U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER: 000-33195
XINHUA CHINA LTD.
______________________________________________
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 88-0437644
_________________________________ ___________________
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
B-26F, ORIENTAL KENZO DONGCHENG DISTRICT
BEIJING 100027
PEOPLE'S REPUBLIC OF CHINA
________________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
86-10-64168816 OR 86-10-64168916
________________________________
(ISSUER'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION NAME OF EACH EXCHANGE ON WHICH
12(b) OF THE ACT: REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.00001 PAR VALUE
___________________________________________________________
(TITLE OF CLASS)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act.[ ]
Check whether the issuer (i) 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 (ii) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
229.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files.
Yes [ ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filed,
unaccelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
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 Exchange Act). Yes [ ] No [X]
State issuers revenues for its most recent fiscal year $ -0-.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. October 1, 2009: $
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
N/A
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Check 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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding as
Class of September 30, 2009
________________________________________
Common Stock, 490,311,400
$0.00001
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (i) any annual report to security holders; (ii)
any proxy or information statement; and (iii) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The
listed documents should be clearly described for identification purposes (e.g.
annual reports to security holders for fiscal year ended December 24, 1990).
N/A
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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XINHUA CHINA LTD.
FORM 10-K
INDEX
Item 1. Business 6
Item 1A. Risk Factors 8
Item 1B Unresolved Staff Comments 16
Item 2 Properties 17
Item 3. Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 17
Item 6 Selected Financial Data 22
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation 23
Item 7A Quantity and Qualitative Disclosure About Market Risks 32
Item 8. Financial Statements and Supplemental Data 33
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 36
Item 9A. Controls and Procedures 36
Item 9A(T) Controls and Procedures 39
Item 9B. Other Information 39
Item 10 Directors, Executive Officers and Corporate Governance 39
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions and Director
Compensation 45
Item 14. Principal Accountant Fees and Services 46
Item 15. Exhibits and Financial Statement Schedules 46
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FORWARD LOOKING STATEMENTS
Statements made in this Form 10-K 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 Annual Report
on Form 10-K 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.
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
Xinhua China Ltd. was incorporated September 14, 1999 under the laws of the
State of Nevada as Camden Mines Limited ("Camden"). Since its formation and up
to September 4, 2004, Camden was considered an inactive development stage
enterprise. 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"). Please note that throughout this Annual Report, and unless otherwise
noted, the words "we," "our," "us," or the "Company" refer to Xinhua China Ltd.
CURRENT SUBSIDIARIES
PAC-POLY INVESTMENTS LIMITED
On September 14, 2004, we signed two separate share purchase agreements
(collectively, the "Share Purchase Agreements"), whereby we issued 35,000,000
shares of our restricted common stock in exchange for a 100% interest in
Pac-Poly Investments Limited, a company incorporated under the laws of the
International Companies Business Act Cap 291 of British Virgin Islands
("Pac-Poly"), and a 95% interest in Beijing Boheng Investments Limited, a
company incorporated under the laws of China ("Beijing Boheng"), respectively.
The shareholders of Pac-Poly and Beijing Boheng received 16,387,000 and
18,613,000 shares of our restricted common stock, respectively. In accordance
with the terms and provisions of the Share Purchase Agreement, one of our
shareholders returned to us 35,000,000 shares of common stock held of record by
such shareholder and the shares were cancelled and returned to treasury.
Immediately prior to consummation of the respective Share Purchase Agreements,
Pac-Poly and Beijing Boheng were under common control. Subsequently, Beijing
Boheng spun off all of its business and net assets to its president and became a
non-operating shell company. Pac-Poly had no significant operations since its
inception.
As of the date of this Annual Report, we hold of record 10,000,000 shares of
common stock at $1.00 par value, which constitutes 100% of the total issued and
outstanding shares of Pac-Poly. Therefore, Pac-Poly is our wholly-owned
subsidiary. Pac-Poly is an investment holding company.
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 hold 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.
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As of the date of this Annual Report, we hold of record 1,250,000 shares of
common stock at $1.00 par value, which constitutes 100% of the total issued and
outstanding shares of Beijing Joannes. Therefore, Beijing Joannes is our
wholly-owned subsidiary.
CURRENT BUSINESS OPERATIONS
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.
DIVESTURE OF INTEREST IN XINHUA CIRCULATION & DISTRIBUTION
During September 2004, 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. In accordance with the terms and provisions of the
Investment Agreement, 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. This change reduced
our equity interest in Xinhua C&D to 7.98%. Xinhua C&D will remain focused on
traditional distribution services for Chinese book publishers throughout China,
and is expected to provide procurement services for our online e-commerce
initiative.
CONTRACTUAL RELATIONSHIPS
Management of the Company believes that it will be able to establish itself as a
leader in the digital media industry. In accordance with our refocused strategic
plan, we intend to enter into certain contractual relationships.
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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 company's 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 ($2,503,735) for fiscal
year ended June 30, 2009. We had a working capital deficit of $1,900,404 and
shareholders' deficit of ($8,848,570) as of June 30, 2009. These factors raise
substantial doubt about our ability to continue as a going concern. The
auditors' report in our financial statements as at June 30, 2009 and June 30,
2008 includes an explanatory paragraph that states that we have generated net
losses and have a shareholders' deficit factors which raise substantial doubt
about our ability to continue as a going concern. We have been dependent on
sales of our equity securities and debt financing to meet our cash requirements.
Further, we do not expect positive cash flow from operations in the near term.
There is no assurance that actual cash requirements will not exceed our
estimates. In particular, additional capital may be required in the event that:
(i) operating costs may be more than we currently anticipate; or (ii) we
encounter greater costs associated with general and administrative expenses or
offering costs.
WE ARE OPERATING IN A DEVELOPING MARKET AND THERE IS UNCERTAINTY AS TO MARKET
ACCEPTANCE OUR TECHNOLOGY AND PRODUCTS.
We researched the markets for our products involving the digital media industry.
We have conducted limited test marketing and thus have relatively little
information on which to estimate our levels of sales, the amount of revenue our
planned operations will generate and our operating and other expenses. There can
be no assurance that we will be successful in our efforts to market our products
or to develop our markets in the manner we contemplate within the digital media
industry.
The markets for our products and technology are developing and rapidly evolving
and are characterized by an increasing number of market entrants who have
developed or are developing a wide variety of products and technologies, a
number of which offer certain of the features that our products offer. Because
of these factors, demand and market acceptance for new products are subject to a
high level of uncertainty. There can be no assurance that our technology and
products will become widely accepted. It is also difficult to predict with any
assurance the future growth rate, if any, and size of the market. If a
substantial market fails to develop, develops more slowly than expected or
becomes saturated with competitors or if our products do not achieve market
acceptance, our business, operating results and financial condition will be
materially and adversely affected.
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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
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.
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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.
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
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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
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.
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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.
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 $2,244,936 as of June 30, 2009 of which
approximately $1,490,911 is due within the next year unless extended. Such
substantial debt obligations could affect our status as a going concern and also
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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 $7,003,322 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Material Commitments."
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
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.
ELIMINATION OF TAX HOLIDAYS
Effective January 1, 2008, the People's Republic of China implemented a new
standard 25% tax rate for all business enterprises regardless of whether the
enterprise is a domestic or foreign enterprise, without any tax holiday. The tax
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holiday is defined as "two-year exemption followed by three-year half
exemption", which had previously been enjoyed by tax payers within the People's
Republic of China. Therefore, as a result of the new tax law of a standard 25%
tax rate, tax holidays terminated as of December 31, 2007. However, the People's
Republic of China has established a set of transition rules to allow business
enterprises that had already commenced use of tax holidays before January 1,
2008, to continue enjoying the tax holidays until all tax holidays are fully
utilized.
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, 2008, 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, 2009, no transfer to the staff welfare and bonus fund was made.
AS A RESULT OF A MAJORITY OF OUR DIRECTORS AND OFFICERS BEING RESIDENTS OF OTHER
COUNTRIES OTHER THAN THE UNITED STATES, INVESTORS MAY FIND IT DIFFICULT TO
ENFORCE WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR OUR
DIRECTORS AND OFFICERS.
We do not currently maintain a permanent place of business within the United
States. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States, and all or a
substantial portion of such persons' assets are located outside the United
States. As a result, it may be difficult for investors to enforce within the
United States any judgments obtained against our company or our officers or
directors, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof.
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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. As of the date of this Annual Report, our total issued
and outstanding shares of common stock are 490,311,400. Therefore, we may need
to obtain shareholder approval to amend our articles of incorporation to
increase the authorized capital stock in order to be able to issue sufficient
shares in the future in accordance with our contractual obligations. Our board
of directors has the authority to issue additional shares of common stock up to
the authorized capital stated in the articles of incorporation. Our board of
directors may choose to issue some or all of such shares to acquire one or more
businesses or to provide additional financing in the future. The issuance of any
such shares may result in a reduction of the book value or market price of the
outstanding shares of our common stock. It will also cause a reduction in the
proportionate ownership and voting power of all other stockholders.
BECAUSE OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, THE LIQUIDITY OF YOUR
INVESTMENT MAY BE RESTRICTED.
Our common stock is now, and may continue to be in the future, subject to the
penny stock rules under the Securities Exchange Act of 1934. These rules
regulate broker/dealer practices for transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require broker/dealers to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
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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
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 1B. UNRESLOVED STAFF COMMENTS
Not applicable as we are a non-accelerated filer.
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ITEM 2. DESCRIPTION OF PROPERTY
We maintains our registered agent's office at 101 Convention Center Drive, Suite
700, Las Vegas, Nevada 89109 and our principal executive office at YuanJia
International Apartment, Building #1, Suite 304, No. 40 Dongzhong Street,
Dongcheng District, Beijing.
ITEM 3. LEGAL PROCEEDINGS.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During fiscal year ended June 30, 2009, no matters were submitted to our
stockholders for approval.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON EQUITY
Shares of our common stock are traded on the OTC Bulletin Board under the symbol
"XHUA". The market for our common stock is limited, and can be volatile. The
trading volume over the past three months has averaged 13,288 shares per day.
While management has a goal of improving corporate value, share price and
liquidity, there is no guarantee this will occur. The following table sets forth
the high and low sales prices relating to our common stock on a quarterly basis
for the last two fiscal years as quoted by the NASDAQ. These quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions, and may
not reflect actual transactions.
QUARTER ENDED HIGH BID LOW BID
June 30, 2009 $0.0022 $0.0013
March 31, 2009 $0.0013 $0.0005
December 31, 2008 $0.001 $0.0004
September 30, 2008 $0.0029 $0.0014
June 30, 2008 $0.019 $0.0016
March 31, 2008 $0.014 $0.004
December 31, 2007 $0.034 $0.007
September 30, 2007 $0.058 $0.033
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As of September 26, 2009, we had 30 shareholders of record, which does not
include shareholders whose shares are held in street or nominee names. We
believe that there are approximately 1,000 beneficial owners of our common
stock.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common
stock. Our losses do not currently indicate the ability to pay any cash
dividends, and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future. There are no restrictions in our
articles of incorporation or by-laws that prevent us from declaring dividends.
The Nevada Revised Statutes, however, do prohibit us from declaring dividends
where, after giving effect to the distribution of the dividend, we would not be
able to pay our debts as they become due in the usual course of business or our
total assets would be less than the sum of our total liabilities plus the amount
that would be needed to satisfy the rights of stockholders who have preferential
rights superior to those receiving the distribution.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Xinhua China Ltd. Stock Option Plan.
On September 4, 2004, our Board of Directors unanimously approved and adopted,
and on September 6, 2004 our shareholders holding a majority of our issued and
outstanding common stock, approved a stock option and incentive plan (the "Stock
Option Plan"). The purpose of the Stock Option Plan is to advance our interests
and our shareholders by affording our key personnel an opportunity for
investment and the incentive advantages inherent in stock ownership in us.
Pursuant to the provisions of the Stock Option Plan, stock options, stock
awards, cash awards or other incentives (the "Stock Options and Incentives")
will be granted only to our key personnel, generally defined as a person
designated by the Board of Directors upon whose judgment, initiative and efforts
we may rely including any of our directors, officers, employees, consultants or
advisors. A maximum of 20,000,000 shares of common stock have been reserved
under the Stock Option Plan. Options may be granted for a term not exceeding ten
years from the date of grant. Under the Stock Option Plan, the Board of
Directors previously authorized the grant of 4,255,000 Stock Options to our
employees and consultants on September 23, 2004 and October 27, 2004,
respectively. The entire 4,255,000 Stock Options have expired by their terms as
of June 30, 2007.
The table set forth below presents the securities authorized for issuance with
respect to the Stock Option Plan under which equity securities are authorized
for issuance as of June 30, 2009:
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EQUITY COMPENSATION PLAN INFORMATION
WEIGHTED-AVERAGE NUMBER OF SECURITIES
NUMBER OF SECURITIES TO EXERCISE PRICE OF REMAINING AVAILABLE FOR
BE ISSUED UPON EXERCISE OUTSTANDING FUTURE ISSUANCE UNDER
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS AND RIGHTS (EXCLUDING COLUMN (A))
(A) (B) (C)
PLAN CATEGORY
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
Stock Options -0- 20,000,000
Total Stock Options -0- 20,000,000
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS
Warrants 622,690 $4.60 0
835,000 $0.00001 0
100,000 $1.47 0
Total warrants 1,557,690
Total 1,557,690
XINHUA CHINA LTD. STOCK OPTION PLAN
The Stock Option Plan is to be administered by our Board of Directors, which
shall determine (i) the persons to be granted Stock Options and Incentives; (ii)
the Fair Market Value of our shares; (iii) the exercise price per share of
options to be granted; (iv) the number of shares to be represented by each
option or incentive award; (v) the time or times at which options and incentive
awards shall be granted; (vi) the interpretation of the Stock Option Plan; (vii)
whether to prescribe, amend and rescind rules and regulations relating to the
Stock Option Plan; (viii) the term and provisions or each option and incentive
award granted (which need not be identical) and, with the consent of the grantee
thereof, modify or amend such option or incentive award; (ix) whether to
accelerate or defer (with the consent of the grantee) of the exercise date of
any option or incentive award; (x) the person to execute on our behalf any
instrument required to effectuate the grant of an option or incentive award
previously granted by the Board; (xi) whether to accept or reject the election
made by a grantee pursuant to Section 7.5 of the Stock Option Plan; and (xii)
all other determinations deemed necessary or advisable for the administration of
the Stock Option Plan. The Stock Option Plan provides authorization to the Board
of Directors to grant Stock Options and Incentives to a total number of shares
of our common stock, not to exceed Twenty Million (20,000,000) shares of our
common stock as at the date of adoption by the Board of Directors of the Stock
Option Plan.
In the event an optionee who is one of our directors, officers, employees
(employee also encompasses consultants and advisors where such is appropriate or
where such is intended by the Board or by a particular grant under the Stock
Option Plan) (each an "Employee") has his employment terminated by us, except if
such termination is voluntary or occurs due to retirement with the consent of
the Board or due to death or disability, then the Stock Option, to the extent
not exercised, shall terminate on the date on which the Employee's employment
with us is terminated. If an Employee's termination is voluntary or occurs due
to retirement with the consent of the Board, then the Employee may after the
date such Employee ceases to be one of our employees, exercises his Stock Option
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at any time within three (3) months after the date he ceases to be one of our
Employees, but only to the extent that he was entitled to exercise it on the
date of such termination. To the extent that the Employee was not entitled to
exercise the Stock Option at the date of such termination, or if he does not
exercise such Stock Option option (which he was entitled to exercise) within the
time specified herein, the option shall terminate. In no event may the period of
exercise in the case of Incentive Options extend more than three (3) months
beyond termination of employment.
In the event an Employee is unable to continue his employment with us as a
result of his permanent and total disability (as defined in Section 22(e)(3) of
the Internal Revenue Code), he may exercise his Stock Option at any time within
six (6) months from the date of termination, but only to the extent he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Stock Option at the date of termination, or if
he does not exercise such option (which he was entitled to exercise) within the
time specified herein, the Stock Option shall terminate. In no event may the
period of exercise in the case of an Incentive Option extend more than six (6)
months beyond the date the Employee is unable to continue employment due to such
disability.
In the event an optionee dies during the term of the Stock Option and is at the
time of his death an Employee who shall have been in continuous status as an
Employee since the date of grant of the option, the Stock Option may be
exercised at any time within six (6) months following the date of death by the
optionee's estate or by a person who acquired the right to exercise the Stock
Option by bequest or inheritance, but only to the extent that an optionee was
entitled to exercise the Stock Option on the date of death, or if the optionee's
estate, or person who acquired the right to exercise the Stock Option by bequest
or inheritance, does not exercise such Stock Option (which he was entitled to
exercise) within the time specified herein, the Stock Option shall terminate. In
no event may the period of exercise in the case of an Incentive Option extend
more than six (6) months beyond the date of the Employee's death.
Except to the extent otherwise expressly provided in an award, the right to
acquire shares or other assets under the Stock Option Plan may not be assigned,
encumbered or otherwise transferred by an optionee and any attempt by an
optionee to do so will be null and void. However Stock Options and Incentives
granted under this Stock Option Plan may be transferred by an optionee by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code or Title I of the
Employee Retirement Income Security Act, as amended, or the rules thereunder.
Unless assigned in accordance with the terms of an award, options and other
awards granted under this Stock Option Plan may not be exercised during an
optionee's lifetime except by the optionee or, in the event of the optionee's
legal incapacity, by his guardian or legal representative acting in a fiduciary
capacity on behalf of the optionee under state law and court supervision.
SECTION 15(G) OF THE SECURITIES EXCHANGE ACT OF 1934
Our shares are covered by Section 15(g) of the Securities Exchange Act of 1934,
as amended that imposes additional sales practice requirements on broker/dealers
who sell such securities to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
-20-
or individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouses). For transactions covered by
this Section 15(g), the broker/dealer must make a special suitability
determination for the purchase and have received the purchaser's written
agreement to the transaction prior to the sale. Consequently, Section 15(g) may
affect the ability of broker/dealers to sell our securities and also may affect
your ability to sell your shares in the secondary market.
Section 15(g) also imposes additional sales practice requirements on
broker/dealers who sell penny securities. These rules require a one page summary
of certain essential items. The items include the risk of investing in penny
stocks in both public offerings and secondary marketing; terms important to in
understanding of the function of the penny stock market, such as "bid" and
"offer" quotes, a dealers "spread" and broker/dealer compensation; the
broker/dealer compensation, the broker/dealers duties to its customers,
including the disclosures required by any other penny stock disclosure rules;
the customers rights and remedies in causes of fraud in penny stock
transactions; and, the NASD's toll free telephone number and the central number
of the North American Administrators Association, for information on the
disciplinary history of broker/dealers and their associated persons.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended June 30, 2009,
to provide capital, we sold stock in private placement offerings, issued stock
in exchange for our debts or pursuant to contractual agreements as set forth
below.
FORBEARANCE AND SETTLEMENT AGREEMENT
Effective December 29, 2006, we entered into a forbearance and settlement (the
"Forbearance and Settlement Agreement") with Cornell Capital Partners, L.P.
("Cornell") and Highgate House Funds, Ltd. ("Highgate"). In accordance with the
terms and provisions of the Forbearance and Settlement Agreement, we agreed to
make certain payments to Cornell and Highgate with respect to the securities
purchase agreement dated November 23, 2005, as amended on March 23, 2006 (the
"Securities Purchase Agreement") previously entered into with Cornell and
Highgate. See "Item 6. Management's Discussion and Analysis or Plan of Operation
- Material Commitments."
In addition, Highgate shall exercise its rights to purchase warrant shares
pursuant to the Warrant issued to it under the Securities Purchase Agreement on
a cashless basis. During fiscal year ended June 30, 2009, we issued an aggregate
of 266,655,667 shares of our common stock to Highgate pursuant to the exercise
by Highgate of its rights to purchase warrant shares pursuant to the Warrant.
DEBT SETTLEMENT
Our Board of Directors, pursuant to a written consent resolutions dated July 13,
2009, approved and authorized the settlement of an aggregate of $3,426,444 in
current indebtedness (the "Debt Settlement"). The Debt was incurred as a result
of our founder and President/Chief Executive Officer, Xianping Wang, loaning
sums of money to us for financing and working capital purposes. As of March 1,
2008, we had incurred an aggregate of $3,426,444 in Debt due and owing to Mr.
-21-
Wang based upon the loan of such funds to us as evidenced by those certain
financial statements dated March 31, 2008. We agreed with Mr. Wang at the time
of the Debt as of March 1, 2008 that, in the event the Corporation was unable to
repay the Debt, the Debt would be satisfied by conversion of the Debt into
shares of our common stock at $0.0001 per share. We entered into a settlement
agreement with Mr. Wang dated July 13, 2009 (the "Settlement Agreement").
Subsequently, Mr. Wang assigned a portion of his right, title and interest in
and to the Debt to that certain assignee, Lily Wang (the "Assignee").
As of the date of this Annual Report, Mr. Wang or his Assignee has converted a
portion of the Debt into 125,000,000 shares of our common stock. The shares were
issued in reliance on Rule 903 of Regulation S promulgated under the Securities
Act. The securities issued have not been registered under the Securities Act or
under any state securities laws and may not be offered or sold without
registration with the United States Securities and Exchange Commission or an
applicable exemption from the registration requirements.
ITEM 6. SELECTED FINANCIAL DATA
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 fiscal years ended June 30, 2009 and
2008, which financial statements are included elsewhere in this Annual Report.
________________________________________________________________________________________________
FOR FISCAL YEAR ENDED FOR FISCAL YEAR ENDED
JUNE 30, 2009 JUNE 30, 2008
(AUDITED) (AUDITED)
________________________________________________________________________________________________
Revenue
Net Revenue $ -0- $ -0-
Net cost of sales -0- -0-
Gross Profit -0- -0-
Operating Expenses
Selling, general and administrative 680,536 374,767
Operating loss (680,536) (374,767)
Other Income (Expenses)
Other income 179,621 -0-
Interest income -0- 55,127
Gain on debt restructuring 73,427 12,644
Interest expense (451,247) (383,928)
Impairment Loss on Boheng investment (1,625,000) -0-
Loss Before Minority Interest and Income Tax (2,503,735) (690,924)
Net Loss (2,503,735) (690,924)
________________________________________________________________________________________________
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATION
FOR FISCAL YEAR ENDED JUNE 30, 2009 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2008.
REVENUES AND GROSS MARGIN
During fiscal year ended June 30, 2009, we had net revenue of $-0- as compared
to net revenue of $-0- during fiscal year ended June 30, 2008.
OPERATING EXPENSES
Our total operating expenses were $680,536 for fiscal year ended June 30, 2009
as compared to total operating expenses of $374,767 for fiscal year ended June
30, 2008 (an increase of $305,769). During fiscal year ended June 30, 2009, our
selling, general and administrative expenses consisted of: (i) legal and
professional fees of $106,275 (2008: $108,111); (ii) office expenses of $73,481
(2008: $14,162); (iii) salaries and benefits of $169,698 (2008: $99,117); (iv)
management fees of $150,000 (2008: $-0-); (v) vehicle expense of $6,779 (2008:
$13,595); and (vii) other expenses of $174,303 (2008: $139,782). The increase in
operating expenses during fiscal year ended June 30, 2009 as compared June 30,
2008 was due to the increase in scope and scale of business operations.
Selling, general and administrative expenses primarily increased based on a
substantial increase in office expenses to $73,481, management fees to $150,000
and salaries and benefits to $169,698. These expenses increased because after we
moved office location, we re-organized our subsidiaries and personnel. The
increase of salaries and benefits was due to severance pay to employees that
were laid off. And, after our Board of Directors held a meeting, they decided to
accrue the management fee that was due to Mr. Wang for services he provided to
us during fiscal years ended December 31, 2008 and December 31, 2007.
GAIN ON DEBT RESTRUCTURING
On December 29, 2006, we completed the debt restructuring with Cornell and
Highgate under the terms and provisions of the Forbearance and Settlement
Agreement. In accordance with the terms and provisions of 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 with
Cornell and Highgate on November 23, 2005 and as amended March 23, 2006, and
those certain convertible debentures in the amount of $1,250,000 to Highgate
dated November 23, 2005 and $2,000,000 to Cornell dated March 23, 2006
(collectively, the "Convertible Debentures"). See "--Material Commitments."
As a result of the debt restructuring arrangement, during fiscal year ended June
30, 2007, our liabilities on warrants, conversions, discounts were discharged
resulting in a net gain of $1,500,132 attributable as follows:
Liabilities on Conversion Discharged $ 2,334,198
Liabilities on Warrants Discharged 891,537
Loans Discharged 225,000
Unamortized Discounts (1,950,603)
___________
$ 1,500,132
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INTEREST EXPENSE
We incurred ($451,247) in interest expense during fiscal year ended June 30,
2009 as compared to ($383,928) incurred as interest expense during fiscal year
ended June 30, 2008. Interest expense of ($451,247) incurred during fiscal year
ended June 30, 2008 consisted of: (i) $39,826 (2008: $49,628) in interest
expense from the amortization of deferred financing cost and discount on
convertible; (ii) $372,751 (2008: $314,865) imputed interest charged on loans
from shareholders; and (iii) $13,768 (2008: $19,435) in interest on loans from
related parties.
IMPAIRMENT LOSS ON BOHENG INVESTMENT
As a result of the termination by the purchaser of the acquisition of Beijing
Boheng Investments and Management Co., Ltd., we repossessed Boheng as our 95%
interest subsidiary on August 25, 2008 at a value of $1,625,000, which was equal
to the unpaid purchase price due by the purchaser. After the repossession of
Boheng, we conducted an evaluation of our carrying value and determined that an
impairment loss in the amount of $1,625,000 was incurred although Boheng still
owns a 7.98% equity interest in Xinhua C&D. This impairment loss was accordingly
reflected in the income statement for the quarter ended December 31, 2008.
Therefore, our net loss during fiscal year ended June 30, 2009 was ($2,503,735)
compared to a net loss of ($690,924) incurred during fiscal year ended June 30,
2008. The increase in net loss was due primarily to the impairment loss on
Boheng investment and the increase in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED JUNE 30, 2009
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 fiscal year ended June 30, 2009, our current assets were $344,532 and our
current liabilities were $2,244,936, resulting in a working capital deficit of
$1,900,404. As at fiscal year ended June 30, 2009, current assets were comprised
of: (i) $45,769 (2008: $38,733) in cash and cash equivalents; (ii) $74,228
(2008: $411,782) in net accounts receivable; (iii) $-0- (2008: $1,625,000) in
note receivable; and (iv) $224,535 (2008: $223,231) in other receivables and
prepayments.
As at fiscal year ended June 30, 2009, our total assets were $399,688 comprised
of: (i) $344,532 (2008: $2,298,746) in current assets; and (ii) $55,156 (2008:
$73,786) in net property, plant and equipment. The decrease in total assets
during fiscal year ended June 30, 2009 from fiscal year ended June 30, 2008 was
primarily due to non-recording of the note receivable in the amount of
-24-
$1,625,000. The note receivable represented the sales proceeds receivable from
the disposal of Beijing Boheng. Pursuant to the provisions of that certain
disposal agreement, the sales proceeds were receivable in five installments and
were due in full no later than July 31, 2008. The note receivable was released.
As at fiscal year ended June 30, 2009, our current liabilities were $2,244,936
comprised of: (i) $754,025 (2008: $1,095,538); (ii) $-0- (2008: $18,355) in
deferred revenue; and (iii) $1,490,911 (2008: $1,635,443 in current portion of
loans payable.
As at fiscal year ended June 30, 2009, our total liabilities were $9,248,258
comprised of: (i) $2,244,936 (2008: $2,749,336) in current liabilities; (ii)
$1,058,261 (2008: $1,058,261) in loans payable; and (iii) $5,945,061 (2008:
$5,410,256) in loans from shareholders. The slight increase in total liabilities
during fiscal year ended June 30, 2009 from fiscal year ended June 30, 2008 was
primarily due to the increase in loans from shareholders.
Stockholders' deficit increased from ($6,845,321) for June 30, 2008 to
($8,848,570) for June 30, 2009.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. During
fiscal year ended June 30, 2009, net cash flow used in operating activities was
($2,112,945) compared to net cash flow used in operating activities of
($111,775) during fiscal year ended June 30, 2008. Net cash flow used in
operating activities during fiscal year ended June 30, 2009 consisted primarily
of a net loss of ($2,503,735) adjusted by $412,577 in imputed interest expense,
$13,768 in amortization of deferred imputed interest from note receivable and
$26,585 in depreciation. Changes in assets and liabilities consisted of a
decrease of $337,554 in accounts receivable, an increase of $381,339 in accounts
payable and accrued liabilities, and an increase of $18,355 in deferred revenue.
Net cash flowed used in operating activities during fiscal year ended June 30,
2008 consisted primarily of a net loss of ($690,924) adjusted by $466,703 in
imputed interest expense and $13,768 in amortization of deferred imputed
interest from note receivable. Changes in assets and liabilities consisted of an
increase of $226,536 in accounts receivable and of $22,045 in other receivables
and prepayments and of $55,072 in deferred revenue, and a decrease of $402,331
in accounts payable and accrued liabilities.
INVESTING ACTIVITIES
During fiscal year ended June 30, 2009, net cash flow used in investing
activities was $1,617,044 compared to net cash flow sourced from investing
activities of ($59,692) for fiscal year ended June 30, 2008. Net cash flow used
in investing activities during fiscal year ended June 30, 2009 was primarily the
result of the loss on impairment of asset of $1,625,000 and purchase of plant
and equipment in the amount of ($7,956) compared to purchase of plant and
equipment in the amount of ($59,692) during fiscal year ended June 30, 2008.
-25-
FINANCING ACTIVITIES
During fiscal year ended June 30, 2009, net cash flow sourced from financing
activities was $503,459 compared to net cash flow sourced from financing
activities of $178,067 for fiscal year ended June 30, 2008. Net cash flow from
financing activities during fiscal year ended June 30, 2009 pertained primarily
to: (i) $3,915 in proceeds from convertible debenture; (ii) $547,132 in loans
from shareholders; (iii) $109,444 in additional paid-in capital; and (iv) offset
by ($157,032) in repayment of loan payable. Net cash flow from financing
activities during fiscal year ended June 30, 2008 pertained primarily to
$329,826 received as loans from shareholders and $441 in proceeds from
convertible debenture offset by ($152,200) in repayment of loan payable.
PLAN OF OPERATION
The local and regional distribution business for books is competitive and
fragmented in the People's Republic of China. Estimates range up to 500 as to
the number of entrants in this field. It is our plan that economy of scale,
relationships with Chinese publishers and also with sub-distributors and
retailers and our nationwide scope which allows us the flexibility to distribute
books in any region will assist us in maintaining and enhancing our competitive
position.
Our goal is to expand our business to include electronic sales, delivery and
distribution of media contents. We also plan to partner with foreign publishers
to provide foreign media contents in China. We seek to achieve our goal on a
national scale to maximize opportunities in one of the largest and fastest
growing economies in the world.
To execute on our strategy to become a digital media company we formed our new
subsidiary, Beijing Joannes. Beijing Joannes is intended to be our digital media
company and it is expected to distribute all digital content for Xinhua C&D and
others. Beijing Joannes has anticipated in operating its business to consumer
(B2C) e-commerce portal as www.geezip.com, and expects to allow customers to
purchase electronic and hard copies of books on-line.
We expect to also establish a co-publishing company which anticipates on
co-publishing agreements with both domestic and foreign publishers, publishing
both hard copy and digital works.
Existing working capital, further advances and possible debt instruments,
warrant exercises, further private placements, monetization of existing assets,
and anticipated cash flow are expected to be adequate to fund our operations
over the next two months. We have no lines of credit or other bank financing
arrangements. Generally, we have financed operations to date through the
proceeds of the private placement of equity and debt securities and loans from
our shareholders. In connection with our business plan, management will delay
additional increases in operating expenses and capital expenditures. We intend
to utilize our best efforts to settle current finance accounts payables and
liabilities with further issuances of securities, debt and or advances,
monetization of existing assets, and revenues from operations. We will need to
raise additional capital and increase revenues to meet both short term and
long-term operating requirements. We have undertaken certain actions and
-26-
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, 2009.
Furthermore, 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, 2009 and June 30, 2008 consolidated financial statements contains
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. The consolidated financial statements have been
prepared "assuming that we will continue as a going concern," which contemplates
that we will realize our assets and satisfy our liabilities and commitments in
the ordinary course of business.
MATERIAL COMMITMENTS
LOANS PAYABLE/CONVERTIBLE DEBENTURE
During 2009/10, 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.
-27-
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 June 30, 2007, we paid $250,000 for the payment due March 10, 2007 and
issued 100,000 shares and 125,000 shares of our common stock on March 1, 2007
and April 18, 2007, respectively, pursuant to exercise rights. During fiscal
years ended June 30, 2009 and June 30, 2008, Cornell and Highgate converted an
aggregate of 266,655,668 and 44,016,843 shares, respectively, against the
outstanding amount at a total conversion price of $144,532 and $152,200,
respectively.
LOANS FROM SHAREHOLDERS
During fiscal year 2009/10, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $5,945,061 represents cash advanced
to us from our shareholders. These shareholder loans are unsecured,
interest-free and not repayable within the next twelve months. For fiscal years
ended June 30, 2009 and June 30, 2008, we calculated imputed interest expense of
$342,847 and $328,711, respectively, in relation to interest-free shareholders
loans at its effective interest rate and accounted for it in the consolidated
financial statements. During fiscal year ended June 30, 2009, the shareholders
converted an aggregate of 125,000,000 shares against the shareholders' loan at a
total conversion price of $12,500.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve
months.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Refer to Note 3 to the Consolidated Financial Statements. The
following paragraphs include a discussion of the critical areas that required a
higher degree of judgment or are considered complex.
-28-
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.
INVESTMENT 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".
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 year ended June 30, 2007, $0 (2006 and 2005 $149,173 and $70,666,
respectively) related to shipping and handling costs was included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations.
-29-
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. The weighted average fair value of options granted during the
years ended June 30, 2007, 2006, and 2005 was $0.32, $1.02, and $1.54 per share,
respectively. Weighted average assumptions used in the valuation for the years
ended June 30, are summarized below:
2007 2006 2005
Risk free interest rate (%) 4.07% 5.01% 3.26%
Dividend yield (%) 0.00% 0.00% 0.00%
Expected life of option grants (years) 2.38% 5.00% 3.77%
Expected volatility of option grants (%) 1,181% 80.00% 80.00%
The Company has issued stock options to directors, officers, employees, and
consultants. As such, the Company records compensation expense for stock options
and awards only if the exercise price is less than the fair market value of the
stock on the measurement date.
Detailed movement of stock-based compensation has been disclosed in the note 14
to consolidated financial statements.
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.
-30-
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 June 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
-31-
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 does not consider the adoption of the above recent accounting
pronouncements having any material impact on its consolidated results of
operations and financial condition.
ITEM 7A. 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 RATES
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.
-32-
ITEM 8. FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm dated August 1, 2009.
Consolidated Balance Sheet as of June 30, 2009 and 2008.
Consolidated Statement of Income For the Year Ended June 30, 2009 and 2008.
Consolidated Statement of Stockholders' Equity as of June 30, 2009 and 2008.
Consolidated Statement of Cash Flows For the Year Ended June 30, 2009 and 2008.
Notes to Consolidated Financial Statements.
-33-
XINHUA CHINA LTD.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
-34-
XINHUA CHINA LTD.
CONTENTS
PAGES
Report of Registered Independent Public Accounting Firm F-1
Consolidated Balance Sheets F-2 - 3
Consolidated Statements of Income F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7 - 23
-35-
Board of Directors and Stockholders
Xinhua China Ltd.
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Xinhua China
Ltd. and its subsidiaries ("the Company") as of June 30, 2009 and 2008, and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of the
Company's internal control over financial reporting. Our audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of June 30, 2009 and 2008 and the consolidated results of operations
and cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred substantial losses
and has a working capital deficit, all of which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regards to
these matters are also described in Note 2. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
South San Francisco, California Samuel H. Wong & Co., LLP
August 1, 2009 Certified Public Accountants
F-1
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
NOTES 2009 2008
_____ ___________ ___________
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3D $ 45,769 $ 38,733
Accounts receivable, NET 3E 74,228 411,782
Note receivable - 1,625,000
Other receivables and prepayments 4 224,535 223,231
___________ ___________
Total Current Assets 344,532 2,298,746
LONG-TERM ASSETS
Property, plant & equipment, NET 3F,5 55,156 73,786
___________ ___________
Total Long-term Assets 55,156 73,786
Total Assets $ 399,688 $ 2,372,532
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 6 $ 754,025 $ 1,095,538
Deferred revenue - 18,355
Current portion of loans payable 3S,7 1,490,911 1,635,443
___________ ___________
Total Current Liabilities 2,244,936 2,749,336
LONG-TERM LIABILITIES
Loans payable 3S,7 1,058,261 1,058,261
Loans from shareholders 8 5,945,061 5,410,256
___________ ___________
Total Long-term Liabilities 7,003,322 6,468,517
Total Liabilities $ 9,248,258 $ 9,217,853
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-2
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
NOTE 2009 2008
____ ___________ ____________
STOCKHOLDERS' EQUITY
Common Stock $0.00001 Par Value 500,000,000 9 $ 4,903 $ 987
Shares Authorized;
490,311,400 and 98,655,733 shares
issued and outstanding at June 30, 2009
and 2008, respectively.
Additional paid in capital 11,399,960 10,903,997
Accumulated other comprehensive income 38,756 38,149
Accumulated deficit (20,292,189) (17,788,454)
___________ ____________
Total Stockholders' (Deficit)/Equity (8,848,570) (6,845,321)
Total Liabilities & Stockholders' Equity $ 399,688 $ 2,372,532
=========== ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-3
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
NOTE 2009 2008
_____ _____________ ____________
REVENUE
Revenue, NET $ - $ -
Revenue, NET - related parties - -
Cost of Sales, NET 3H - -
Cost of Sales, NET - related parties 3I - -
_____________ ____________
Gross Profit - -
OPERATING EXPENSES
Selling, General, and Administrative 14 680,536 374,767
Expenses
Total Operating Expense 680,536 374,767
_____________ ____________
Operating Income/(Loss) (680,536) (374,767)
OTHER INCOME (EXPENSES)
Other Income 179,621 -
Interest Income - 55,127
Gain on debt restructuring 17 73,427 12,644
Interest Expense 18 (451,247) (383,928)
Impairment Loss on Boheng investment (1,625,000) -
_____________ ____________
Loss before minority interest and income tax (2,503,735) (690,924)
Loss before Income Tax (2,503,735) (690,924)
Income Tax 3M,19 -
-
_____________ ____________
Net Loss $ (2,503,735) $ (690,924)
============= ============
Basic & Diluted Earnings Per Share 3N,23 $ (0.016) $ ( 0.011)
Weighted Average Shares Outstanding 375,084,602 65,400,512
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-4
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AS OF JUNE 30, 2009 AND 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 - - 109,444 - - - 109,444
Imputed interest on interest
free advances from related party - - 386,519 - - - 386,519
Issuance of shares to Highgate 266,655,667 2,666 - - - - 2,666
Issuance of shares to Xianping
Wang 125,000,000 1,250 - - - - 1,250
Foreign Currency translation - - - 607 607 - 607
Net Loss for year - - - (2,503,735) - (2,503,735) (2,503,735)
______________________________________________________________________________________________
Balance, June 30, 2009 490,311,400 4,903 11,399,960 (20,253,432) 38,756 (20,292,189) (8,848,570)
==============================================================================================
ACCUMULATED COMPREHENSIVE INCOME
JUNE 30, 2009 JUNE 30, 2008
_____________ _____________
COMPREHENSIVE INCOME(LOSS)
Net Loss $ (2,503,735) $ (690,924)
OTHER COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment 607 29,400
_____________ ____________
Total Comprehensive Income $ (2,503,128) $ (661,524)
============= ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
XINHUA CHINA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
2009 2008
____________ __________
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss/(Loss) $ (2,503,735) $ (690,924)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 26,585 -
Imputed interest expense 412,577 466,703
Amortization of deferred imputed interest from note receivable 13,768 13,768
CHANGES IN ASSETS AND LIABILITIES:
Decrease/(Increase) Accounts receivable 337,554 (226,536)
Decrease/(Increase) Other receivables and prepayments - (22,045)
Decrease/(Increase) Accounts Payable and accrued liabilities (381,339) 402,331
Decrease/(Increase) in Deferred Revenue (18,355) (55,072)
____________ __________
Cash Sourced/(Used) in Operating Activities (2,112,945) (111,775)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (7,956) (59,692)
Impairment loss on impairment of asset 1,625,000 -
____________ __________
Cash Used/(Sourced) in Investing Activities 1,617,044 (59,692)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debenture 3,915 441
Repayment of Loan Payable (157,032) (152,200)
Loans from shareholders 547,132 329,826
Additional Paid-in Capital 109,444 -
____________ __________
Cash Sourced/(Used) in Financing Activities 503,459 178,067
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR THE YEAR 7,035 6,600
EFFECT OF CURRENCY TRANSLATION (523) 29,400
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 38,733 2,733
CASH & CASH EQUIVALENTS AT END OF YEAR $ 45,769 $ 38,733
Cash paid for interest expenses $ - $ 55,217
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 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
B26-F, Oriental Kenzo, No. 48 Dongzhimenwai 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 June 30, 2009 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, a Investment holding, 10,000,000 ordinary 100%
company with limited PRC shares of US$1 par
liability value
Beijing Joannes Information PRC, a company with limited Sales and Registered capital 100%
Technology Co., Ltd. liability distribution of US$1,250,000
books, PRC
_________________________________________________________________________________________________________________
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 June 30, 2009, the Company had no working capital but current liabilities
exceeding current assets by $1,900,404 and an accumulated deficit of $20,292,189
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, 2010. 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.
F-7
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 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.
F-8
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 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
F-9
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
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 year ended
June 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 June 30, 2009, 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 uses the accrual method of accounting to determine and
report its taxable reduction of income taxes for the year in which
they are available. The Company has implemented Statement of Financial
F-10
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Income tax liabilities computed according to the United States and
People's Republic of China (PRC) tax laws are provided for the tax
effects of transactions reported in the financial statements and
consists of taxes currently due plus deferred taxes related primarily
to differences between the basis of fixed assets and intangible assets
for financial and tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will be either taxable or deductible when the
assets and liabilities are recovered or settled. Deferred taxes also
are recognized for operating losses that are available to offset
future income taxes. A valuation allowance is created to evaluate
deferred tax assets if it is more likely than not that these items
will either expire before the Company is able to realize that tax
benefit, or that future realization is uncertain.
In respect of the Company's subsidiaries domiciled and operated in
China:
o Beijing Joannes Information Technology Co., Ltd. is located
in the PRC and Pac-Poly Investment Ltd. is located in the
British Virgin Islands; all of these entities are subject to
the relevant tax laws and regulations of the PRC and British
Virgin Islands in which the related entity domiciled. The
maximum tax rates of the subsidiaries pursuant to the
countries in which they domicile are: -
SUBSIDIARY COUNTRY OF DOMICILE INCOME TAX RATE
Beijing Joannes Information
Technology Co., Ltd. PRC 25.00%
Pac-Poly Investment Ltd. British Virgin 0.00%
Islands
o Effective January 1, 2008, PRC government implemented a new
25% tax rate across the board for all enterprises regardless
of whether domestic or foreign enterprise without any tax
holiday which is defined as "two-year exemption followed by
three-year half exemption" hitherto enjoyed by tax payers.
As a result of the new tax law of a standard 25% tax rate,
tax holidays terminated as of December 31, 2007. However,
PRC government has established a set of transition rules to
allow enterprises already started tax holidays before
January 1, 2008, to continue enjoying the tax holidays until
being fully utilized.
o The Company is subject to United States Tax according to
Internal Revenue Code Sections 951 and 957. Corporate income
tax is imposed on progressive rates in the range of: -
F-11
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
TAXABLE INCOME
RATE OVER BUT NOT OVER OF AMOUNT OVER
15% 0 50,000 0
25% 50,000 75,000 50,000
34% 75,000 100,000 75,000
39% 100,000 335,000 100,000
34% 335,000 10,000,000 335,000
35% 10,000,000 15,000,000 10,000,000
38% 15,000,000 18,333,333 15,000,000
35% 18,333,333 - -
Based on the consolidated net income for the year ended June 30, 2009,
the Company shall not be subject to income tax.
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 490,311,400 of common stock at
June 30, 2009 is 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 6/30/2009 6/30/2008
Year end RMB : US$ exchange rate 6.8319 6.8718
Average yearly RMB : US$ exchange rate 6.8355 7.0726
F-12
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 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. All material related part transactions have been disclosed
in Note 16 - Related Party Transactions.
R. 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.
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.
The weighted average fair value of options granted during the years
ended June 30, 2007, and 2006, was $0.32, and $1.02 per share,
respectively. Weighted below:
2007 2006
Risk free interest rate (%) 4.07% 5.01%
Dividend yield (%) 0.00% 0.00%
Expected life of option grants (years) 2.38 5.00
Expected volatility of option grants (%) 1,181% 80.00%
No options were granted during the year ended June 30, 2009.
Detailed movement of stock-based compensation has been disclosed in
the Note 11-Stock Option Plan.
F-13
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
S. 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.
T. RECENTLY ISSUED ACCOUNTING STANDARD
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
F-14
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
(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.
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 does not consider the adoption of the above recent
accounting pronouncements having any material impact on its
consolidated results of operations and financial condition.
4. OTHER RECEIVABLES AND PREPAYMENT
2009 2008
_________ _________
Prepayments $ 224,535 $ 223,231
The carrying amounts of prepayments approximate their fair value.
F-15
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
5. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment as of June 30, 2009 and 2008 consists of the
following:
2009 2008
_________ _________
Equipment and machinery $ 53,418 $ 53,108
Motor vehicles 47,007 39,458
Leasehold Improvement 16,306 16,211
_________ _________
116,731 108,777
LESS: Accumulated Depreciation (61,576) (34,991)
_________ _________
$ 55,156 $ 73,786
========= =========
Depreciation expense for 2009 and 2008 was $26,585 and $10,157.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of June 30, 2009 and 2008
consists of the following:
2009 2008
__________ ___________
Accounts payable $ 754,025 $ 1,095,538
7. LOANS PAYABLE/CONVERTIBLE DEBENTURE
On November 23, 2005, the Company entered into a debt financing agreement
(the "Agreement") with an institutional investor, and on March 23, 2006,
the Agreement was modified to include an additional institutional investor,
who is an affiliate of the original institutional investor (both
institutional investors collectively referred to as "the Investors"). The
Investors committed to purchase up to $4,000,000 of a secured convertible
debenture ("the debenture") that shall be convertible into shares of the
Company's common stock.
After two closings on December 13, 2005 and March 23, 2006, the Company
received gross proceeds of $3,250,000 (net proceeds $2,989,460) for the
secured convertible debenture. The Company and debenture-holders entered
into a Forbearance and Settlement Agreement on December 29, 2006 because of
default in debt service, whereby the Company agreed to make cash payment
and to grant rights to the creditors to cashless purchase the Company's
common stock by exercising the warrant at 200,000 shares in every three
month period beginning on December 29, 2006 according to the following
payment plan:
F-16
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
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
============ =========
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 years ended June 30, 2009
and 2008, the debenture holders converted 266,655,668 and 44,016,843 shares
against outstanding loan at a total conversion price of $144,532 and
$152,200, respectively.
Loans Payable outstanding as of June 30, 2009 amount to $2,549,172 of which
$1,490,911 and $1,058,261 were attributed to current portion and long-term,
respectively.
Loans Payable outstanding as of June 30, 2008 amount to $2,693,704 of which
$1,635,443 and $1,058,261 were attributed to current portion and long-term,
respectively.
8. LOANS FROM SHAREHOLDERS
The total outstanding amount of $5,945,061 represents cash advanced from
shareholders of the Company.
These shareholders' loans are unsecured and not repayable within the next
twelve months. For the year ended June 30, 2009 and 2008, there was
$342,847 and $328,711 imputed interest, at 6.00% per annum, recorded.
During the year ended June 30, 2009, the shareholders converted 125,000,000
shares against outstanding shareholders' loan at a total conversion price
of $12,500.
9. 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.
F-17
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
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.
(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,
2009, 835,000 warrants issued to convertible debenture holders
were outstanding which will lead to the issuance of a total of
313,331,642 additional shares of common stock if fully exercised
at June 30, 2009.
(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.
10. STOCK OPTION PLAN
The board of directors approved a Stock Option Plan (the "Plan") effective
on September 4, 2004 pursuant to which directors, officers, employees and
consultants of the Company are eligible to receive grants of options for
the Company's common stock. The plan has a life of ten (10) years and
expires on September 4, 2014. A maximum of 20,000,000 common shares have
been reserved under the plan. Each stock option entitles its holder to
purchase one common share of the Company. Options may be granted for a term
not exceeding ten years from the date of grant. The plan is administered by
the board of directors.
Under the Plan, the Board of Directors authorized to grant 4,255,000
options to the employees and consultants of the Company, respectively
basically on September 23, 2004 and October 27, 2004 with an estimated
F-18
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
value of $1.00 per share, using the Black-Scholes Option Pricing Model with
the weighted average assumptions. However, the whole of the 4,255,000
options have been expired as of June 30, 2007.
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 $53,457 and $23,854 for
the years ended 2009 and 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2009 2008
_________ _________
Legal and professional fees $ 106,275 $ 108,111
Management Fee 150,000 -
Office expenses 73,481 14,162
Salaries and benefits 169,698 99,117
Vehicle expense 6,779 13,595
Other expenses 174,303 139,782
_________ _________
$ 680,536 $ 374,767
========= =========
F-19
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
14. 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,
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
===========
F-20
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
15. INTEREST EXPENSE
2009 2008
_________ _________
Interest expense from the amortization of
deferred financing cost and discount on
convertible debenture $ 39,826 $ 49,628
Imputed interest charged 372,751 314,865
Interest on loans from related parties 13,768 19,435
_________ _________
$ 451,247 $ 383,928
========= =========
16. 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
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
year ended June 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 June 30, 2009 and 2008, valuation allowances of $2,503,735 and
$690,924 were provided to the deferred tax assets due to the uncertainty
surrounding their realization.
17. 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-21
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
18. IMPAIRMENT LOSS ON BOHENG INVESTMENT
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. After
the repossession of Boheng, the Company conducted an evaluation of its
carrying value and determined that an impairment loss in amount of
$1,625,000 was incurred although Boheng still owns 7.98% equity interest in
Xinhua C&D. This impairment loss was accordingly reflected in the income
statement for the quarter ended December 31, 2008.
19. COMMITMENT AND CONTINGENCIES
The Company leases an office premise under a non-cancelable operating lease
for a term of three years from January 1, 2009 to December 31, 2011. The
cost incurred under this operating lease is recorded as rental expense and
totaled $65,944 for the year ended June 30, 2009. Future minimum rental
payments due according to the operating lease until termination at December
31, 2011 are:
Within one year $ 70,280
Within year two until termination 105,418
_________
$ 175,698
=========
20. 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:
2009 2008
____________ ___________
Basic and diluted net loss per share calculation:
(a). Numerator:
Net loss used in computing basic net loss
per share 2,503,735 690,924
(b). Denominator:
Weighted average ordinary shares outstanding 375,084,602 65,400,512
Basic and diluted net loss per share $ 0.016 $ 0.011
F-22
XINHUA CHINA LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
(STATED IN US DOLLARS)
For the year ended June 30, 2009 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.
21. COMPARATIVE AMOUNTS
Certain amounts included in prior years' consolidated balance sheet and the
consolidated statements of operations and cash flows have been reclassified
to conform to the current year's presentation. These reclassifications had
no effect on reported total assets, liabilities, stockholders' equity, or
net income.
F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective on July 25, 2007, our Board of Directors appointed Samuel H. Wong &
Co., LLP ("Wong & Co.") as our principal independent registered public
accounting firm.
The report of Wong & Co. on our financial statements for fiscal years ended June
30, 2009 and June 30, 2008 did not contain an adverse opinion or disclaimer of
opinion, nor was it modified as to uncertainty, audit scope or accounting
principles, other than to state that there is substantial doubt as to our
ability to continue as a going concern. During our fiscal years ended June 30,
2009 and June 30, 2008, there were no disagreements between us and Wong & Co.,
whether or not resolved, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of Wong & Co., would have caused Wong & Co. to make
reference thereto in their reports on our audited consolidated financial
statements.
In connection with our appointment of Wong & Co. as our principal registered
accounting firm, we have not consulted with Wong & Co. on any matter relating to
the application of accounting principles to a specific transaction, either
completed or contemplated, or the type of audit opinion that might be rendered
on our financial statements.
The address and telephone number of our principal registered accounting firm is:
Samuel H. Wong & Co., LLP, 400 Oyster Point Boulevard, Suite 122, South San
Francisco, California 94080, telephone 415.732.1288, fax 415. 397.9028 and email
[email protected]
ITEM 9A. CONTROLS AND PROCEDURES
FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 , as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our president (also our principal
executive officer) and our secretary, treasurer and chief financial officer
(also our principal financial and accounting officer) to allow for timely
decisions regarding required disclosure.
-36-
As of June 30, 2009, the end of our fiscal year covered by this Annual Report,
we carried out an evaluation, under the supervision and with the participation
of our president (also our principal executive officer), and our chief financial
officer (also our principal financial and accounting officer) of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our president and chief financial officer
concluded that our disclosure controls and procedures were not effective in
providing reasonable assurance in the reliability of our corporate reporting as
of the end of the period covered by this annual report due to certain
deficiencies that existed in the design or operation of our internal controls
over financial reporting as disclosed below and that may be considered to be
material weaknesses.
EVALUATION OF INTERNAL CONTROLS AND PROCEDURES OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as required by Sarbanes-Oxley (SOX) Section
404 A. Our internal control over financial reporting is a process designed under
the supervision of our Chief Executive Officer/Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
As of June 30, 2009, management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") and SEC guidance on conducting such assessments. Based on
that evaluation, we concluded that, during the period covered by this report,
such internal controls and procedures were somewhat effective but not by all
criteria utilized. Therefore conclusions were that internal control over
financial reporting was not effective to detect the inappropriate application of
US GAAP rules as more fully described below. This was due to deficiencies that
existed in the design or operation of our internal control over financial
reporting that adversely affected our internal controls and that may be
considered to be material weaknesses. To some degree however, a mitigating
factor was the relatively minor scale of operations during the year that did not
warrant a more elaborate system to reduce risks further.
The matters involving internal controls and procedures that our management
considered to be continuing material weaknesses under COSO and SEC rules were:
(1) inadequate segregation of duties consistent with control objectives;
(2) insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and
SEC disclosure requirements;
-37-
(3) infrequent ongoing monitoring and a lack of separate evaluations when an
effective monitoring and evaluative system is deemed necessary for
corporate integrity;
(4) a lack of country specific controls and written protocols leading to timely
reporting of previously budgeted expenditures.
(5) ineffective controls over period end financial close and reporting
processes.
The aforementioned material weaknesses were identified by our Chief Executive
Officer / Chief Financial Officer in connection with the preparation of our
financial statements as of June 30, 2009 and communicated the matters to our
management and board of directors.
Management believes that the material weaknesses set forth in items (1) to (5)
above did not have a material affect on our financial results due to our current
scale and scope of operations.
We are committed to improving our financial organization. As part of this
commitment, we intend to create control situations resulting in the segregation
of duties consistent with control objectives and will increase our personnel
resources and technical accounting expertise within the accounting function when
funds are available to us to:
i) define, document, implement, and monitor written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP , and create country specific
controls and protocols,
ii) prepare and implement sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC
disclosure requirements, and
iii) ineffective controls over period end financial close and reporting
processes.
In addition, management believes that preparing and implementing sufficient
written policies and checklists will remedy the following material weaknesses
(i) insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements; and (ii) These procedures coupled with the appointment
of additional outside directors will greatly decrease any control and procedure
issues the Company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our internal
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
-38-
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes in our internal controls over financial
reporting that occurred during fiscal year ended June 30, 2009 that have
materially or are reasonably likely to materially affect, our internal controls
over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Internal control over financial reporting has inherent limitations which include
but is not limited to the use of independent professionals for advice and
guidance, interpretation of existing and/or changing rules and principles,
segregation of management duties, scale of organization, and personnel factors.
Internal control over financial reporting is a process which involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements on a timely basis, however these inherent limitations
are known features of the financial reporting process and it is possible to
design into the process safeguards to reduce, though not eliminate, this risk.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
This Annual Report does not include an attestation report of our registered
public accounting firm, Wong & Co., regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Security and Exchange
Commission that permit us to provide only management's report in this Annual
Report.
ITEM 9A(T)
Not applicable.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
-39-
As of the date of this Annual Report our directors and executive officers, their
ages, positions held are as follows:
NAME AGE POSITION WITH THE COMPANY
Xianping Wang 48 President/Chief Executive Officer/Chief Financial
Officer and a director
BACKGROUND OF OUR OFFICERS AND DIRECTORS
XIANPING WANG. Mr. Wang has been one of our directors since August 5, 2004 and
has been our President and Chief Executive Officer since September 4, 2004. He
has been our Chief Financial Officer since August 7, 2007. In addition, Mr. Wang
is the President of Asia-Durable (Beijing) Investments Co., Ltd. from 2002 to
2004, which is a company that has successfully invested in construction and
development projects as well as biotechnology research. From 1997 to 2002, Mr.
Wang was the President of Beijing New Fortune Investment Co., Ltd., which is a
company that has invested in real estate and other profitable projects such as
Chongqing Wanli Storage Battery Co., Ltd. and Shenzhen Technology Co., Ltd. Mr.
Wang helped Chongqing Wanli Storage Battery Co., Ltd. and Shenzhen Technology
Co., Ltd. to become publicly listed companies on Chinese stock markets in
Shanghai and Shenzhen. Mr. Wang received an Engineering Bachelor Degree from
Navy Engineering Institute in 1978 and an Economics Master Degree from Tsinghua
University in 1990.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To our knowledge, during the past five years, no present or former director or
executive officer: (1) filed a petition under the federal bankruptcy laws or any
state insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by a court for the business or present of such a person, or any
partnership in which he was a general partner at or within two yeas before the
time of such filing, or any corporation or business association of which he was
an executive officer within two years before the time of such filing; (2) was
convicted in a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) was the
subject of any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining him from or otherwise limiting the following activities: (i) acting as
a futures commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage transaction merchant, associated
person of any of the foregoing, or as an investment advisor, underwriter, broker
or dealer in securities, or as an affiliated person, director of any investment
company, or engaging in or continuing any conduct or practice in connection with
such activity; (ii) engaging in any type of business practice; (iii) engaging in
any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of federal or state securities
laws or federal commodity laws; (4) was the subject of any order, judgment or
decree, not subsequently reversed, suspended or vacated, of any federal or state
authority barring, suspending or otherwise limiting for more than 60 days the
right of such person to engage in any activity described above under this Item,
or to be associated with persons engaged in any such activity; (5) was found by
a court of competent jurisdiction in a civil action or by the Securities and
Exchange Commission to have violated any federal or state securities law and the
-40-
judgment in subsequently reversed, suspended or vacate; (6) was found by a court
of competent jurisdiction in a civil action or by the Commodity Futures Trading
Commission to have violated any federal commodities law, and the judgment in
such civil action or finding by the Commodity Futures Trading Commission has not
been subsequently reversed, suspended or vacated.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the
persons who beneficially own more than ten percent of our common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Copies of all filed reports are required to be furnished to us
pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the
reports received by us and on the representations of the reporting persons, we
believe that these persons have complied with all applicable filing requirements
during the fiscal year ended June 30, 2009.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
As of the date of this Annual Report, we do not have any members on our audit
committee. We have not appointed additional members to the Board of Directors
and, therefore, the respective role of an audit committee has been conducted by
our Board of Directors. When new members are to be appointed to the audit
committee, the audit committee's primary function will be to provide advice with
respect to our financial matters and to assist our board of directors in
fulfilling its oversight responsibilities regarding finance, accounting, and
legal compliance. The audit committee's primary duties and responsibilities will
be to: (i) serve as an independent and objective party to monitor our financial
reporting process and internal control system; (ii) review and appraise the
audit efforts of our independent accountants; (iii) evaluate our quarterly
financial performance as well as our compliance with laws and regulations; (iv)
oversee management's establishment and enforcement of financial policies and
business practices; and (v) provide an open avenue of communication among the
independent accountants, management and the board of directors.
Our Board of Directors has considered whether the provision of such non-audit
services would be compatible with maintaining the principal independent
accountant's independence. Our Board of Directors considered whether our
principal independent accountant was independent, and concluded that the auditor
for the fiscal year ended June 30, 2009 was independent.
CODE OF ETHICS
We have adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
-41-
DISCLOSURE COMMITTEE AND CHARTER
We have a disclosure committee and disclosure committee charter. Our disclosure
committee is comprised of our officers and directors. The purpose of the
committee is to provide assistance to the Chief Executive Officer and the Chief
Financial Officer in fulfilling their responsibilities regarding the
identification and disclosure of material information about us and the accuracy,
completeness and timeliness of our financial reports.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by
us to the Chief Executive Officer and the other highest paid executive officers
(the Named Executive Officer) during the three most recent fiscal years.
SUMMARY COMPENSATION TABLE
________________________________________________________________________________________________________________________________
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
(A) (B) (C) (D) (E) (F) (G) (H) (I)
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS/SARS LTIP COMPENSATION ($)
POSITION YEAR ($) ($) ($) ($) (#) PAYOUTS ($)
________________________________________________________________________________________________________________________________
Xianping Wang (1) 2009 120,000 0 0\ 0 0 0 0
President, CEO and 2008 120,000 0 0 0 0 0 0
Director 2007 120,000 0 0 0 0 0 0
Clement Wu (3)
CFO, Secretary, 2008 -0- 0 0 0 0 0 0
Treasurer and
Director 2007 45,231 0 0 0 150,000 0 0
Peter Shandro (5)
VP Business Strategy 2008 -0- 0 0 0 0 0 0
and Director 2007 71,121 0 0 0 0 0 0
________________________________________________________________________________________________________________________________
(1) Mr. Xianping Wang was appointed as a director on August 5, 2004 and as our
President and Chief Executive Officer on September 4, 2004.
(2) Mr. Xianping Wang was to receive $10,000 per month starting Feb. 2005.
However, this amount has been accrued by Mr. Wang. Therefore, for the
fiscal years ended June 30, 2009, 2008 and 2007, we have outstanding
obligations of $120,000 owing to Mr. Wang for each year.
(3) Mr. Clement Wu was appointed a director and our Chief Financial Officer on
January 1, 2006 and as our Secretary and Treasurer on May 19, 2006. Mr. Wu
resigned as a director and as our Chief Financial Officer on August 6,
2007.
(4) Mr. Clement received $5,938 per month starting on January 1, 2006 and
received a total of $45,231as compensation for the fiscal year ended June
30, 2007.
(5) Mr. Peter Shandro was appointed a director on September 3, 2004 and as our
Vice-President for Business Strategy on April 1, 2006. Mr. Shandro resigned
from both positions on August 1, 2007.
(6) Mr. Peter Shandro received a total of $71,121 as compensation for the
fiscal year ended June 30, 2007.
-42-
No long term incentive plan awards were made to any executive officer during the
fiscal years ended June 30, 2009 and June 30, 2008.
Our officers and directors may be reimbursed for any out-of-pocket expenses
incurred by them on our behalf. As of the date of this Annual Report, none of
our officers or directors are a party to employment agreements with us. We
presently have no pension, health, annuity, insurance, profit sharing or similar
benefit plans.
There were no formal arrangements under which our directors were compensated by
us during the most recently completed fiscal year for their services solely as
directors.
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED JUNE 30, 2009
The following table sets forth information as at June 30, 2009 relating to
options that have been granted to the Named Executive Officers during fiscal
year ended June 30, 2009:
____________________________________________________________________________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
____________________________________________________________________________________________________________________________________
Equity
Equity Incentive
Incentive Plan Awards:
Market Plan Awards: Market or
Equity Value of Number of Payout Value
Number of Number of Incentive Plan Number of Shares Unearned of Unearned
Securities Securities Awards: Number Shares or or Units Shares, Units Shares, Units
Underlying Underlying of Securities Units of of Stock or Other or Other
Unexercised Unexercised Underlying Option Option Stock That That Rights That Rights That
Options Options Unexercised Exercise Expira- Have Not Have Not Have Not Have Not
Exercisable Unexercisable Unearned Options Price tion Vested Vested Vested Vested
Name (#) (#) (#) ($) Date (#) ($) (#) (#)
____________________________________________________________________________________________________________________________________
Xianping Wang,
Chief Executive
Officer/
President -0- -0- -0- -- --- --- --- -0- -0-
Clement Wu,
prior
Chief Financial
Officer/
Treasurer -0- -0- -0- -- -- -- -- -0- -0-
____________________________________________________________________________________________________________________________________
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The following table sets forth information relating to compensation paid to our
directors during fiscal year ended June 30, 2009:
_____________________________________________________________________________________________________________________
DIRECTOR COMPENSATION TABLE
Change in
Pension
Value and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred All
Paid in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
_____________________________________________________________________________________________________________________
Xianping Wang -0- -0- -0- -0- -0- -0- -0-
_____________________________________________________________________________________________________________________
INDEMNIFICATION
Pursuant to the articles of incorporation and bylaws of the corporation, we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the state of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of
1933 which may be permitted to directors or officers pursuant to the foregoing
provisions, we are informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, as expressed in the
Act and is, therefore unenforceable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock by each stockholder known by us to be
the beneficial owner of more than 5% of our common stock and by each of our
current directors and executive officers. Each person has sole voting and
investment power with respect to the shares of common stock, except as otherwise
indicated. Beneficial ownership consists of a direct interest in the shares of
common stock, except as otherwise indicated. As of the date of this Annual
Report, there are 490,311,400 shares of common stock issued and outstanding.
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________________________________________________________________________________
NAME OF BENEFICIAL AMOUNT AND NATURE PERCENT
OWNER BENEFICIAL OWNER POSITION OF CLASS
________________________________________________________________________________
Xianping Wang 2,500,000(1) President, Nil
B-26F Oriental Kenzo, Chief Executive Officer
No. 48 and and a director
Dongzhimenwai,
Dongcheng District,
Beijing, China
ALL OFFICERS AND 2,500,000 (1) Nil
DIRECTORS AS A GROUP
(1 PERSON)
________________________________________________________________________________
(1) These are restricted shares of common stock. Under Rule 13d-3, a beneficial
owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (i) voting power, which includes the power to
vote, or to direct the voting of shares; and (ii) investment power, which
includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if,
for example, persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example, upon
exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason
of these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number of
shares of common stock actually outstanding as of the date of this Annual
Report. As of the date of this Annual Report, there are 490,311,400 shares
issued and outstanding.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation
of which may at a subsequent date result in a change of control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
COMPENSATION
None of our directors, officers or principal stockholders, nor any associate or
affiliate of the foregoing, have any interest, direct or indirect, in any
transaction to the date of this Annual Report, or in any proposed transactions,
which has materially affected or will materially affect us.
It is possible, however, that debts owed to Mr. Wang, our President/Chief
Executive Officer and sole director, could be demanded and cause us serious harm
if we are unable to pay and must settle in some manner. The aggregate amount
owed to Mr. Wang up to June 30, 2009 is $5,945,061 (not including his salary of
$120,000 in 2009 and 2008 which remains accrued and unpaid). The shareholders
loan is interest free, but the loan accrues interest at the rate of 6% annually
and has been recorded as additional paid in capital. Adjustments, conversions or
other action could be taken as to his debt, including the recent conversion of
$12,500.00 into 125,000,000 shares of common stock by the Assignee. Moreover,
Mr. Wang was to receive $10,000 per month starting Feb. 2005. However, this
amount has been accrued and is due and owing to Mr. Wang. Therefore, for fiscal
years ended June 30, 2009, June 30, 2008 and June 30, 2007, we have outstanding
obligations of $120,000 owing to Mr. Wang.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for our audit of annual financial
statements for fiscal year ended June 30, 2009 and review of our financial
statements for quarters ended September 30, 2008, December 31, 2008 and March
31, 2009 or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal years was
$50,000 to Wong & Co.
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for our audit of annual financial
statements for fiscal year ended June 30, 2008 and review of our financial
statements for quarters ended September 30, 2007, December 31, 2007 and March
31, 2008 or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal years was
$55,000 to Wong & Co.
AUDIT RELATED FEES
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported in the preceding paragraph was $-0- to Wong & Co.
TAX FEES
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning was $-0- to Wong & Co.
ALL OTHER FEES
The aggregate fees billed in each of the last two fiscal years for the products
and services provided by the principal accountant, other than the services
reported in paragraphs (1), (2), and (3) was $-0- to Wong & Co.
When existing , our audit committee's pre-approval policies and procedures
described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the
audit committee pre-approve all accounting related activities prior to the
performance of any services by any accountant or auditor.
The percentage of hours expended on the principal accountant's engagement to
audit our financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full time, permanent employees was 0%.
ITEM 15. EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K:
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ITEM 15. EXHIBITS
The following exhibits are filed as part of this Annual 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.
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: October 9, 2009 By: /s/ XIANPING WANG
_____________________________________
Xianping Wang
President/Chief Executive Officer
Dated: October 9, 2009 By: /s/ XIANPING WANG
_____________________________________
Xianping Wang
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, October 9, 2009
__________________ Chief Financial Officer
Xianping Wang and a Director
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