreement") among our two subsidiaries Pac-Poly and Beijing Boheng and Xinhua
Bookstore (Main Store) ("Xinhua Bookstore"), we acquired a 57.67% interest in
the publication distribution business in the People's Republic of China. Xinhua
Bookstore transferred the publication distribution business into a newly formed
-7-
Chinese company called Xinhua Circulation & Distribution ("Xinhua C&D"). Xinhua
C&D is presently primarily a book distribution enterprise. As of May 31, 2006,
we reduced our ownership interest in Xinhua C&D to 7.98%. We had originally
intended to help guide Xinhua C&D through the modernization and growth of its
systems and distribution strategies. Realizing the large investment in real
estate, equipment, fixed assets requirements to achieve modernization and
growth, as well as the shifting of reading habits to a digital format and a
dynamic and growing digital youth (age 12-25) comprising over 50% of the
population, our management, after very careful consideration, effective May 31,
2006, revised our business focus to instead concentrate on the growing
opportunity in online content distribution, co-publishing, and digital rights
management. While executing this strategy, we will continue to maximize our
strategic position in the publishing industry by utilizing the connections and
channels we have established as a result of our interest in Xinhua C&D. As a
result of the decision to focus on digital media and co-publishing, we were able
to renegotiate our financial commitment to Xinhua C&D and eliminate the
requirement to invest a further $16,700,000 into Xinhua C&D to build their new
distribution warehouse along with all other obligations related to the long term
leasing of approximately 128 acres of land on which the warehouse was to be
built. This change reduced our equity interest in Xinhua C&D to 7.98%.
RESULTS OF OPERATION
The summarized consolidated financial data set forth in the tables below and
discussed in this section should be read in conjunction with our consolidated
financial statements and related notes for the three-month period ended
September 30, 2007 and 2006, which financial statements are included elsewhere
in this Quarterly Report.
FOR QUARTER ENDED FOR QUARTER ENDED
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
(UNAUDITED) (UNAUDITED)
Net Sales $ 0 $ 50,220
Loss from Operations (78,301) (525,325)
Loss from Operations per Share -0.01 -0.03
Total Assets 2,054,158 2,227,860
Total Liabilities 8,782,396 10,148,253
RESULTS OF OPERATION
FOR QUARTER ENDED SEPTEMBER 30, 2007 COMPARED TO QUARTER ENDED SEPTEMBER 30,
2006.
REVENUES AND GROSS MARGIN
We had net sales of $-0- for the quarter ended September 30, 2007 compared to
net sales of $4,771 for the quarter ended September 30, 2006, after taking into
account cost of sales. Net sales decreased substantially due to the divesture of
our interest in Xinhua C& D.
-8-
COST OF SALES
Our cost of sales for the quarter ended September 30, 2007 was $-0- compared to
cost of sales of $45,449 for the quarter ended September 30, 2006. Cost of sales
consisted of purchased costs to publishers and depreciation of property, plant
and equipment. Cost of sales decreased proportionately with the decrease in
revenues to $-0- during the quarter ended September 30, 2007 compared with the
quarter ended September 30, 2006 due to the divesture of our interest in Xinhua
C&D.
OPERATING EXPENSES
Our total operating expenses were $78,301 for the quarter ended September 30,
2007 as compared to total operating expenses of $530,096 for the quarter ended
September 30, 2006. The decrease in operating expenses during the quarter ended
September 30, 2007 as compared September 30, 2006 was due to the corresponding
decrease in net revenues. Selling, general and administrative expenses decreased
based on a substantial decrease in stock-based compensation. Stock-based
compensation decreased from $68,665 during the quarter ended September 30, 2006
to $-0- during the quarter ended September 30, 2007. Stock-based compensation
expense is attributable to the valuation of our Stock Option Plan under the fair
value method in accordance with SFAS No. 123. Selling, general and
administrative expenses decreased from $461,431 during the quarter ended
September 30, 2006 to $78,301 during the quarter ended September 30, 2007. This
primarily resulted from the decrease of fees to our consultants and
professionals in relation to our fund raising and issuance of convertible
debentures primarily to Cornell Capital LLC and other legal and financial
matters.
INTEREST
We incurred $83,243 in interest expense during the quarter ended September 30,
2007 as compared to $771,076 incurred as interest expense during the quarter
ended September 30, 2006. Interest expense incurred consisted primarily of
interest charged on loans from related parties.
We incurred a net loss of ($161,534) for the quarter ended September 30, 2007
compared to a net loss of ($1,295,925) incurred during the quarter ended
September 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
QUARTER ENDED SEPTEMBER 30, 2007
Our financial statements have been prepared assuming that we will continue as a
going concern and, accordingly, do not include adjustments relating to the
recoverability and realization of assets and classification of liabilities that
might be necessary should we be unable to continue in operation.
As at the quarter ended September 30, 2007, our current assets were $1,418,025
and our current liabilities were $2,579,904, resulting in a working capital
deficit of $1,161,879. As at the quarter ended September 30, 2007, current
assets were comprised of: (i) $3,262 in cash and cash equivalents; (ii) $210,709
-9-
in net accounts receivable; (iii) $1,000,000 in note receivable; and (iv)
$204,054 in other receivables and prepayments. The note receivable represents
the sales proceeds of $1,875,000, of which $250,000 has been paid, from the
disposal of Beijing Boheng in accordance with the terms and provisions of the
disposal agreement. The sales proceeds are receivable in five installments and
are due in full no later than July 31, 2008. As at the quarter ended September
30, 2007, our current liabilities were comprised of: (i) $732,602 in accounts
payable and accrued liabilities; (ii) $1,787,643 in current portion of loans
payable; and (iii) $59,659 in deferred revenue. See " - Material Commitments."
As at the quarter ended September 30, 2007, our total assets were $2,054,158
comprised of: (i) $1,418,025 in current assets; (ii) $625,000 in long-term
portion of note receivable; and (iii) $11,133 in net property, plant and
equipment. The slight increase in total assets during the quarter ended
September 30, 2007 from fiscal year ended June 30, 2007 was primarily due to the
note receivable.
As at the quarter ended September 30, 2007, our total liabilities were
$8,782,396 comprised of: (i) $2,579,904 in current liabilities; (ii) $1,058,261
in loans payable; and (iii) $5,144,231 in loans from shareholders. The slight
increase in total liabilities during the quarter ended September 30, 2007 from
fiscal year ended June 30, 2007 was primarily due to the increase in loans from
shareholders and in accounts payable and accrued liabilities.
Stockholders' deficit increased from ($6,664,709) for June 30, 2007 to
($6,728,238) for September 30, 2007.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
quarter ended September 30, 2007, net cash flow used in operating activities was
($2,908,974). Net cash flow used in operating activities during the quarter
ended September 30, 2007 consisted primarily of a net loss of ($161,534)
adjusted by $83,213 in imputed interest expense and $13,768 in amortization of
deferred imputed expense. Changes in assets and liabilities consisted of an
increase of $25,463 in account receivable, $139,395 in accounts payable and
accrued liabilities, $13,768 in deferred revenue inventory and $2,868 in other
receivables and prepayments.
INVESTING ACTIVITIES
During the quarter ended September 30, 2007, net cash flow used in investing
activities was $-0-compared to net cash flow used in investing activities of
($243,301) for the quarter ended September 30, 2006. Net cash flow used in
investing activities during the quarter ended September 30, 2006 was primarily
the result of $252,982 in deposits received from disposal of the subsidiary.
FINANCING ACTIVITIES
During the quarter ended September 30, 2007, net cash flow from financing
activities was $63,801 compared to net cash flow from financing activities of
$498,665 for the quarter ended September 30, 2006. Net cash flow from financing
activities during the quarter ended September 30, 2007 pertained primarily to
$63,801 received as proceeds from loan from shareholders.
-10-
PLAN OF OPERATION
The local and regional distribution business for books is competitive and
fragmented in the People's Republic of China. Estimates range up to 500 as to
the number of entrants in this field. It is our plan that economy of scale,
relationships with Chinese publishers and also with sub-distributors and
retailers and our nationwide scope which allows us the flexibility to distribute
books in any region will assist us in maintaining and enhancing our competitive
position.
Our goal is to expand our business to include electronic sales, delivery and
distribution of media contents. We also plan to partner with foreign publishers
to provide foreign media contents in China. We seek to achieve our goal on a
national scale to maximize opportunities in one of the largest and fastest
growing economies in the world.
To execute on our strategy to become a digital media company we formed our new
subsidiary, Beijing Joannes. Beijing Joannes is intended to be our digital media
company and it is expected to distribute all digital content for Xinhua C&D and
others. Beijing Joannes has anticipated in operating its business to consumer
(B2C) e-commerce portal as www.geezip.com, and expects to allow customers to
purchase electronic and hard copies of books on-line.
We expect to also establish a co-publishing company which anticipates on
co-publishing agreements with both domestic and foreign publishers, publishing
both hard copy and digital works.
Existing working capital, further advances and possible debt instruments,
warrant exercises, further private placements, monetization of existing assets,
and anticipated cash flow are expected to be adequate to fund our operations
over the next two months. We have no lines of credit or other bank financing
arrangements. Generally, we have financed operations to date through the
proceeds of the private placement of equity and debt securities and loans from
our shareholders. In connection with our business plan, management will delay
additional increases in operating expenses and capital expenditures. We intend
to utilize our best efforts to settle current finance accounts payables and
liabilities with further issuances of securities, debt and or advances,
monetization of existing assets, and revenues from operations. We will need to
raise additional capital and increase revenues to meet both short term and
long-term operating requirements.
We have undertaken certain actions and continue to implement changes designed to
improve our financial results and operating cash flows. The actions involve
certain cost-saving initiatives and growing strategies, including: (i)
reductions in headcounts and corporate overhead expenses; and (ii) continue to
develop e-commerce business through Beijing Joannes. We believe that these
actions will enable us to improve future profitability and cash flow in our
continuing operations through June 30, 2008. Furthermore, the commitment to
contribute further capital of $16,700,000 to Xinhua C&D and the restructure of
debt pertaining to Cornell and Highgate has been advantageous to our over
financial outlook. Ultimately, we have released the burden on cash flow for
further contribution and intend to put our resources in co-publishing and
e-commerce business opportunities.
-11-
The report of the independent registered public accounting firm that accompanies
our June 30, 2007 and June 30, 2006 consolidated financial statements contains
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. The consolidated financial statements have been
prepared "assuming that we will continue as a going concern," which contemplates
that we will realize our assets and satisfy our liabilities and commitments in
the ordinary course of business.
MATERIAL COMMITMENTS
LOANS PAYABLE/CONVERTIBLE DEBENTURE
During 2007/8, a material commitment for us relates to the Forbearance and
Settlement Agreement with Cornell and Highgate. On December 29, 2006, we
completed the debt restructuring with Cornell and Highgate under the Forbearance
and Settlement Agreement. Pursuant to the Forbearance and Settlement Agreement,
we agreed to make certain payments to Cornell and Highgate with respect to the
Securities Purchase Agreement previously entered into by us with Cornell and
Highgate dated November 23, 2005 and amended on March 23, 2006, and the two
convertible debentures in the amounts of $1,250,000 to Highgate dated November
23, 2005 and $2,000,000 to Cornell dated March 23, 2006 (collectively, the
"Convertible Debentures") in accordance with the terms and conditions set forth
in the Forbearance and Settlement Agreement.
In further accordance with the Forbearance and Settlement Agreement, we agreed
to use the proceeds from the disposal of Beijing Boheng to repay the principal
and interest due to Cornell and Highgate under the Convertible Debentures in
exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time
basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no
application of the redemption premium on the scheduled repayments; (iii)
conversion of the Convertible Debentures in an amount equal to at least the
amount of a scheduled repayment subject to certain conditions; (iv) no
additional liquidated damages accruing during the term of the Forbearance and
Settlement Agreement; (v) permitting us to withdraw the registration statement
filed on March 28, 2006 with the Securities and Exchange Commission in
connection with the Convertible Debentures; (vi) during the term of the
Forbearance and Settlement Agreement, waiving the requirement for us to receive
written consent of Cornell and Highgate for any organizational change (as
defined in the Securities Purchase Agreement) to be directly or indirectly
consummated by us, and that we will not effectuate any stock splits for at least
nine months without the consent of Cornell and Highgate; and (vii) terminating
the provisions for security shares as set forth in Section 9 of the Securities
Purchase Agreement and in Section 2 of the transfer agent instructions upon
receipt by Cornell and Highgate of the first scheduled repayment amount.
The payment plan under the Forbearance and Settlement Agreement is as follows:
Conversion of
Payment Date Cash Payment Debenture
________________ ____________ _____________
March 10, 2007 $ 250,000 250,000
June 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
____________ _________
$ 1,875,000 1,875,000
============ =========
-12-
As of September 30, 2007, we paid $250,000 for the payment due March 10, 2007
and issued 100,000 shares of our common stock on March 1, 2007 and 125,000
shares on April 18, 2007, respectively, pursuant to exercise rights.
LOANS FROM SHAREHOLDERS
During fiscal year 2007/8, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $5,144,231 represents cash advanced
to us from our shareholders. These shareholder loans are unsecured,
interest-free and not repayable within the next twelve months. For the quarter
ended September 30, 2007, we calculated imputed interest expense of $83,213 in
relation to interest-free shareholders loans at its effective interest rate and
accounted for it in the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse change in foreign currency
and interest rates.
EXCHANGE RATE
Our reporting currency is United States Dollars ("USD"). The Chinese Renminbi
("RMB") has been informally pegged to the USD. However, China is under
international pressure to adopt a more flexible exchange rate system. If the RMB
were no longer pegged to the USD, rate fluctuations may have a material impact
on the Company's consolidated financial reporting and make realistic revenue
projections difficult. Recently (July 2005) the Renminbi was allowed to rise 2%.
This has not had an appreciable effect on our operations and seems unlikely to
do so.
As Renminbi is the functional currency of Xinha C&D and Boheng, the fluctuation
of exchange rates of Renminbi may have positive or negative impacts on the
results of operations of the Company. However, since all sales revenue and
expenses of these two subsidiary companies are denominated in Renminbi, the net
income effect of appreciation and devaluation of the currency against the US
Dollar will be limited to the net operating results of the subsidiary companies
attributable to us.
INTEREST RATE
Interest rates in China are low and stable and inflation is well controlled, due
to the habit of the population to deposit and save money in the banks (among
with other reasons, such as the People's Republic of China's perennial balance
of trade surplus). Our loans relate mainly to trade payables and are mainly
short-term. However our debt is likely to rise with physical plant in connection
with expansion and, were interest rates to rise at the same time, this could
become a significant impact on our operating and financing activities.
-13-
We have not entered into derivative contracts either to hedge existing risks or
for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the participation of
our management, including our Chief Executive Officer/Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2007. Based on that evaluation, our Chief
Executive Officer/Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of such date to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. Such officers also confirmed that
there was no change in our internal control over financial reporting during the
quarter ended September 30, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. None
of our directors, officers or affiliates are (i) a party adverse to us in any
legal proceedings, or (ii) has an adverse interest to us in any legal
proceedings. Management is not aware of any other legal proceedings pending or
that have been threatened against us or our properties.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in this prospectus in evaluating our company and its
business before purchasing shares of our common stock. Our business, operating
results and financial condition could be seriously harmed due to any of the
following risks. The risks described below are all of the material risks that we
are currently aware of that are facing our company. Additional risks not
presently known to us may also impair our business operations. You could lose
all or part of your investment due to any of these risks.
WE HAVE INCURRED LOSSES AND SUBSTANTIAL DOUBT EXISTS ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
We have a history of operating losses, expect to continue to incur losses, and
may never be profitable. We have incurred a net loss of ($161,534) for the
quarter ended September 30, 2007. We had a working capital deficit of $1,161,879
and shareholders' deficit of $6,728,238 as of September 30, 2007. These factors
-14-
raise substantial doubt about our ability to continue as a going concern. The
auditors' report in our financial statements as at fiscal year ended June 30,
2007 includes an explanatory paragraph that states that we have generated net
losses and have a shareholders' deficit factors which raise substantial doubt
about our ability to continue as a going concern. We have been dependent on
sales of our equity securities and debt financing to meet our cash requirements.
Further, we do not expect positive cash flow from operations in the near term.
There is no assurance that actual cash requirements will not exceed our
estimates. In particular, additional capital may be required in the event that:
(i) operating costs may be more than we currently anticipate; or (ii) we
encounter greater costs associated with general and administrative expenses or
offering costs.
WE ARE OPERATING IN A DEVELOPING MARKET AND THERE IS UNCERTAINTY AS TO MARKET
ACCEPTANCE OUR TECHNOLOGY AND PRODUCTS.
We researched the markets for our products involving the digital media industry.
We have conducted limited test marketing and thus have relatively little
information on which to estimate our levels of sales, the amount of revenue our
planned operations will generate and our operating and other expenses. There can
be no assurance that we will be successful in our efforts to market our products
or to develop our markets in the manner we contemplate within the digital media
industry.
The markets for our products and technology are developing and rapidly evolving
and are characterized by an increasing number of market entrants who have
developed or are developing a wide variety of products and technologies, a
number of which offer certain of the features that our products offer. Because
of these factors, demand and market acceptance for new products are subject to a
high level of uncertainty. There can be no assurance that our technology and
products will become widely accepted. It is also difficult to predict with any
assurance the future growth rate, if any, and size of the market. If a
substantial market fails to develop, develops more slowly than expected or
becomes saturated with competitors or if our products do not achieve market
acceptance, our business, operating results and financial condition will be
materially and adversely affected.
OUR DIGITAL MEDIA INDUSTRY AND MARKET IS CHARACTERISED BY NEW ENTRANTS AND RAPID
TECHNOLOGICAL CHANGE.
The digital media industry and market for our products is characterized by
rapidly changing technology and frequent new product introductions. Our success
will depend in part on our ability to enhance our technologies and products and
to introduce new products and technologies to meet changing customer
requirements. We are currently devoting, and intend to continue to devote,
significant resources toward the development of digital media technology and
products. There can be no assurance that we will successfully complete the
development of these technologies and related products in a timely fashion or
that our current or future products will satisfy the needs of the digital media
industry. There can also be no assurance that digital media products and
technologies developed by others will not adversely affect our competitive
position or render our products or technologies non-competitive or obsolete.
-15-
IF WE ARE UNABLE TO COMPETE IN THE DIGITAL MEDIA MARKET, YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.
The digital media market is highly competitive and highly fragmented. Our
competitors may have substantially greater financial, technological, marketing,
personnel and research and development resources than we currently have. There
are direct competitors who have competitive technology and products. Many of
these competitors may have significant advantages over us, including greater
financial, technical, marketing and manufacturing resources, more extensive
distribution channels, larger customer bases and faster response times to adapt
new or emerging technologies and changes in customer requirements. As a result,
our competitors may develop superior products or beat us to market with products
similar to ours. Further, there can be no assurance that new companies will not
enter our markets in the future. Although we believe that our products will be
distinguishable from those of our competitors on the basis of their
technological features and functionality at an attractive value proposition,
there can be no assurance that we will be able to penetrate any of our
anticipated competitors' portions of the market. There can be no assurance that
we will be able to compete successfully against currently anticipated or future
competitors or that competitive pressures will not have a material adverse
effect on our business, operating results and financial condition. If we are not
successful in competing against our current and future competitors, you could
lose your entire investment.
Moreover, foreign direct investment in China has increased rapidly in the last
twenty years and the investment environment has further improved to encourage
foreign and local investors to invest in fields other than those considered by
the government of the Peoples' Republic of China to be sensitive. Distribution
channels have been opened up to new foreign investment subject to Peoples'
Republic of China government guidelines. Many companies are involved in the
electronic and traditional publishing and distribution of literary and
entertainment material. There is no guarantee that other competitors will not
become involved in business similar to ours. If this occurs, there may be
competitors with greater financial resources and to the extent that such
competitors compete on the basis of price, this could affect our results of
operations and our ability to continue operations.
WE HAVE LIMITED MARKETING CAPABILITY.
We have limited marketing capabilities and resources. In order to achieve market
penetration we will have to undertake significant efforts and expenditures to
create awareness of, and demand for, our technology and products. Our ability to
penetrate the market and build our customer base will be substantially dependent
on our marketing efforts, including our ability to establish strategic marketing
arrangements. No assurance can be given that we will be able to enter into any
such arrangements or if entered into that they will be successful. Our failure
to successfully develop our marketing capabilities, both internally and through
third-party alliances, would have a material adverse effect on our business,
operating results and financial condition. Further, there can be no assurance
that, if developed, such marketing capabilities will lead to sales.
-16-
WE WILL NEED TO RESTRUCTURE OUR BUSINESS TO MAXIMIZE OUR PROFITABILITY AND CASH
FLOW.
We may experience significant fluctuations in our operating results and rate of
growth. Due to our limited operating history and our evolving business model,
and the unpredictability of the future of our industry, we may not be able to
accurately forecast our rate of growth. We base our current and future expense
levels and our investment plans on estimates of future net sales. Our expenses
and investments are to a large extent fixed, and we may not be able to adjust
our spending quickly enough if our net sales fall short of our expectations.
Our revenue and operating profit growth depends on the continued growth of
demand for books offered by our customers and partners, and our business is
affected by business conditions in China and, indirectly, worldwide. Revenue
growth may not be sustainable and our company-wide percentage growth rate may
decrease in the future.
OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD WHICH COULD REDUCE OUR REVENUES.
A fundamental requirement for online commerce and communications is the secure
transmission of confidential information, such as credit card numbers or other
personal information, over public networks. Our security measures may be
inadequate and, if any compromise of security were to occur, it could have a
detrimental effect on our reputation and adversely affect our ability to
maintain our existing travelers and/or attract new travelers.
Consumer concerns over the security of transactions conducted on the Internet or
the privacy of users may inhibit the growth of the Internet and online commerce.
To transmit confidential information such as customer credit card numbers
securely, we rely on encryption and authentication technology. Unanticipated
events or developments could result in a compromise or breach of the systems we
use to protect customer transaction data. Our servers and those of our service
providers may be vulnerable to viruses or other harmful code or activity
transmitted over the Internet. A virus or other harmful activity could cause a
service disruption.
In addition, we bear financial risk from products or services purchased with
fraudulent credit card data. Although we have implemented anti-fraud measures, a
failure to control fraudulent credit card transactions adequately could
adversely affect our business. Because of our limited operating history, we
cannot assure you that our anti-fraud measures are sufficient to prevent
material financial loss. Since we cannot exert the same level of influence or
control over our sales agents as we could were they our own employees, our sales
agents could fail to comply with our policies and procedures, which could result
in claims against us that could harm our financial condition and operating
results. We are not in a position to directly provide the same direction,
motivation and oversight for our sales agents as we would if such sales agents
were our own employees. As a result, there can be no assurance that our sales
agents will participate in our marketing strategies or plans, accept our
introduction of new products and services, or comply with our policies and
procedures.
Moreover, our processing, storage, use and disclosure of personal data could
give rise to liabilities as a result of government regulation, conflicting legal
requirements or differing views of personal privacy rights. In the processing of
our traveler transactions, we receive and store a large volume of personally
identifiable information. This information is also increasingly subject to
legislation and regulations in numerous jurisdictions around the world. This
government action is typically intended to protect the privacy of personal
-17-
information that is collected, processed and transmitted in or from the
governing jurisdiction. We could be adversely affected if legislation or
regulations are expanded to require changes in our business practices or if
governing jurisdictions interpret or implement their legislation or regulations
in ways that negatively affect our business, financial condition and results of
operations. As privacy and data protection have become more sensitive issues, we
may also become exposed to potential liabilities as a result of differing views
on the privacy of travel data. These and other privacy developments that are
difficult to anticipate could adversely affect our business, financial condition
and results of operation.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, PARTICULARLY IN LIGHT OF
CHINESE INTELLECTUAL PROPERTY LAWS.
Intellectual property rights are evolving in China, trending towards
international norms, but are by no means fully developed. We have not had
significant involvement in intellectual property to date. The application of
intellectual property rights to protect our foreign clients' and partners' media
will likely be necessary in the future. Protection is needed at a minimum
against piracy; legal action may be needed and all legal action involves risk
and expenses.
WE MAY NOT BE ABLE TO HIRE AND RETAIN THE PERSONNEL WE NEED TO SUSTAIN OUR
BUSINESS.
We depend on the continued services of our executive officers and other key
personnel. The loss of or failure to attract key personnel could significantly
impede our financial plans, growth, and other objectives. We believe that our
future success will depend in large part on our ability to attract and retain
additional highly skilled and qualified personnel and to expand, train and
manage our employee base. We may not continue to be successful in doing so,
because the competition for qualified personnel in China is intense. If we are
unable to attract and retain qualified personnel, we may never achieve
profitability.
WE MAY NOT BE ABLE TO ENTER NEW MARKETS, WHICH MAY IMPAIR OUR ABILITY TO GROW.
Our ability to enter into new markets is dependent upon the availability of
quality products and demand of these products in China. Thus, it is important
for us to develop relationships with publishers and distributors of foreign
(mainly English-language) books and media contents to expedite their import,
translation and distribution through electronic and traditional channels
nationwide in China. There is no guarantee that we can develop relationships
with foreign publishers and distributors. Currently, foreign books and media
contents are not commonly available in China, therefore, we are not able to
quantify the demand of foreign books and media contents in China. As such we
cannot predict our probability of success in this new market.
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE DIGITAL MEDIA
PRODUCTS AND ATTRACTING CUSTOMERS IN A COST-EFFECTIVE MANNER.
Our sales and revenues will not grow as we plan if consumers do not purchase
significantly more digital media products online than they currently do and if
the use of the Internet as a medium of commerce for such products does not
-18-
continue to grow or grows more slowly than expected. The success of our business
is dependent on significant increase in the number of consumers who use the
Internet to purchase digital media products.
Our business strategy depends on our ability to broaden the appeal of our
website to consumers and business and to increase the overall number of consumer
transactions conducted on our website in a cost-effective manner. In order to
increase the number of consumer transactions, we must attract more visitors to
our website and convert a larger number of these visitors into paying customers.
Our ability to offer products and services that will attract a significant
number of consumers to use our services is not certain. If it does not occur,
our growth may be limited. It may be necessary to spend substantial amounts on
marketing and advertising to enhance our brand recognition and attract new
customers to our website, and to successfully convert these new visitors into
paying customers. We cannot assure you that our marketing and advertising
efforts will be effective to attract new customers. If we fail to attract
customers and increase our overall number of consumer transactions in a
cost-effective manner, our ability to grow and become profitable may be
impaired.
Moreover, we rely on the Internet infrastructure which may be unable to support
increased levels of demand. The internet infrastructure may not expand fast
enough to meet the increased levels of demand. In particular, the expected
benefits from our online operations may be reduced if internet usage does not
continue to grow. In addition, activities that diminish the experience for
internet users, such as spyware, spoof e-mails, viruses and spam directed at
internet users, as well as viruses and "denial of service" attacks directed at
internet companies and service providers, may discourage people from using the
internet, including for commerce. If consumer use diminishes or grows at a
slower rate, then our business and results of operations could be adversely
affected.
WE HAVE SUBSTANTIAL DEBT OBLIGATIONS, INCLUDING CERTAIN DEBT OBLIGATIONS SECURED
BY ALL OF OUR ASSETS. IF WE ARE UNABLE TO REPAY SUCH OBLIGATIONS, OUR BUSINESS
WILL LIKELY FAIL.
Our current liabilities were $2,579,904 as of September 30, 2007 of which
approximately $1,787,643 is due within the next year unless extended. Such
substantial debt obligations could affect our status as a going concern and also
represent a concentration of risk which could pose a serious concern. Our
ability to repay debt will be dependent on cash flow from the business and our
ability to raise new funds in the form of loans, debt or equity in the next
year. We have $6,202,492 in long term debt of which $1,250,000 is due on or
before November 23, 2010 and $2,000,000 is due on or before March 23, 2011 in
connection with recent convertible debenture financings with Highgate House
Funds, Ltd. and Cornell Capital Partners, LP.
CHINESE TAX AND OTHER LAWS MAY NEGATIVELY IMPACT OUR BUSINESS RESULTS.
We conduct our business in China through our subsidiaries. China currently has a
number of laws related to various taxes imposed by both federal and regional
governmental authorities. Applicable taxes include value-added tax, corporate
income tax, and payroll and worker and welfare taxes, along with others. Laws
-19-
related to some of these taxes have not been in force for a significant period,
in contrast to more developed market economies and regulations for their
implementation are often unclear or incomplete. Often, differing opinions
regarding legal interpretation exist both among and within government ministries
and organizations; thus creating uncertainties and areas of conflict. Tax
declarations, together with other legal compliance areas (as examples, customs
and currency control matters) are subject to review and investigation by a
number of authorities, who are enabled by law to impose severe fines, penalties
and interest charges. These facts create tax risks in China substantially more
significant than typically found in countries with more developed tax systems.
We believe that we are in substantial compliance with the tax laws affecting our
operations; however, the risk remains that the relevant authorities could take
differing positions with regard to interpretive issues and the effect could be
significant. The fact that a year has been reviewed does not close that year, or
any tax declaration applicable to that year, from further review.
Chinese company law as it applies to foreign invested corporations (our
subsidiaries) requires them to maintain dedicated reserves which include a
general reserve and a reserve for enterprise expansion. The dedicated reserves
are appropriated from net income after taxes, determined under the relevant
Chinese accounting regulations, at a rate set by the Board of Directors of the
respective subsidiaries, and record as a component of shareholders' equity.
These reserves are not distributable, other than upon liquidation. No
appropriation has been made for the year as our subsidiaries recorded losses.
Similar provisions of Chinese company law require our Board of Directors at
their discretion to transfer a certain amount of their annual net income after
taxes, as determined under the relevant Chinese accounting regulations, to a
staff welfare and bonus fund. No such transfer was made for the fiscal period,
as the subsidiaries recorded losses.
EXCHANGE RATE FLACTUATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
Our reporting currency is the United States Dollar but our functional currency
in China is the Renminbi. As such, rate fluctuations may have a material impact
on our consolidated financial reporting and make realistic revenue projections
difficult. Additionally, as Renminbi is the functional currency of Beijing
Joannes, Xinhua C&D and Beijing Boheng, the fluctuation of exchange rates of
Renminbi may have positive or negative impacts on our results of operations.
CHINESE FUNDS REMITTANCE POLICIES MAY NOT ALLOW US TO MAXIMIZE OUR
PROFITABILITY.
Pursuant to Chinese company law applicable to foreign investment companies, such
as our Chinese subsidiaries, as well as our minor interest in Xinhua C&D, are
required to maintain dedicated reserves, which include a general reserve and an
enterprise expansion reserve. The dedicated reserves are to be appropriated from
net income after taxes, determined under the relevant Chinese accounting
regulations at a rate determined by the board of directors of the respective
subsidiaries, and recorded as a component of shareholders' equity. The dedicated
reserves are not distributable other than upon liquidation. As our Chinese
subsidiaries and Xinhua C&D have recorded losses for the fiscal year ended June
-20-
30, 2007, no appropriation to the dedicated reserves was made. Moreover,
pursuant to the same Chinese company law, our Chinese subsidiaries are required
to transfer at the discretion of their boards of directors, a certain amount of
its annual net income after taxes as determined under the relevant Chinese
accounting regulations to a staff welfare and bonus fund. Since our Chinese
subsidiaries and Xinhua C&D have recorded losses for the fiscal year ended June
30, 2007, no transfer to the staff welfare and bonus fund was made.
AS A RESULT OF A MAJORITY OF OUR DIRECTORS AND OFFICERS BEING RESIDENTS OF OTHER
COUNTRIES OTHER THAN THE UNITED STATES, INVESTORS MAY FIND IT DIFFICULT TO
ENFORCE WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR OUR
DIRECTORS AND OFFICERS.
We do not currently maintain a permanent place of business within the United
States. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States, and all or a
substantial portion of such persons' assets are located outside the United
States. As a result, it may be difficult for investors to enforce within the
United States any judgments obtained against our company or our officers or
directors, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS FROM
CERTAIN TYPES OF LAWSUITS.
Nevada law provides that our officers and directors will not be liable to us or
our stockholders for monetary damages for all but certain types of conduct as
officers and directors. Our Bylaws permit us broad indemnification powers to all
persons against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
officers and directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our officers and directors against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
A DECLINE IN THE PRICE OF OUR SHARES OF COMMON STOCK COULD AFFECT OUR ABILITY TO
RAISE FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A prolonged decline in the price of our shares of common stock could result in a
reduction in the liquidity of our shares of common stock and a reduction in our
ability to raise capital. Any reduction in our ability to raise equity capital
in the future would force us to reallocate funds from other planned uses and
would have a significant negative effect on our business plans and operations,
including our ability to develop our business and continue our current
operations. If the stock price declines, there can be no assurance that we can
raise additional capital or generate funds from operations sufficient to meet
our obligations.
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IF WE ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, THIS MAY RESULT IN
DILUTION TO OUR EXISTING STOCKHOLDERS.
Our articles of incorporation, as amended, authorize the issuance of 500,000,000
shares of common stock. Our board of directors has the authority to issue
additional shares of common stock up to the authorized capital stated in the
articles of incorporation. Our board of directors may choose to issue some or
all of such shares to acquire one or more businesses or to provide additional
financing in the future. The issuance of any such shares may result in a
reduction of the book value or market price of the outstanding shares of our
common stock. It will also cause a reduction in the proportionate ownership and
voting power of all other stockholders.
BECAUSE OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, THE LIQUIDITY OF YOUR
INVESTMENT MAY BE RESTRICTED.
Our common stock is now, and may continue to be in the future, subject to the
penny stock rules under the Securities Exchange Act of 1934. These rules
regulate broker/dealer practices for transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require broker/dealers to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations and the broker/dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction, the broker and/or dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These additional penny stock disclosure requirements are burdensome and may
reduce the trading activity in the market for our common stock. As long as the
common stock is subject to the penny stock rules, holders of our common stock
may find it more difficult to sell their securities.
NASD SALES PRACTIVE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR SHARES OF COMMON STOCK.
In addition to the "penny stock" rules described above, the National Association
of Securities Dealers Inc. has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the National
Association of Securities Dealers Inc. believes that there is a high probability
that speculative low priced securities will not be suitable for at least some
customers. The National Association of Securities Dealers Inc. requirements make
it more difficult for broker-dealers to recommend that their customers buy our
shares of common stock, which may limit your ability to buy and sell our shares
of common stock and have an adverse effect on the market for its shares.
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TRADING ON THE OTC BULLETIN BOARD MAY BE SPORADIC BECAUSE IT IS NOT A STOCK
EXCHANGE, AND STOCKHOLDERS MAY HAVE DIFFICULTY RESELLING THEIR SHARES.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on
the OTC Bulletin Board is often thin and characterized by wide fluctuations in
trading prices, due to many factors that may have little to do with the
Company's operations or business prospects. The OTC Bulletin Board is not a
stock exchange, and trading of securities on the OTC Bulletin Board is often
more sporadic than the trading of securities listed on a quotation system like
Nasdaq or a stock exchange like Amex. Accordingly, you may have difficulty
reselling any of our shares you purchase.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report:
Exhibit
31.1 Certification under Rule 13a-14(a).
31.2 Certification under Rule 13a-14(a).
32.1 Certification under Section 1350.
32.2 Certification under Section 1350.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
XINHUA CHINA LTD.
Dated: November 13, 2007 By: /s/ XIANPING WANG
___________________________
Xianping Wang
President
Chief Executive Officer
Dated: November 13, 2007 By: /s/ XIANPING WANG
___________________________
Xianping Wang
Acting as Interim
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities.
SIGNATURES TITLE DATE
/s/ XIANPING WANG President, Chief Executive Officer November 13, 2007
_________________ and a Director
Xianping Wang
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