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 six-month period ended December 31, 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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SUITE 304, BUILDING #1, YUANJIA INTERNATIONAL APARTMENT
NO. 40 DONGZHONG ST., DONGCHENG DISTRICT
BEIJING 100027
PEOPLE'S REPUBLIC OF CHINA
_______________________________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
86-10-64168816
___________________________
(ISSUER'S TELEPHONE NUMBER)
7A-11 CHANWAI MEN PROEPRTY TRADE
CENTER OFFICE BUILDING
NO. 26 CHAOYANMEN WEI STREET
CHAOYANG DISTRICT, BEIJING
PEOPLE'S REPUBLIC OF CHINA
________________________________________________________________________________
(FORMER NAME,FORMER ADDRESS AND FORMER FISCAL YEAR,IF CHANGED SINCE LAST REPORT)
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 February 19, 2008
of each of the issuer's classes of common
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
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 15
Item 4. Controls and Procedures 15
Item 4T. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
-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
December 31, 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-7-19
-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 December 31, 2007 and June 30, 2007, and the
related statements of income, stockholders' equity, and cash flows for the six
months and three months ended December 31, 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
January 11, 2008 Certified Public Accountants
F-1
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 AND JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 12/31/2007 6/30/2007
____________ ___________
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 20,009 2,733
Accounts Receivable, net 252,980 185,246
Receivable from trustee - -
Note receivable 4 1,625,000 1,000,000
Other receivables and prepayments 209,732 201,186
____________ ___________
Total Current Assets 2,107,721 1,389,165
LONG-TERM ASSETS
Property, Plant & Equipment, net 5 68,571 14,094
Note receivable, long-term portion 4 - 625,000
Distribution network right, net - -
Goodwill, net - -
____________ ___________
Total Long-term Assets 68,571 639,094
____________ ___________
Total Assets $ 2,176,292 $ 2,028,259
============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities 844,710 693,207
Deferred revenue 45,892 73,427
Current portion of loans payable 6 2,012,643 1,787,643
Due to related parties - -
____________ ___________
Total Current Liabilities 2,903,245 2,554,277
LONG-TERM LIABILITIES
Loans Payable 6 1,058,261 1,058,261
Loans from shareholders 7 4,942,218 5,080,430
____________ ___________
Total Long-term Liabilities 6,000,479 6,138,691
Total Liabilities 8,903,724 8,692,968
____________ ___________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-2
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2007 AND JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 12/31/2007 6/30/2007
____________ ___________
Minority Interest - -
STOCKHOLDERS' EQUITY
Common Stock $0.0001 Par Value
500,000,000 Shares Authorized;
54,638,890 issued and outstanding at
December 31, 2007 and June 30, 2007 546 546
Additional Paid in Capital 10,636,953 10,423,526
Accumulated Other Comprehensive
Income 43,049 8,749
Accumulated Deficit (17,407,980) (17,097,530)
____________ ___________
Total Stockholders' (Deficit)/Equity (6,727,432) (6,664,709)
____________ ___________
____________ ___________
Total Liabilities & Stockholders' Equity 2,176,292 $ 2,028,259
============ ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-3
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(STATED IN US DOLLARS)
SIX MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED DECEMBER 31,
NOTE 2007 2006 2007 2006
__________ __________ __________ __________
REVENUE
Revenue, net - 152,655 - 102,435
Revenue, net - related parties - - - -
COST OF SALES
Cost of Sales, net - 144,386 - 98,937
Cost of Sales, net - related parties - - - -
__________ __________ __________ __________
Gross Profit - 8,269 - 3,498
OPERATING EXPENSES
Selling, General, and Administrative
Expenses 170,754 739,919 90,720 278,488
Stock-based Compensation - 135,480 - 66,815
__________ __________ __________ __________
Total Operating Expense 170,754 875,399 90,720 345,303
__________ __________ __________ __________
Loss from Operations (170,754) (867,130) (90,720) (341,805)
__________ __________ __________ __________
OTHER INCOME
Interest Income 13,800 477 13,789 -
Gain on debt restructuring - 1,275,132 - 1,275,132
Gain on disposal of a subsidiary - 2,155,519 - 2,155,519
OTHER EXPENSES
Interest Expense 229,750 859,802 146,507 88,725
__________ __________ __________ __________
Loss before minority interest and income (386,704) 1,704,196 (225,170) 3,000,121
Minority interest in net loss of
consolidated subsidiaries - - - -
__________ __________ __________ __________
Loss before Income Tax (386,704) 1,704,196 (225,170) 3,000,121
Income Tax - - - -
__________ __________ __________ __________
Net Loss (386,704) 1,704,196 (225,170) 3,000,121
========== ========== ========== ==========
Net Loss per common share-
-Basic (0.01) 0.03 0.00 0.06
========== ========== ========== ==========
-Diluted (0.01) 0.03 0.00 0.05
========== ========== ========== ==========
Weighted Average Shares Outstanding
-Basic 57,723,668 52,279,765 57,723,668 51,779,765
========== ========== ========== ==========
-Diluted 57,723,668 58,293,110 57,723,668 57,793,110
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-4
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 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 186,029 186,029
o Deferred Revenue
amortized as interest 27,398 27,398
__________ __________
226,981 226,981
Foreign Currency translation 34,300 34,300 34,300
Net Loss for year (310,450) (310,450) (310,450)
____________________________________________________________________________________________
Balance, December 31, 2007 54,638,890 546 10,636,953 (17,364,930) 43,049 (17,407,980) (6,727,432)
============================================================================================
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-5
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(STATED IN US DOLLARS)
12/31/2007 12/31/2006
__________ ___________
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $ (310,450) $ 1,704,196
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 2,554 24,060
Stock-based compensation - 135,480
Net gain on deconsolidation of a subsidiary - -
Amortization of deferred imputed interest 13,768 677,898
Imputed interest expense 199,659 123,539
Gain on disposal of a subsidiary - (2,155,519)
Gain on debt restructuring - (1,275,132)
Changes in assets and liabilities:
Decrease/(Increase) Accounts receivable (67,734) (138,820)
Decrease/(Increase) Other receivables and prepayments (8,546) (158,320)
Decrease/(Increase) Accounts Payable and accrued liabilities 151,503 101,881
Decrease/(Increase) in Deferred Revenue Inventory (27,535) -
__________ ___________
Net Cash Used in Operating Activities (46,781) (960,737)
__________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits received from disposal of a subsidiary - 252,982
Purchase of plant and equipment (57,031) (11,551)
__________ ___________
Net Cash Used in Investing Activities (57,031) 241,431
__________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from shareholders 86,788 675,702
__________ ___________
Net Cash Provided by Financing Activities 86,788 675,702
__________ ___________
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR THE YEAR (17,024) (57,057)
EFFECT OF CURRENCY TRANSLATION 34,300 (13,453)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 2,733 224,192
__________ ___________
CASH & CASH EQUIVALENTS AT END OF YEAR $ 20,009 $ 167,135
========== ===========
Cash paid for interest expenses - -
========== ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-6
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 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 December 31, 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, 10,000,000 ordinary 100%
a company with limited PRC shares of US$1 par
liability value
_________________________________________________________________________________________________________________
Beijing Joannes Information PRC, a company with Sales and Registered capital 100%
Technology Co., Ltd. limited liability distribution of US$1,250,000
books, PRC
_________________________________________________________________________________________________________________
F-7
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 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 December 31, 2007, the Company had no working capital but current
liabilities exceeding current assets by $795,524, a negative operating
cash flow of $46,781 and an accumulated deficit of $17,407,980 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.
F-8
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
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
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 SIX-MONTH PERIOD ENDED DECEMBER 31, 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 SIX-MONTH PERIOD ENDED DECEMBER 31, 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
December 31, 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 SIX-MONTH PERIOD ENDED DECEMBER 31, 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 December 31, 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 December
31, 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 SIX-MONTH PERIOD ENDED DECEMBER 31, 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 12/31/2007 6/30/2007
______________ __________ _________
Period end RMB : US$ exchange rate 7.3141 7.6248
Average period RMB : US$ exchange rate 7.5063 7.8160
(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 SIX-MONTH PERIOD ENDED DECEMBER 31, 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.
No options were granted during the three months ended December 31,
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 SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
(Y.) Recently Issued Accounting Standard
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.
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.
3. 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
F-15
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
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 December 31, 2007.
4. 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 December 31, 2007 $ 1,625,000 13,000,000
___________ __________
The schedule payments of $375,000 and $375,000 on September 30, 2007
and October 31, 2007 were still unpaid through December 31, 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.
5. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consist of the following: -
12/31/2007 6/30/2007
Land Use Right $ - $ -
Buildings - -
Equipment and machinery 37,072 38,928
Motor vehicles 57,403 -
Leasehold Improvement - -
________ ________
94,475 38,928
Less: Accumulated Depreciation 25,904 24,834
____ ________ ________
$ 68,571 $ 14,094
======== ========
Depreciation expense for the quarter ended December 31, 2007, was
$2,554.
F-16
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
6. 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:
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 December 31, 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 December 31, 2007 amount to $3,070,904
of which $2,012,643 and $1,058,261 attributed to current portion and
long-term respectively.
7. 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 December 31, 2007, there was
$116,370 imputed interest, at 6.00% per annum, recorded.
8. 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).
F-17
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
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 December 31, 2007.
Subject to the approval of the relevant tax authorities, the Company
had tax losses carry-forward against future years' taxable income.
As of December 31, 2007, valuation allowance of $873,110 was provided
to the deferred tax assets due to the uncertainty surrounding their
realization.
9. 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
$ 6,072 for the quarter ended December 31, 2007.
10. 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.
11. 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.
F-18
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2007
(STATED IN US DOLLARS)
12. 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 $17,258 for the quarter ended December 31,
2007. Future minimum rental payments due under a non-cancelable
operating lease until termination at December 31, 2009 are $112,310.
F-19
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. Subsequent to the
deconsolidation of Xinhua C&D as discussed below, we have commenced the internet
book distribution business through Beijing Joannes.
-7-
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
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 six-month period ended December
31, 2007 and 2006, which financial statements are included elsewhere in this
Quarterly Report.
___________________________________________________________________________
FOR QUARTER ENDED FOR QUARTER ENDED
DECEMBER 31, 2007 DECEMBER 31, 2006
(UNAUDITED) (UNAUDITED)
___________________________________________________________________________
Net Sales $-0- $152,655
___________________________________________________________________________
Loss from Operations (170,754) (867,130)
___________________________________________________________________________
Loss from Operations per Share (0.01) 0.03
___________________________________________________________________________
Total Assets 2,176,292 2,028,259
(as of 06/30/07)
___________________________________________________________________________
Total Liabilities 8,903,724 8,692,968
(as of 06/30/07)
___________________________________________________________________________
-8-
RESULTS OF OPERATION
FOR SIX-MONTH PERIOD ENDED DECEMBER 31, 2007 COMPARED TO SIX-MONTH PERIOD ENDED
DECEMBER 31, 2006.
REVENUES AND GROSS MARGIN
We had net sales of $-0- for the six-month period ended December 31, 2007
compared to net sales of $152,655 for the six-month period ended December 31,
2006, before taking into account cost of sales of $144,386, resulting is gross
profit of $8,269. Net sales decreased substantially due to the divesture of our
interest in Xinhua C& D.
COST OF SALES
Our cost of sales for the six-month period ended December 31, 2007 was $-0-
compared to cost of sales of $144,386 for the six-month period ended December
31, 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 six-month
period ended December 31, 2007 compared with the six-month period ended December
31, 2006 due to the divesture of our interest in Xinhua C&D.
OPERATING EXPENSES
Our total operating expenses were $170,754 for the six-month period ended
December 31, 2007 as compared to total operating expenses of $875,399 for the
six-month period ended December 31, 2006. The decrease in operating expenses
during the six-month period ended December 31, 2007 as compared December 31,
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 $135,480 during the
six-month period ended December 31, 2006 to $-0- during the six-month period
ended December 31, 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
$739,919 during the six-month period ended December 31, 2006 to $170,754 during
the six-month period ended December 31, 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 $229,750 in interest expense during the six-month period ended
December 31, 2007 as compared to $859,802 incurred as interest expense during
the six-month period ended December 31, 2006. Interest expense incurred
consisted primarily of interest charged on loans from related parties.
OTHER INCOME
We earned interest income of $13,800 during the six-month period ended December
31, 2007 as compared to interest income of $477 during the six-month period
ended December 31, 2006. We, however, recognized a gain of $1,275,132 on debt
-9-
restructuring and a gain of $2,155,519 on disposal of a subsidiary during the
six-month period ended December 31, 2006 compared to a gain of $-0- during the
six-month period ended December 31, 2007.
Thus, we incurred a net loss of ($386,704) for the six-month period ended
December 31, 2007 compared to a net gain of $1,704,196 incurred during the
six-month period ended December 31, 2006. This difference resulted primarily
from recognition of the gains on debt restructuring and disposal of subsidiary
during the six-month period ended December 31, 2006.
FOR THREE-MONTH PERIOD ENDED DECEMBER 31, 2007 COMPARED TO THREE-MONTH PERIOD
ENDED DECEMBER 31, 2006.
REVENUES AND GROSS MARGIN
We had net sales of $-0- for the three-month period ended December 31, 2007
compared to net sales of $102,435 for the three-month period ended December 31,
2006, before taking into account cost of sales of $98,937, resulting is gross
profit of $3,498. Net sales decreased substantially due to the divesture of our
interest in Xinhua C& D.
COST OF SALES
Our cost of sales for the three-month period ended December 31, 2007 was $-0-
compared to cost of sales of $98,937 for the three-month period ended December
31, 2006. Cost of sales decreased proportionately with the decrease in revenues
to $-0- during the three-month period ended December 31, 2007 compared with the
three-month period ended December 31, 2006 due to the divesture of our interest
in Xinhua C&D.
OPERATING EXPENSES
Our total operating expenses were $90,720 for the three-month period ended
December 31, 2007 as compared to total operating expenses of $345,303 for the
three-month period ended December 31, 2006. The decrease in operating expenses
during the three-month period ended December 31, 2007 as compared December 31,
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 $66,815 during the
three-month period ended December 31, 2006 to $-0- during the three-month period
ended December 31, 2007. Selling, general and administrative expenses decreased
from $278,488 during the three-month period ended December 31, 2006 to $90,720
during the three-month period ended December 31, 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 $146,507 in interest expense during the three-month period ended
December 31, 2007 as compared to $88,725 incurred as interest expense during the
three-month period ended December 31, 2006. Interest expense incurred consisted
primarily of interest charged on loans from related parties.
-10-
OTHER INCOME
We earned interest income of $13,789 during the three-month period ended
December 31, 2007 as compared to interest income of $-0- during the three-month
period ended December 31, 2006. We, however, recognized a gain of $1,275,132 on
debt restructuring and a gain of $2,155,519 on disposal of a subsidiary during
the three-month period ended December 31, 2006 compared to a gain of $-0- during
the three-month period ended December 31, 2007.
Thus, we incurred a net loss of ($225,170) for the three-month period ended
December 31, 2007 compared to a net gain of $3,000,121 incurred during the
three-month period ended December 31, 2006. This difference resulted primarily
from recognition of the gains on debt restructuring and disposal of subsidiary
during the three-month period ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
SIX-MONTH PERIOD ENDED DECEMBER 31, 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 six-month period ended December 31, 2007, our current assets were
$2,107,721 and our current liabilities were $2,903,245, resulting in a working
capital deficit of $795,524. As at the six-month period ended December 31, 2007,
current assets were comprised of: (i) $20,009 in cash and cash equivalents; (ii)
$252,980 in net accounts receivable; (iii) $1,625,000 in note receivable; and
(iv) $209,732 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
six-month period ended December 31, 2007, our current liabilities were comprised
of: (i) $844,710 in accounts payable and accrued liabilities; (ii) $2,012,643 in
current portion of loans payable; and (iii) $45,892 in deferred revenue. See " -
Material Commitments."
As at the six-month period ended December 31, 2007, our total assets were
$2,176,292 comprised of: (i) $2,107,721 in current assets; and (ii) $68,571 in
net property, plant and equipment. The slight increase in total assets during
the six-month period ended December 31, 2007 from fiscal year ended June 30,
2007 was primarily due to the note receivable.
As at the six-month period ended December 31, 2007, our total liabilities were
$8,903,724 comprised of: (i) $2,903,245 in current liabilities; (ii) $1,058,261
in loans payable; and (iii) $4,942,218 in loans from shareholders. The slight
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increase in total liabilities during the six-month period ended December 31,
2007 from fiscal year ended June 30, 2007 was primarily due to the increase in
accounts payable and accrued liabilities.
Stockholders' deficit increased from ($6,664,709) for June 30, 2007 to
($6,727,432) for December 31, 2007.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
six-month period ended December 31, 2007, net cash flow used in operating
activities was ($46,781). Net cash flow used in operating activities during the
six-month period ended December 31, 2007 consisted primarily of a net loss of
($310,450) adjusted by $199,659 in imputed interest expense, $2,554 in
depreciation and $13,768 in amortization of deferred imputed expense. Changes in
assets and liabilities consisted of an increase of $67,734 in account
receivable, $27,535 in deferred revenue inventory and $8,546 in other
receivables and prepayments and a decrease of $151,503 in accounts payable and
accrued liabilities.
INVESTING ACTIVITIES
During the six-month period ended December 31, 2007, net cash flow used in
investing activities was $57,031 compared to net cash flow from investing
activities of $241,431 for the six-month period ended December 31, 2006. Net
cash flow used in investing activities during the six-month period ended
December 31, 2007 was primarily the result of $57,031 in purchase of plant and
equipment compared to $252,982 in deposits received from disposal of the
subsidiary and $11,551 used in purchase of plant and equipment during the
six-month period ended December 31, 2006.
FINANCING ACTIVITIES
During the six-month period ended December 31, 2007, net cash flow provided by
financing activities was $86.788 compared to net cash flow provided by financing
activities of $675,702 for the six-month period ended December 31, 2006. Net
cash flow from financing activities during the six-month period ended December
31, 2007 pertained primarily to $86,788 received as proceeds from loan from
shareholders compared to $675,702 received as proceeds from loan from
shareholders during the six-month period ended December 31, 2006.
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.
-12-
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.
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.
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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
========== =========
As of December 31, 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. The scheduled
payments of $375,000 due on September 30, 2007 and October 31, 2007,
respectively, have remained unpaid as of December 31, 2007. We have calculated
imputed interest income of $87,195 and reduced from the gain on disposal of
subsidiary.
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LOANS FROM SHAREHOLDERS
During fiscal year 2007/8, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $4,942,218 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 six-month
period ended December 31, 2007, we calculated imputed interest expense of
$116,370 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.
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
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procedures as of December 31, 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
six-month period ended December 31, 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 ($386,704) for the
six-month period ended December 31, 2007. We had a working capital deficit of
($795,524) and shareholders' deficit of ($6,727,432) as of December 31, 2007.
These factors 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
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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.
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
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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.
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.
-18-
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
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
-19-
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
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.
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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 $2,903,245 as of December 31, 2007 of which
approximately $2,012,643 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 $6,000,479 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
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
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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
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.
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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.
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
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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.
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
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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
23.1 Consent of Independent Registered Public Accounting Firm
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: February 19, 2008 By: /s/ XIANPING WANG
____________________________________
Xianping Wang, President/Chief
Executive Officer
Dated: February 19, 2008 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 February 19, 2008
_________________ and a Director
Xianping Wang
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