UNITED STATES
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 quarterly period ended September 30, 2008
[ ] 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.
______________________________________________
(exact name of registrant as specified in its charter)
NEVADA 88-0437644
_______________________________ ___________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
YuanJia International Apartment
Building #1, Suite 304
No. 40 Dongzhong Street
Dongcheng District, Beijing China 100027
_______________________________________________________
(Address of principal executive offices) (Zip Code)
86-10-64168816
___________________________
(Registrant's telephone number including area code)
Indicate by check mark 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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most practicable date. Outstanding as of November 12,
2008:
Class
Common Stock 142,899,008
Transitional Small Business Disclosure Format (Check one): __ Yes X No
XINHUA CHINA LTD.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements. 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 4T. Controls and Procedures. 27
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 28
Item 6. Exhibits. 28
Signatures 29
FORWARD LOOKING STATEMENTS
Statements made in this form 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 U.S. 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.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XINHUA CHINA LTD.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008 AND JUNE 30, 2008
(STATED IN US DOLLARS)
2
XINHUA CHINA LTD.
CONTENTS PAGES
Report of Registered Independent Public Accounting Firm 4
Consolidated Balance Sheet 5
Consolidated Statement of Income 6
Consolidated Statement of Stockholders' Equity 7
Consolidated Statement of Cash Flows 8
Notes to the Financial Statements 9
3
Board of Directors and Stockholders
Xinhua China Ltd.
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We have reviewed the accompanying interim consolidated Balance Sheets of Xinhua
China Ltd. ("the Company") as of September 30, 2008 and June 30, 2008, and the
related statements of income, stockholders' equity, and cash flows for the
three-months ended September 30, 2008 and 2007. 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
October 17, 2008 Certified Public Accountants
4
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2008 AND JUNE 30, 2008
(STATED IN US DOLLARS)
NOTES SEPTEMBER 30, 2008 JUNE 30, 2008
_____ __________________ _____________
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 3D 14,783 38,733
Accounts Receivable, NET 3E 74,130 411,782
Note Receivable 4 - 1,625,000
Other Receivables and Prepayments 5 224,043 223,231
___________ ___________
Total Current Assets 312,956 2,298,746
LONG-TERM ASSETS
Property, Plant & Equipment, NET 3F,6 68,550 73,786
Investment in Subsidiary - BoHeng 1,625,000 -
___________ ___________
Total Long-term Assets 1,693,550 73,786
___________ ___________
Total Assets $ 2,006,506 $ 2,372,532
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities 7 588,854 1,095,538
Deferred Revenue - 18,355
Current portion of Loans Payable 8 1,591,443 1,635,443
___________ ___________
Total Current Liabilities 2,180,297 2,749,336
LONG-TERM LIABILITIES
Loans Payable 8 1,058,261 1,058,261
Loans from Shareholders 9 5,611,104 5,410,256
___________ ___________
Total Long-term Liabilities 6,669,365 6,468,517
___________ ___________
Total Liabilities 8,849,662 9,217,853
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
5
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2008 AND JUNE 30, 2008
(STATED IN US DOLLARS)
NOTES SEPTEMBER 30, 2008 JUNE 30, 2008
_____ __________________ _____________
STOCKHOLDERS' EQUITY
Common Stock $0.00001 Par Value
500,000,000 Shares Authorized;
131,499,008 and 98,655,733 shares
issued and outstanding at September
30, 2008 and June 30, 2008, accordingly. 10 1,315 987
Additional Paid-In Capital 11,029,490 10,903,997
Accumulated Other Comprehensive Income 38,645 38,149
Accumulated Deficit (17,912,606) (17,788,454)
___________ ___________
Total Stockholders' (Deficit)/Equity (6,843,156) (6,845,321)
___________ ___________
Total Liabilities & Stockholders' Equity $ 2,006,506 $ 2,372,532
=========== ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
6
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(STATED IN US DOLLARS)
NOTES SEPTEMBER 30, 2008 JUNE 30, 2008
_____ __________________ _____________
REVENUE
Revenue, NET 3H $ - $ -
Cost of Sales, NET 3I - -
Gross Profit - -
OPERATING EXPENSES
Selling, General, and Administrative
Expenses 226,867 78,301
___________ ___________
Total Operating Expense 226,867 78,301
___________ ___________
Operating Income/(Loss) (226,867) (78,301)
___________ ___________
OTHER INCOME (EXPENSES)
Other Income 179,621 -
Interest Income 26 11
Gain on disposal of Beijing BoHeng 73,427 -
Interest Expense 150,360 83,243
___________ ___________
Loss before minority interest and income tax (124,153) (161,534)
Minority interest in net loss of
consolidated subsidiaries - -
___________ ___________
Loss before Income Tax (124,153) (161,534)
Income Tax 3M,14 - -
Accumulated Deficits of Boheng (124,153) -
___________ ___________
Net Loss $ (124,153) $ (161,534)
=========== ===========
Basic & Diluted Earnings Per Share 3N,17 $ (.001) $ ( 0.0028)
___________ ___________
Weighted Average Shares Outstanding 111,928,254 57,723,668
___________ ___________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
7
XINHUA CHINA LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
ADDITIONAL OTHER
NUMBER OF COMMON PAID IN COMPREHENSIVE COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL INCOME(LOSS) INCOME(LOSS) DEFICIT TOTAL
___________ ______ __________ _____________ _____________ ___________ __________
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 - - 151,760 - - - 151,760
Imputed interest on interest
free advances from
related party - - 328,711 - - - 328,711
Issuance of shares to
Highgate 44,016,843 441 - - - - 441
Foreign Currency translation - - - 29,400 29,400 - 29,400
Net Loss for year - - - (690,924) - (690,924) (690,924)
___________ ______ __________ _____________ ______ ___________ __________
Balance, June 30, 2008 98,655,733 987 10,903,997 (17,750,304) 38,149 (17,788,454) (6,845,321)
=========== ====== ========== ============= ====== =========== ==========
Balance, July 1, 2008 98,655,733 987 10,903,997 (17,750,304) 38,149 (17,788,454) (6,845,321)
Additional Paid-in Capital - - 13,768 - - - (1,581,328)
Imputed interest on interest
free advances from
related party - - 111,725 - - - 81,821
Issuance of shares to
Highgate 32,843,275 328 - - - - 328
Foreign Currency translation - - - 496 496 - 496
Net Loss for quarter - - - (124,152) - (124,152) (124,152)
___________ ______ __________ _____________ ______ ___________ __________
Balance, September 30, 2008 131,499,008 1,315 11,029,490 (17,873,960) 38,645 (17,912,606) (8,468,156)
=========== ====== ========== ============= ====== =========== ==========
SEPTEMBER 30, 2008 JUNE 30, 2008
__________________ _____________
COMPREHENSIVE INCOME(LOSS)
Net Loss $ (124,152) $ (690,924)
OTHER COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment 496 29,400
__________ __________
Total Comprehensive Income $ (123,656) $ (661,524)
========== ==========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
8
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(STATED IN US DOLLARS)
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
_________________ __________________
CASH FLOW FROM OPERATING ACTIVITIES:
Net (Loss) $ (124,153) $ (161,534)
Adjustments to reconcile net earnings(loss) to net cash
used in operating activities:
Depreciation 5,632 822
Imputed interest expense 111,725 83,213
Amortization of deferred imputed interest from
note receivable 13,768 13,768
CHANGES IN ASSETS AND LIABILITIES:
Decrease/(Increase) Accounts receivable 337,652 (25,463)
Decrease/(Increase) Other receivables and prepayments (812) (2,868)
Decrease/(Increase) Accounts Payable and accrued
liabilities (506,684) 39,395
Decrease/(Increase) in Deferred Revenue (18,355) (13,768)
___________ ___________
Cash Sourced/(Used) in Operating Activities (181,227) (66,435)
___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of note receivable - Boheng 1,625,000 -
Purchase of plant and equipment (396) -
Investment in subsidiary - Boheng (1,625,000) -
___________ ___________
Cash Used/(Sourced) in Investing Activities (396) -
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock Issue to Highgate on debt conversion 328 -
Repayment of Loan to Highgate (44,000) -
Loans from shareholders 200,848 63,801
___________ ___________
Cash Sourced/(Used) in Financing Activities 157,176 63,801
___________ ___________
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR
THE YEAR (24,447) 529
EFFECT OF CURRENCY TRANSLATION 496 (3,163)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 38,733 2,733
___________ ___________
CASH & CASH EQUIVALENTS AT END OF YEAR $ 14,782 $ 3,262
=========== ===========
Cash paid for interest expenses $ - $ 30
=========== ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
9
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(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 Suite 304, Building #1,
YuanJia International Apartment, No. 40 Dongzhong Street, Dongcheng
District, Beijing, 100027, People's Republic of China.
As of May 31, 2006, the Company reduced its equity interest in Xinhua C&D
from 56.14% to 7.98%. Subsequent to the deconsolidation of Xinhua C&D, the
Company commenced the internet book distribution business through Beijing
Joannes Information Technology Co., Ltd. ("Joannes").
Details of the Company's subsidiaries as of September 30, 2008 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
Sales and
Beijing Joannes Information PRC, a company with distribution of Registered capital
Technology Co., Ltd. limited liability books, PRC US$1,250,000 100%
Beijing Boheng Investments PRC, a company with Investment holding, Registered capital
and Management Co., Ltd. limited liability PRC US$17,142,500 95%
British Virgin Islands, 10,000,000 ordinary
Pac-Poly Investment Ltd. a company with limited Investment holding, shares of US$1 par
liability PRC value 100%
2. GOING CONCERN UNCERTAINTIES
These consolidated financial statements have been prepared assuming that
Company will continue as a going concern, which contemplates the
realization of assets and the discharge of liabilities in the normal course
of business for the foreseeable future.
As of September 30, 2008, the Company had no working capital but current
liabilities exceeding current assets by $1,867,341 and an accumulated
deficit of $17,912,606 because 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, 2009. 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.
10
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A.) BASIS OF PRESENTATION
These accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP").
(B.) USE OF ESTIMATES
In preparing these consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets
and liabilities in the balance sheets and revenues and expenses during
the year reported. Actual results may differ from these Estimates.
(C.) BASIS OF CONSOLIDATION
The interest of the Company in the subsidiaries was acquired by means
of exchange of shares in the Company pursuant to a share exchange
agreement on September 14, 2004. The transaction is considered a
transfer between entities under common control, within the meaning of
US GAAP. Accordingly, the assets and liabilities transferred have been
accounted for at historical cost or at their "fair value" at the date
of their original acquisition and have been included in the foregoing
financial statements as of the beginning of the periods presented.
The consolidated financial statements include the financial statements
of the Company and its subsidiaries. Subsidiaries are those entities
in which the Company, directly or indirectly, controls more than one
half of the voting power; has the power to govern the financial and
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.) 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.
(E.) 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.
11
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
(F.) 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
Motor Vehicles 8 - 10 years
Equipment and Machinery 5 - 8 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.
(G.) 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
whether the carrying values are not impaired.
(H.) 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. 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
12
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
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 year ended
September 30, 2008, there were no shipping and handling costs included
in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(I.) COST OF SALES
Cost of sales includes depreciation of property, plant, and equipment
and purchase costs to publishers.
(J.) 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.
(K.) 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
period ended September 30, 2008, advertising expenses amount to zero.
(L.) 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.
(M.) 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
13
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
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.
(N.) 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 131,499,008 and 98,655,733 of
common stock at September 30, 2008 and June 30, 2008, respectively,
are anti-dilutive. As a result, diluted loss per share data does not
include the assumed exercise of outstanding stock options, stock
purchase warrants, or conversion of convertible debenture and has been
presented jointly with basic loss per share.
(O.) 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 SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2008 2008 2007
_____________ ________ _____________
Period/year end RMB : US$ exchange rate 6.8551 6.8718 7.5176
Average period/year RMB : US$ exchange rate 6.8529 7.0726 7.6757
14
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
(P.) 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.
(Q.) 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.
(R.) 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:
|X| 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.
|X| 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.
|X| 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.
15
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
(S.) RECENTLY ISSUED ACCOUNTING STANDARD
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 161 requires entities to provide greater transparency
about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles (the GAAP hierarchy).
Statement 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." In May 2008, the FASB
issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP
APB 14-1 requires the issuer of certain convertible debt instruments
that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a
retroactive basis.
In September 2008, FASB issued FSP No. 133-1 and FIN 45-4,
"Disclosures about Credit Derivatives and Certain Guarantees", an
amendment of FASB Statement No. 133 and FASB Interpretation No. 45;
and Clarification of the Effective Date of FASB Statement No. 161.
This FSP is intended to improve disclosures about credit derivatives
by requiring more information about the potential adverse effects of
changes in credit risk on the financial position, financial
performance, and cash flows of the sellers of credit derivatives. The
provisions of the FSP that amend Statement 133 and FIN 45 are
effective for reporting periods (annual or interim) ending after
November 15, 2008.
This FSP amends FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, to require disclosures by sellers
of credit derivatives, including credit derivatives embedded in hybrid
instruments. This FSP also amends FASB Interpretation (FIN) No. 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS, to require an
additional disclosure about the current status of the
payment/performance risk of a guarantee. The provisions of the FSP
that amend Statement 133 and FIN 45 are effective for reporting
periods (annual or interim) ending after November 15, 2008.
16
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
Finally, this FSP clarifies the effective date in FASB Statement No.
161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
The disclosures required by Statement 161 should be provided for any
reporting period (annual or quarterly interim) beginning after
November 15, 2008. For example, an entity with a March 31 fiscal
year-end should provide the disclosures for its fourth quarter interim
period ending March 31, 2009, in its 2009 annual financial statements.
This clarification of the effective date of Statement 161 is effective
upon issuance of the FSP.
The Company is currently evaluating the potential impact, if any, of
the adoption of the above recent accounting pronouncements on its
consolidated results of operations and financial condition.
4. NOTE RECEIVABLE
As a result of the termination of the acquisition of Beijing Boheng
Investments and Management Co., Ltd. by Purchaser. The Company repossessed
Boheng as its 95% interest subsidiary on August 25, 2008 at a value of
$1,625,000 equal to the unpaid purchase price due by the Purchaser and
recorded as Note Receivable. After such set-off, the Note Receivable was
considered cleared.
5. OTHER RECEIVABLES AND PREPAYMENT
SEPTEMBER 30, 2008 JUNE 30, 2008
__________________ _____________
Prepayments $ 224,043 $ 223,231
================== =============
The carrying amounts of prepayments approximate their fair value.
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consist of the following:
SEPTEMBER 30, 2008 JUNE 30, 2008
__________________ _____________
Equipment and machinery $ 53,301 $ 53,108
Motor vehicles 39,602 39,458
Leasehold Improvement 16,270 16,211
_________ _________
109,173 108,777
LESS: Accumulated Depreciation (40,623) (34,991)
_________ _________
$ 68,550 $ 73,786
========= =========
Depreciation expense for September 30, 2008 and June 30, 2008 were $5,632
and $10,157, respectively.
17
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 2008 and June
30, 2008 consists of the following:
SEPTEMBER 30, 2008 JUNE 30, 2008
__________________ _____________
Accounts Payable $ 387,098 $1,095,538
Other Payables 201,756 -
_________ __________
$ 588,854 $1,095,538
========= ==========
8. 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
=========== =========
18
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
The Company paid $250,000 for the payment due March 10, 2007 and the
debenture holders exercised 100,000 shares and 125,000 shares on March 1,
2007 and April 18, 2007, respectively. During the period ended September
30, 2008, the debenture holders converted 32,843,275 shares against
outstanding loan at a total conversion price of $44,000.
Loans Payable outstanding as of September 30, 2008 amount to $2,649,704 of
which $1,591,443 and $1,058,261 were attributed to current portion and
long-term, respectively.
9. LOANS FROM SHAREHOLDERS
The total outstanding amount of $5,611,104 represents cash advanced from
shareholders of the Company.
These shareholders' loans are unsecured and not repayable within the next
twelve months. For the quarter ended September 30, 2008, there was $81,821
imputed interest, at 6.00% annum, recorded. For the year ended June 30,
2008, there was $328,711 imputed interest, at 6.00% per annum, recorded.
10. COMMON STOCK AND WARRANTS
A. COMMON STOCK
During 2005, the authorized capital stock of the Company increased
from $1,000 consisting of 100,000,000 shares of common stock of par
value $0.00001 each to $5,000 consisting of 500,000,000 shares of
common stock of par value $0.00001 each.
B. WARRANTS
(1) The Company completed a private placement in 2005 with certain
individuals for 622,690 units at $3.25 per unit for total cash
proceeds of $2,023,800. Each unit consists of one share of common
stock and one-half of one non-transferable share purchase
warrant. The warrant will expire on the earlier of:
(i) two years from the date of issuance; and
(ii) fifteen business days from date that the Company provides
notice in writing to the subscriber that the Company's
common shares have been trading or traded at a price of $7
or more for a period of ten days.
The warrant shares shall have an exercise price of $4.50 per
warrant share for the first twelve months, and if still available
after twelve months, the warrant shares shall have an exercise
price of $4.60 per warrant share starting on the first day of the
second twelve month period and increasing by $0.10 on the first
day of each subsequent month thereafter until expiration of the
warrants.
19
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
(2) SHARE PURCHASE WARRANT ISSUED FROM CONVERTIBLE DEBENTURE
On December 13, 2005, the Company issued to the holder of the
convertible debenture 1,035,000 warrants. One share purchase
warrants is exercisable for one common share at $0.00001 per
share, until expiration on November 22, 2010. As of June 30,
2008, 835,000 warrants issued to convertible debenture holders
were outstanding which will lead to the issuance of a total of
213,554,987 additional shares of common stock if fully exercised
at June 30, 2008.
(3) SHARE WARRANT ISSUED FOR SERVICE
On May 1, 2006, the Company issued 100,000 warrants at $1.47 per
share to Mr. Peter Shandro, the VP Business Strategy of the
Company, in association with the planning and execution of the
on-line ecommerce initiative of the Company. Compensation expense
of $94,775 was recorded with the issuance of these warrants.
11. 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 accrue for these benefits
based on certain percentages of the employees' salaries. The total
contributions made for such employee benefits were $ 6,791 and $23,854, for
the quarter ended September 30, 2008 and the year ended June 30, 2008,
respectively.
12. 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.
13. GAIN ON DEBT RESTRUCTURING
On December 29, 2006, the Company completed a debt restructuring with its
Investors, namely Cornell Capital Partners, L.P. ("Cornell") and Highgate
House Funds, Ltd. ("Highgate") under the Forbearance and Settlement
Agreement (the "Forbearance and Settlement Agreement"). Pursuant to the
Forbearance and Settlement Agreement, the Company agreed to make certain
payments to the Investors, with respect to the Securities Purchase
Agreement (the "Securities Purchase Agreement") entered into between the
Company and the Investors on November 23, 2005, as amended on March 23,
20
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
2006, on the convertible debentures in the amounts of $1,250,000 (to
Highgate on November 23, 2005) and $2,000,000 (to Cornell on March 23,
2006) (the "Convertible Debentures") in accordance with the terms and
conditions set forth in the Forbearance and Settlement Agreement.
In accordance with the Forbearance and Settlement Agreement, the Company
agrees to use the proceeds from the disposal of Boheng to repay the
principal and interest due to the Investors under the Convertible
Debentures in exchange for the Investors agreeing to:
(i) Waive on a one-time basis only any accrued liquidated
damages owing to the Investors;
(ii) Not apply the redemption premium on the scheduled
repayments;
(iii) Converting 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 the Company to withdraw the Registration
Statement filed on March 28, 2006 with the SEC in connection
with the Convertible Debentures;
(vi) During the term of the Forbearance and Settlement Agreement,
waiving the requirement for the Company to receive written
consent of each Buyer for any organizational change (as
defined in the Securities Purchase Agreement) to be directly
or indirectly consummated by the Company, and that the
company will not effectuate any stock splits for at least
nine months without the consent of the Investors; and
(vii) Terminate 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
the Investors of the first scheduled repayment amount.
As a result of the debt restructuring arrangement, the Company's
liabilities on warrants, conversions, discounts were discharged
resulting to a net gain of $1,500,132 attributable as follows:
o Liabilities on Conversion discharged $ 2,334,198
o Liabilities on Warrants discharged 891,537
o Loans discharged 225,000
o Unamortized discounts (1,950,603)
___________
$ 1,500,132
___________
14. INCOME TAX
The Company is subject to U.S. corporate taxes at a rate of 35%. Pac-Poly
is a BVI company and is not subject to income taxes. Pursuant to the PRC
Income Tax Laws, the PRC subsidiaries are generally subject to enterprise
21
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
income tax ("EIT") at a statutory rate of 33% (30% national income tax plus
3% local income tax). Effective January 1, 2008, PRC government adopted a
new uniform tax rate of 25% applicable to domestic and foreign enterprise.
Neither the Company nor its subsidiaries had any assessable income for the
period and so neither provision nor benefit for EIT was recorded for the
quarter ended September 30, 2008.
Subject to the approval of the relevant tax authorities, the Company had
tax losses carry-forward against future years' taxable income.
As of September 30, 2008, no valuation allowance was provided to the
deferred tax assets due to the uncertainty surrounding their realization.
15. CONCENTRATION OF RISK
(A). MAJOR CUSTOMERS AND VENDORS
100% of the Company's revenues were derived from customers located in
the PRC, and there are no customers and vendors who account for 10% or
more of revenues and purchases. The Company's assets are all located
in the PRC.
(B). CREDIT RISK
There are no concentrations of credit risk because the Company, while
in operation, entered into large number of cash sale transactions
without deploying financial instruments, which may potentially drive
to significant concentrations.
16. COMMITMENT AND CONTINGENCIES
The Company leases an office premise under a non-cancelable operating lease
for a term of two years from January 1, 2008 to December 31, 2009. The cost
incurred under this operating lease is recorded as rental expense and
totaled $15,377 and $51,261 for the period ended September 30, 2008 and
year ended June 30, 2008, respectively. Future minimum rental payments due
according to the operating lease until termination at December 31, 2009
are:
Year Amount
____ ______
2008 $ 9,634
2009 80,035
_______
$89,669
=======
22
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
(STATED IN US DOLLARS)
17. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
the ordinary shares outstanding during the year. Diluted net loss per share
is computed using the weighted average number of ordinary shares and
ordinary share equivalents outstanding during the year.
The following table sets forth the computation of basic and diluted net
loss per share for the year indicated:
Basic and diluted net loss per share calculation:
SEPTEMBER 30, SEPTEMBER 30,
2008 2007
(a). Numerator:
Net loss used in computing
basic net loss per share 124,153 161,534
(b). Denominator:
Weighted-average ordinary
shares outstanding 111,928,254 57,723,668
Basic and diluted net loss per share $ 0.001 $ 0.0028
For the year ended June 30, 2008 in which the Company had a net loss,
inclusion of warrants outstanding would have been anti-dilutive and
therefore not included in the computation of diluted losses per share.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Our Business and Plans-Summary
Our company, Xinhua China Ltd. ("Company") was incorporated September 14, 1999
under the laws of the State of Nevada, USA. We have certain digital media
distribution and related rights in "China" where we mostly operate and seek to
pursue our business. We are in the development stage seeking to grow our
Company.
We are focused to develop a plan for funding, sales, marketing and other
benefits relating to China and this plan may include other related pursuits such
as assisting one or more USA or international companies to navigate the
regulatory demands of doing related business in China and to possibly join with
us by joint venture or similar arrangement to pursue business in one of the
World's if not the World's most rapidly growing financial and consumer
population environments. As part of this we still seek to establish ourselves as
a leader in the digital media industry first in China and then possibly
elsewhere. We intend to maximize our strategic position in the publishing
industry.
We are developing a new business plan focused on the upcoming New Year of 2009
to achieve several key areas or goals: restructure certain aspects of our
organization and relationships after careful consideration as part of our plan
to grow our Company and revenues; focus on market awareness of our Company
primarily making those investors in the USA stock markets aware of us, given our
arrangements, discussed below, with the People's Republic of China (China) seek
how we can expand our business in both our core license rights and to possibly
obtain other benefits or rights similar in nature, and seek acquisitions of
mainly China companies or assets that may be the subject of registrations or
"spin-off" transactions in the USA markets, both stock and business trade, given
the extensive energy, time and expense we have been through in learning about
the markets. These plans need to be developed and approved by the Board of
Directors, which we also plan to restructure by adding Directors to expand.
We are subject to many risks and there is no assurance of success in our plans.
24
RESULTS OF OPERATIONS
Three months ended September 30,2007 and 2008.
REVENUES AND GROSS MARGIN
Our revenues and gross margin for the three-month comparable periods were both
zero given little if any sales activities without any revenues associated.
COST OF SALES
Our cost of sales for the three-month comparable periods were both zero given
little if any sales activities without any costs associated.
OPERATING EXPENSES
Our total operating expenses were $226,867 for the three-month period ended
September 30, 2008 as compared to total operating expenses of $78,301 for the
three-month period ended September 30, 2007. The increase in operating expenses
was due to a variety of expenditures relating to restructuring effort.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased from $78,301 during the
three-month period ended September 30, 2008 to $226,867 during the three-month
period ended September 30, 2008. This primarily resulted from the increase of
fees to our consultants and professionals in relation to our fund raising and
and other legal and financial matters.
INTEREST
We incurred $150,360 in interest expense during the three-month period ended
September 30, 2008 as compared to $83,243 incurred as interest expense during
the three-month period ended September 30, 2007. Interest expense incurred
consisted primarily of interest charged on loans from related parties and
increased due to loan activity increasing.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2008 our total assets were $2,006,506 compared to $2,054,158
for the three month period ended September 30,2007 representing little change.
Total current assets was $1,418,025 for September 30,2007 compared to
$313,956,for the period in 2008 resulting primarily from the removal of a note
receivable of $1 million dollars.
Cash and cash equivalents increased from $3,262 to $14,783, compared from the
prior period to September 30,2008.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. The net
cash flow for the September, 30, 2008 quarter was significant less then the
comparable quarter in 2007. The net loss for the 2008 quarter was significantly
greater than the comparable quarter in 2007. We have incurred more losses from
expenditures with third party advisors and accountants.
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.
25
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.
As of March 31, 2008, 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, were not paid as of March 31, 2008. During the three-month period
ended March 31, 2008, an aggregate of 18,707,077 shares of our common stock were
issued pursuant to conversion of the debt.
LOANS FROM SHAREHOLDERS
During fiscal year 2007/8, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $5,181,361 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
nine-month period ended March 31, 2008, we calculated imputed interest expense
of $154,546 in relation to interest-free shareholders loans at its effective
interest rate of 6% per annum 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. In 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.
Other changes may apply but we don't think they have a material effect.
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 our business is denominated in Renminbi, the net income effect of
appreciation and devaluation of the currency against the US Dollar should be
limited to the net operating results of the subsidiary companies attributable to
us.
INTEREST RATE
Normally 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. Most of our third party loan obligations 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.
Keep in mind that the current unusual world wide economic problems may alter the
above information or make the information subject to uncertainty since interest
rates, currency exchange, and such financial related matters are in flux and
difficult to track to make a fair assessment of the situations.
26
ITEM 4T. CONTROLS AND PROCEDURES.
An evaluation was conducted under the supervision and with the participation of
our Management, including our Chief Executive Officer/Chief Financial Officer of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the subject quarter. 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
period that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
We maintain "disclosure controls and procedures," as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"),
that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer/Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the "Evaluation"), under the supervision and with the
participation of our Chief Executive Officer/Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls") as of the end of the period covered by this
report pursuant to Rule 13a-15 of the Exchange Act. The evaluation of our
disclosure controls and procedures included a review of the disclosure controls'
and procedures' objectives, design, implementation and the effect of the
controls and procedures on the information generated for use in this report. In
the course of our evaluation, we sought to identify data errors, control
problems or acts of fraud and to confirm the appropriate corrective actions, if
any, including process improvements, were being undertaken. Our Chief Executive
Officer/Chief Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective
and were operating at the reasonable assurance level. Please note we are
considering engaging a dedicated financial officer other than our CEO and the
current person is an interim officer in such position as financial officer.
Our management is responsible for establishing and maintaining adequate control
over financial reporting (as defined in Rules 13a-15(f) promulgated under the
Exchange Act. The term internal control over financial reporting is defined as a
process designed by, or under the supervision of, the issuer's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the issuer's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the issuer;
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with
authorizations of management and directors of the issuer; and
Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the issuer's assets
that could have a material effect on the financial statements.
Our management, including our chief executive officer and chief financial
officer, do/does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.
Our management, with the participation of the chief executive officer and chief
financial officer, assessed the effectiveness of our internal control over
financial reporting as of the end of the subject period. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in INTERNAL
CONTROL-INTEGRATED FRAMEWORK. Our management has concluded our internal control
over financial reporting is effective.
This report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three-month period ended September 30, 2008, we issued shares of our
common stock in accordance with conversion of a certain portion of debt. These
transactions were conducted under one or more possible exemptions from
registration such as Section 4(2) of the Securities Act of 1933, as amended, or
Regulation D of the Commission. Securities were marked as restricted securities.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report:
Exhibit
31.1 Certification under Rule 13a-14(a).
31.2 Certification under Rule 13a-14(a).
32.1 Certification under Section 1350.
32.2 Certification under Section 1350.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XINHUA CHINA LTD.
Dated: November 14, 2008 By: /s/ XIANPING WANG
_____________________________________
Xianping Wang
President(principal executive officer)
Dated: November 14, 2008 By: /s/ XIANPING WANG
_____________________________________
Xianping Wang
Acting as Interim Chief Financial
Officer (principal financial officer)
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