U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the six month period ended September 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 OF (I.R.S. EMPLOYER
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)
SUITE 304, BUILDING #1, YUANJIA INTERNATIONAL APARTMENT
NO. 40 DONGZHONG ST., DONGCHENG DISTRICT
BEIJING 100027
PEOPLE'S REPUBLIC OF CHINA
_______________________________________________________
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
SECURITIES REGISTERED PURSUANT TO SECTION NAME OF EACH EXCHANGE ON WHICH
12(B) OF THE ACT: REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.00001 PAR VALUE
________________________________
(TITLE OF CLASS)
Indicate by checkmark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X ] No[ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS.
N/A
Indicate by checkmark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding Outstanding as of November 13, 2009
of each of the issuer's classes of common
stock, as of the most practicable date:
Class
Common Stock $0.00001 par value 499,911,400
2
XINHUA CHINA LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION 5
Item 1. Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 3. Quantitative and Qualitative Discloses About Market Risk 33
Item 4. Controls and Procedures 33
Item 4T. Controls and Procedures 35
PART II - OTHER INFORMATION 35
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits 37
3
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Xinhua China Ltd. files annual, quarterly, current reports, proxy statements,
and other information with the Securities and Exchange Commission (the
"Commission"). You may read and copy documents referred to in this Quarterly
Report on Form 10-Q that have been filed with the Commission at the Commission's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov.
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XINHUA CHINA LTD.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 AND JUNE 30, 2009
(Stated in US Dollars)
5
XINHUA CHINA LTD.
CONTENTS Pages
Report of Registered Independent Public Accounting Firm 7
Consolidated Balance Sheet 8 - 9
Consolidated Statement of Income 10
Consolidated Statement of Stockholders' Equity 11
Consolidated Statement of Cash Flows 12
Notes to the Financial Statements 13 - 25
6
Board of Directors and Stockholders
Xinhua China Ltd.
Report of Registered Independent Public Accounting Firm
We have reviewed the accompanying interim consolidated Balance Sheets of Xinhua
China Ltd. ("the Company") as of September 30, 2009 and June 30, 2009, and the
related statements of income, stockholders' equity, and cash flows for the
three-months ended September 30, 2009 and 2008. These interim consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California Samuel H. Wong & Co., LLP
October 29, 2009 Certified Public Accountants
7
Xinhua China Ltd.
Consolidated Balance Sheets
As of September 30, 2009 and June 30, 2009
(Stated in US Dollars)
(Audited)
Notes September 30, 2009 June 30, 2009
__________________ _____________
ASSETS
Current Assets
Cash and Cash Equivalents 3D $ 12,086 $ 45,769
Accounts Receivable, net 3E 74,176 74,228
Other Receivables and Prepayments 4 224,630 224,535
___________ ____________
Total Current Assets 310,892 344,532
Long-term Assets
Property, Plant & Equipment, net 3F,5 51,350 55,156
___________ ____________
Total Long-term Assets 51,350 55,156
___________ ____________
Total Assets $ 362,242 $ 399,688
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities 6 $ 725,294 $ 754,025
Current portion of Loans Payable 7 1,479,475 1,490,911
___________ ____________
Total Current Liabilities 2,204,769 2,244,936
Long-term Liabilities
Loans Payable 7 1,058,261 1,058,261
Loans from Shareholders 8 6,078,455 5,945,061
___________ ____________
Total Long-term Liabilities 7,136,716 7,003,322
___________ ____________
Total Liabilities $ 9,341,485 $ 9,248,258
See Accompanying Notes to the Financial Statements and Accountant's Report
8
Xinhua China Ltd.
Consolidated Balance Sheets
As of September 30, 2009 and June 30, 2009
(Stated in US Dollars)
(Audited)
Notes September 30, 2009 June 30, 2009
__________________ _____________
Stockholders' Equity
Common Stock $0.00001 Par Value
500,000,000 Shares Authorized;
499,911,400 and 490,311,400 shares
issued and outstanding at September 30,
2009 and June 30, 2009, accordingly. 10 4,999 4,903
Additional Paid-In Capital 11,503,215 11,399,960
Accumulated Other Comprehensive
Income 38,656 38,756
Accumulated Deficit (20,526,113) (20,292,189)
___________ ___________
Total Stockholders' (Deficit)/Equity (8,979,243) (8,848,570)
___________ ___________
Total Liabilities & Stockholders' Equity $ 362,242 $ 399,688
=========== ===========
See Accompanying Notes to the Financial Statements and Accountant's Report
9
Xinhua China Ltd.
Consolidated Statement of Income
For the three months ended September 30, 2009 and 2008
(Stated in US Dollars)
Note September 30, 2009 September 30, 2008
__________________ __________________
Revenue
Revenue, net 3H $ - $ -
Cost of Sales, net 3I - -
Gross Profit - -
Operating Expenses
Selling, General, and Administrative
Expenses 129,019 226,867
____________ ____________
Total Operating Expense 129,019 226,867
____________ ____________
Operating Income/(Loss) (129,019) (226,867)
____________ ____________
Other Income (Expenses)
Other Income - 179,621
Interest Income 8 26
Gain on disposal of Beijing BoHeng - 73,427
Interest Expense 104,913 150,360
____________ ____________
Loss before minority interest and income tax (233,924) (161,534)
Loss before Income Tax (233,924) (124,153)
Income Tax 3M,14 - -
____________ ____________
Net Loss $ (233,924) $ (124,153)
============ ============
Basic & Diluted Earnings Per Share 3N,17 $ (0.0004) $ ( 0.0028)
____________ ____________
Weighted Average Shares Outstanding 496,259,226 111,928,254
____________ ____________
See Accompanying Notes to the Financial Statements and Accountant's Report
10
Xinhua China Ltd.
Consolidated Statements of Stockholders' Equity
For the three months ended September 30, 2009
(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, 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)
=============================================================================================
Balance, July 1, 2009 490,311,400 4,903 11,399,960 (20,253,432) 38,756 (20,292,189) (8,848,570)
Additional Paid-in Capital - - 11,339 - - - 11,399
Imputed interest on interest
free advances from related party - - 91,916 - - - 91.916
Issuance of shares to Highgate 9,600,000 96 - - - - 96
Foreign Currency translation - - - (100) (100) - (100)
Net Loss for quarter - - - (233,924) - (233,924) (233,924)
______________________________________________________________________________________________
Balance, September 30, 2009 499,911,400 4,999 11,503,215 (20,487,456) 38,656 (20,526,113) (8,979,243)
=============================================================================================
September 30, 2009 June 30, 2009
__________________ _____________
COMPREHENSIVE INCOME(LOSS)
Net Loss $ (233,924) $ (2,503,735)
OTHER COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment (100) 607
__________ ____________
Total Comprehensive Income $ (234,024) $ (2,503,128)
========== ============
See Accompanying Notes to the Financial Statements and Accountant's Report
11
Xinhua China Ltd.
Consolidated Statements of Cash Flows
For the three months ended September 30, 2009 and 2008
(Stated in US Dollars)
September 30, 2009 September 30, 2008
__________________ __________________
Cash Flow from Operating Activities:
Net (Loss) $ (233,924) $ (124,153)
Adjustments to reconcile net earnings(loss) to net cash used in
operating activities:
Depreciation 3,856 5,632
Imputed interest expense 104,708 111,725
Amortization of deferred imputed interest from note receivable - 13,768
Changes in assets and liabilities:
Decrease/(Increase) Accounts receivable - 337,652
Decrease/(Increase) Other receivables and prepayments - (812)
Decrease/(Increase) Accounts Payable and accrued liabilities (41,523) (506,684)
Decrease/(Increase) in Deferred Revenue - (18,355)
__________ __________
Cash Sourced/(Used) in Operating Activities (166,883) (181,227)
__________ __________
Cash Flows from Investing Activities:
Proceeds of note receivable - Boheng - 1,625,000
Purchase of plant and equipment - (396)
Investment in subsidiary - Boheng - (1,625,000)
__________ __________
Cash Used/(Sourced) in Investing Activities - (396)
__________ __________
Cash Flows from Financing Activities:
Stock Issue to Highgate on debt conversion 96 328
Repayment of Loan to Highgate (11,436) (44,000)
Loans from shareholders 133,236 200,848
Additional Paid-in Capital 11,340 -
__________ __________
Cash Sourced/(Used) in Financing Activities 133,236 157,176
__________ __________
Net Increase/(Decrease) in Cash & Cash Equivalents for the Year (33,647) (24,447)
Effect of Currency Translation (36) 496
Cash & Cash Equivalents at Beginning of Year 45,769 38,733
__________ __________
Cash & Cash Equivalents at End of Year $ 12,086 $ 14,782
========== ==========
Cash paid for interest expenses $ - $ -
========== ==========
See Accompanying Notes to the Financial Statements and Accountant's Report
12
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(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 September 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
________________________________________________________________________________________________________________
Sales and
Beijing Joannes Information PRC, a company with distribution of Registered capital
Technology Co., Ltd. limited liability books, PRC US$1,250,000 100%
________________________________________________________________________________________________________________
British Virgin Islands, a 10,000,000 ordinary
Pac-Poly Investment Ltd. company with limited Investment holding, shares of US$1 par
liability PRC value 100%
________________________________________________________________________________________________________________
2. GOING CONCERN UNCERTAINTIES
These consolidated financial statements have been prepared assuming that
Company will continue as a going concern, which contemplates the
realization of assets and the discharge of liabilities in the normal course
of business for the foreseeable future.
As of September 30, 2009, the Company had no working capital but current
liabilities exceeding current assets by $1,893,877 and an accumulated
deficit of $20,526,113 because the Company continued to incur losses over
the past several years. Management has taken certain action and continues
to implement changes designed to improve the Company's financial results
and operating cash flows. The actions involve certain cost-saving
initiatives and growing strategies, including (a) reductions in headcount
and corporate overhead expenses; and (b) development of e-commerce
business. Management believes that these actions will enable the Company to
improve future profitability and cash flow in its continuing operations
through September 30, 2009. As a result, the financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of the
Company's ability to continue as a going concern.
13
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(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.
14
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
(F.) Property, Plant, and Equipment, Net
Property, plant, and equipment are stated at cost less accumulated
depreciation and accumulated impairment losses, if any. Depreciation
is calculated on the straight-line basis over the following expected
useful lives from the date on which they become fully operational.
Asset Classification Depreciable Life
____________________ ________________
Land Use right 50 years
Buildings 50 years
Motor Vehicles 8 - 10 years
Equipment and Machinery 5 - 8 years
Leasehold Improvement 2 years
Expenditure for maintenance and repairs is expensed as incurred. The
gain or loss on the disposal of property, plant, and equipment is the
difference between the net sales proceeds and the carrying amount of
the relevant assets and is recognized in the consolidated statement of
operations.
(G.) Impairment of Long-life Assets
In accordance with SFAS No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of', a
long-lived assets and certain identifiable intangible assets held and
used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For the purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived
assets. The Company reviews long-lived assets, if any, to determine
whether the carrying values are not impaired.
(H.) Revenue Recognition
Sales revenue is recognized when persuasive evidence of an arrangement
exists, the price is fixed and final, delivery has occurred and there
is reasonable assurance of collection of the sales proceeds. The
Company generally obtains purchase authorizations from its customers
for a specified amount of products at a specified price and considers
delivery to have occurred when the customer takes possession of the
products. Net sales incorporate offsets for discounts and sales
returns. Revenue is recognized upon delivery, risk and ownership of
the title is transferred and a reserve for sales returns is recorded
even though invoicing may not be completed. The Company has
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".
15
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
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 period ended
September 30, 2009, there were no shipping and handling costs included
in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(I.) Cost of Sales
Cost of sales includes depreciation of property, plant, and equipment
and purchase costs to publishers.
(J.) Value-Added Tax
The Company is subject to value added tax ("VAT") imposed by the PRC
on sales. The output VAT is charged to customers who purchase books
from the Company and the input VAT is paid when the Company purchases
books from publishers. The VAT rate is 13%. The input VAT can be
offset against the output VAT.
(K.) Advertising Expenses
The Company expenses advertising costs as incurred in accordance with
the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-7, "Reporting for Advertising Costs". For the
period ended September 30, 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
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
16
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
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: -
Country of Income Tax
Subsidiary Domicile Rate
__________ __________ __________
Beijing Joannes Information
Technology Co., Ltd. PRC 25.00%
Pac-Poly Investment Ltd. British Virgin
Islands 0.00%
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: -
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 period ended September
30, 2009, the Company shall not be subject to income tax.
17
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
(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 499,911,400 and 490,311,400 of
common stock at September 30, 2009 and June 30, 2009, respectively,
are anti-dilutive. As a result, diluted loss per share data does not
include the assumed exercise of outstanding stock options, stock
purchase warrants, or conversion of convertible debenture and has been
presented jointly with basic loss per share.
(O.) Foreign Currencies Translation
The functional and reporting currency of the Company is the United
States dollars ("U.S. dollars"). The accompanying consolidated
financial statements have been expressed in U.S. dollars.
The functional currency of the Company's foreign subsidiaries is the
Renminbi Yuan ("RMB"). The balance sheet is translated into United
States dollars based on the rates of exchange ruling at the balance
sheet date. The statement of operations is translated using a weighted
average rate for the year. Translation adjustments are reflected as
cumulative translation adjustments in stockholders' equity.
September 30, June 30, September 30,
Exchange Rates 2009 2009 2008
______________ _____________ ________ _____________
Period/year end RMB:
US$ exchange rate 6.8290 6.8319 6.8551
Average period/year
RMB: US$ exchange
rate 6.8310 6.8355 6.8529
(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.
18
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
(Q.) Related Parties
For the purposes of these financial statements, parties are considered
to be related if one party has the ability, directly or indirectly, to
control the party or exercise significant influence over the party in
making financial and operating decisions, or vice versa, or where the
Company and the party are subject to common control or common
significant influence. Related parties may be individuals or other
entities.
(R.) Convertible Debenture Issued with Stock Purchase Warrants
The Company accounts for the issuance of and modifications to the
convertible debt issued with stock purchase warrants in accordance
with APB No. 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants , EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments and SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings.
Due to the indeterminate number of shares, which might be issued under
the embedded convertible host debt conversion feature of these
debentures, the Company is required to record a liability relating to
both the detachable warrants and embedded convertible feature of the
notes payable (included in the liabilities as a "derivative
liability").
The accompanying consolidated financial statements comply with current
requirements relating to warrants and embedded derivatives as
described in SFAS 133 as follows:
|X| The Company treats the full fair market value of the
derivative and warrant liability on the convertible secured
debentures as a discount on the debentures (limited to their
face value). The excess, if any, is recorded as an increase
in the derivative liability and warrant liability with a
corresponding increase in loss on adjustment of the
derivative and warrant liability to fair value.
|X| Subsequent to the initial recording, the change in the fair
value of the detachable warrants, determined under the
Black-Scholes option pricing formula and the change in the
fair value of the embedded derivative (utilizing the
Black-Scholes option pricing formula) in the conversion
feature of the convertible debentures are recorded as
adjustments to the liabilities as of September 30, 2006.
|X| The expense relating to the change in the fair value of the
Company's stock reflected in the change in the fair value of
the warrants and derivatives is included in interest expense
in the accompanying consolidated statements of operations.
19
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
(S.) Recently Issued Accounting Standard
In June 2009, FASB issued FASB Statement No. 166, Accounting for
Transfers for Financial Assets and FASB Statement No. 167, a revision
to FASB Interpretation No. 46 (Revised December 2003), Consolidation
of Variable Interest Entities.
Statement 166 is a revision to FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will require more information about transfers of
financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a "qualifying
special-purpose entity," changes the requirements for derecognizing
financial assets, and requires additional disclosures.
Statement 167 is a revision to FASB Interpretation No. 46 (Revised
December 2003), Consolidation of Variable Interest Entities, and
changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based
on, among other things, the other entity's purpose and design and the
reporting entity's ability to direct the activities of the other
entity that most significantly impact the other entity's economic
performance.
On July 1, 2009, FASB issued FASB Statement No. 168, The "FASB
Accounting Standards Codification" and the Hierarchy of Generally
Accepted Accounting Principles. The ASC has become the source of
authoritative US GAAP recognized by the FASB to be applied by
nongovernmental entities and provides that all such guidance carries
an equal level of authority. The ASC is not intended to change or
alter existing GAAP. The ASC is effective for interim and annual
periods ending after September 15, 2009.
The Company is currently evaluating the potential impact, if any, of
the adoption of the above recent accounting pronouncements on its
consolidated results of operations and financial condition.
4. OTHER RECEIVABLES AND PREPAYMENT
September 30, 2009 June 30, 2009
__________________ _____________
Prepayments $ 224,630 $ 224,535
========= =========
The carrying amounts of prepayments approximate their fair value.
5. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consist of the following:
September 30, 2009 June 30, 2009
__________________ _____________
Equipment and machinery $ 53,441 $ 53,418
Motor vehicles 47,027 47,007
Leasehold Improvement 16,313 16,306
_________ _________
116,781 116,731
Less: Accumulated Depreciation (65,431) (61,576)
_________ _________
$ 51,350 $ 55,156
========= =========
Depreciation expense for September 30, 2009 and June 30, 2009 were $3,856
and $26,585, respectively.
20
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 2009 and June
30, 2009 consists of the following:
September 30, 2009 June 30, 2009
__________________ _____________
Accounts Payable $ 725,294 $ 754,025
========= =========
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:
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
=========== =========
21
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
The Company paid $250,000 for the payment due March 10, 2007 and the
debenture holders exercised 100,000 shares and 125,000 shares on March 1,
2007 and April 18, 2007, respectively. During the period ended September
30, 2009 and year ended June 30, 2009, the debenture holders converted
9,600,000 and 266,655,667 shares against outstanding loan at a total
conversion price of $11,436 and $144,532, respectively.
Loans Payable outstanding as of September 30, 2009 amount to $2,537,736 of
which $1,479,475 and $1,058,261 were attributed to current portion and
long-term, 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.
8. LOANS FROM SHAREHOLDERS
The total outstanding amount of $6,078,455 represents cash advanced from
shareholders of the Company.
These shareholders' loans are unsecured and not repayable within the next
twelve months. For the period ended September 30, 2009, there was $91,916
imputed interest, at 6.00% annum, recorded. For the year ended June 30,
2009, there was $342,847 imputed interest, at 6.00% per annum, recorded.
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.
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.
22
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
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
warrant is exercisable for one common share at $0.00001 per
share, until expiration on November 22, 2010. As of September 30,
2009, 374,911,400 shares of common stock have been converted by
the convertible debenture holders at an aggregate amount of
$533,168.
(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. 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 $21,887 and $53,457, for
the period ended September 30, 2009 and the year ended June 30, 2009,
respectively.
11. 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.
23
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
12. 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
24
Xinhua China Ltd.
Notes to Consolidated Financial Statements
For the three months ended September 30, 2009
(Stated in US Dollars)
13. 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.
14. 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 $ 17,567 and $65,944 for the period ended September 30, 2009 and
year ended June 30, 2009, respectively. Future minimum rental payments due
according to the operating lease until termination at December 31, 2011
are:
Within one year $ 52,713
Within year two until termination 105,418
__________
$ 158,131
==========
15. 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 period indicated:
Basic and diluted net loss per share calculation:
September 30, 2009 September 30, 2008
__________________ __________________
(a). Numerator:
Net loss used in computing
basic net loss per share 233,924 124,153
(b). Denominator:
Weighted-average ordinary
shares outstanding 496,259,226 111,928,254
Basic and diluted net loss
per share $0.0004 $0.0010
For the period ended September 30, 2009 and 2008 in which the Company had a
net loss, inclusion of warrants outstanding would have been anti-dilutive
and therefore not included in the computation of diluted losses per share.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS DEVELOPMENT
Xinhua China Ltd. was incorporated September 14, 1999 under the laws of the
State of Nevada as Camden Mines Limited ("Camden"). On October 12, 2004, Camden
changed its name from "Camden Mines Limited" to its current corporate name
"Xinhua China Ltd." We have certain digital media distribution and related
rights in "China" where we mostly operate and seek to pursue our business. We
are in the development stage seeking to grow our company.
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 Quarterly 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.
26
As of the date of this Quarterly 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.
RECENT BUSINESS OPERATIONS
We are a company establishing ourselves as a leader in the digital media
industry. We have refocused our strategic business operation plans to maximize
our strategic position in the publishing industry. We believe that we will be
able to establish ourselves as a leader in the digital media industry. In
accordance with our refocused strategic plan, we intend to enter into certain
contractual relationships.
We are subject to many risks and there is no assurance of success in our plans.
RESULTS OF OPERATION
The summarized consolidated financial data set forth in the tables below and
discussed in this section should be read in conjunction with our consolidated
financial statements and related notes for the three month period ended
September 30, 2009 and 2008, which financial statements are included elsewhere
in this Quarterly Report.
FOR THREE MONTH FOR THREE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 2009 SEPTEMBER 30, 2008
(UNAUDITED) (UNAUDITED)
________________________________________________________________________________
REVENUE
Net revenue -0- -0-
Cost of Sales -0- -0-
GROSS PROFIT -0- -0-
OPERATING EXPENSES
Selling, general and administrative
expenses $ 129,019 $ 226,867
OPERATING INCOME (LOSS) (129,019) (226,867)
OTHER INCOME (EXPENSES)
Other income -0- 179,621
Interest income 8 26
Gain on disposal of Beijing BoHeng -0- 73,427
Interest expense 104,913 150,360
NET LOSS (233,924) (124,153)
27
RESULTS OF OPERATION
FOR THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 2008.
REVENUES AND GROSS MARGIN AND COST OF SALES
We had net sales of $-0- for both three month periods ended September 30, 2009
and September 30, 2009.
OPERATING EXPENSES
Our total operating expenses were $129,019 for the three month period ended
September 30, 2009 as compared to total operating expenses of $226,867 for the
three month period ended September 30, 2008. The decrease in operating expenses
during the three month period ended September 30, 2009 as compared to the three
month period ended September 30, 2008 was due to a decrease in a variety of
expenditures relating to our restructuring efforts and decreased scope and scale
of business operations. During the three month period ended September 30, 2009,
our selling, general and administrative expenses consisted of: (i) legal and
professional fees of $16,783 (2008: $19,901); (ii) office expenses of $1,664
(2008: $1,854); (iii) salaries and benefits of $51,900 (2008: $24,992); (iv)
management fees of $30,000 (2008: $150,000); (v) vehicle expense of $187 (2008:
$2,097); and (vii) other expenses of $28,485 (2008: $28,023).
INTEREST EXPENSE
We incurred $104,913 in interest expense during the three month period ended
September 30, 2009 as compared to $150,360 incurred as interest expense during
the three month period ended September 30, 2008. Interest expense of $104,913
incurred during the three month period ended September 30, 2009 consisted of:
(i) $-0- (2008: $13,768) in interest expense from the amortization of note
receivable; (ii) $104,708 (2008: $111,725) imputed interest charged on loans
from related parties.
IMPAIRMENT LOSS ON BOHENG INVESTMENT/OTHER INCOME
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 fiscal year ended December 31, 2008. Thus,
$73,427 was recorded during the three month period ended September 30, 2008.
28
During the three month period ended September 30, 2008, we also recorded
$179,621 in other income.
Therefore, our net loss during the three month period ended September 30, 2009
was ($233,924) compared to a net loss of ($124,153) incurred during the three
month period ended September 30, 2008. The increase in net loss during the three
month period ended September 30, 2009 was due primarily to the recording during
the three month period ended September 30, 2008 of a gain of $73,427 on disposal
of the Boheng Investment and of $179,621 in other income.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTH PERIOD ENDED SEPTEMBER 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 the three month period ended September 30, 2009, our current assets were
$310,892 and our current liabilities were $2,204,769, resulting in a working
capital deficit of $1,893,877. As at the three month period ended September 30,
2009, current assets were comprised of: (i) $12,086 in cash and cash
equivalents; (ii) $74,176 in net accounts receivable; and (iii) $224,630 in
other receivables and prepayments. As at the three month period ended September
30, 2009, our current liabilities were comprised of: (i) $725,294 in accounts
payable and accrued liabilities; and (ii) $1,479,475 in current portion of loans
payable. See " - Material Commitments."
As at the three month period ended September 30, 2009, our total assets were
$362,242 comprised of: (i) $310,892 in current assets; and (ii) $51,350 in net
property, plant and equipment. The decrease in total assets during the three
month period ended September 30, 2009 from fiscal year ended June 30, 2009 was
primarily due to the decrease in cash.
As at the three month period ended September 30, 2009, our total liabilities
were $9,341,485 comprised of: (i) $2,204,769 in current liabilities; (ii)
$1,058,261 in loans payable; and (iii) $6,078,455 in loans from shareholders.
The slight increase in total liabilities during the three month period ended
September 30, 2009 from fiscal year ended June 30, 2009 was primarily due to the
increase in loans from shareholders.
Stockholders' deficit increased from ($8,848,570) for June 30, 2009 to
($8,979,243) for September 30, 2009.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
three month period ended September 30, 2009, net cash flow used in operating
activities was ($166,883) compared to net cash used operating activities of
($181,227) during the three month period ended September 30, 2008. Net cash flow
from operating activities during the three month period ended September 30, 2009
consisted primarily of a net loss of ($233,924) adjusted by $3,856 in
depreciation and $104,708 in imputed interest expense. Further changes in assets
and liabilities consisted of a decrease of $41,523.
29
Net cash flow from operating activities during the three month period ended
September 30, 2008 consisted primarily of a net loss of ($124,153) adjusted by
$5,632 in depreciation, $111,725 in imputed interest expense and $13,768 in
amortization of deferred imputed interest from note receivable. Further changes
in assets and liabilities consisted of a decrease of $337,652 in accounts
receivable and an increase of $812 in other receivables and prepayments,
$506,684 in accounts payable and accrued liabilities and $18,355 in deferred
revenue.
INVESTING ACTIVITIES
During the three month period ended September 30, 2009, net cash flow used in
investing activities was $-0- compared to net cash flow sourced from investing
activities of ($396) for the three month period ended September 30, 2008. Net
cash flow used in investing activities during the three month period ended
September 30, 2008 was primarily the result of $1,625,000 as proceeds from note
receivable - Boheng Investment which was offset by $1,625,000 as the impairment
loss of the Boheng Investment and a further $396 as purchase of plant and
equipment.
FINANCING ACTIVITIES
During the three month period ended September 30, 2009, net cash flow provided
by financing activities was $133,236 compared to net cash flow provided by
financing activities of $137,176 for the three month period ended September 30,
2008. Net cash flow provided from financing activities during the three month
period ended September 30, 2009 pertained primarily to $133,236 received as loan
from shareholders, $96 in stock issued to Highgate on debt conversion and
$11,340 as additional paid-in capital, which was offset by $11,436 in repayment
of loan to Highgate.
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.
30
We expect to also establish a co-publishing company which anticipates on
co-publishing agreements with both domestic and foreign publishers, publishing
both hard copy and digital works.
Existing working capital, further advances and possible debt instruments,
warrant exercises, further private placements, monetization of existing assets,
and anticipated cash flow are expected to be adequate to fund our operations
over the next two months. We have no lines of credit or other bank financing
arrangements. Generally, we have financed operations to date through the
proceeds of the private placement of equity and debt securities and loans from
our shareholders. In connection with our business plan, management will delay
additional increases in operating expenses and capital expenditures. We intend
to utilize our best efforts to settle current finance accounts payables and
liabilities with further issuances of securities, debt and or advances,
monetization of existing assets, and revenues from operations. We will need to
raise additional capital and increase revenues to meet both short term and
long-term operating requirements.
We have undertaken certain actions and continue to implement changes designed to
improve our financial results and operating cash flows. The actions involve
certain cost-saving initiatives and growing strategies, including: (i)
reductions in headcounts and corporate overhead expenses; and (ii) continue to
develop e-commerce business through Beijing Joannes. We believe that these
actions will enable us to improve future profitability and cash flow in our
continuing operations through June 30, 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.
31
In further accordance with the Forbearance and Settlement Agreement, we agreed
to use the proceeds from the disposal of Beijing Boheng to repay the principal
and interest due to Cornell and Highgate under the Convertible Debentures in
exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time
basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no
application of the redemption premium on the scheduled repayments; (iii)
conversion of the Convertible Debentures in an amount equal to at least the
amount of a scheduled repayment subject to certain conditions; (iv) no
additional liquidated damages accruing during the term of the Forbearance and
Settlement Agreement; (v) permitting us to withdraw the registration statement
filed on March 28, 2006 with the Securities and Exchange Commission in
connection with the Convertible Debentures; (vi) during the term of the
Forbearance and Settlement Agreement, waiving the requirement for us to receive
written consent of Cornell and Highgate for any organizational change (as
defined in the Securities Purchase Agreement) to be directly or indirectly
consummated by us, and that we will not effectuate any stock splits for at least
nine months without the consent of Cornell and Highgate; and (vii) terminating
the provisions for security shares as set forth in Section 9 of the Securities
Purchase Agreement and in Section 2 of the transfer agent instructions upon
receipt by Cornell and Highgate of the first scheduled repayment amount.
The payment plan under the Forbearance and Settlement Agreement is as follows:
CONVERSION OF
PAYMENT DATE CASH PAYMENT DEBENTURE
March 10, 2007 $ 250,000 250,000
June 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
__________ _________
$1,875,000 1,875,000
========== =========
As of 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
year ended June 30, 2009 and the three month period ended September 30, 2009,
Cornell and Highgate converted an aggregate of 266,655,668 and 15,620,252
shares, respectively, against the outstanding amount at a total conversion price
of $144,532 and $18,699, respectively.
LOANS FROM SHAREHOLDERS
During fiscal year 2009/10, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $6,078,455 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 year
ended June 30, 2009, we calculated imputed interest expense of $342,847 in
relation to interest-free shareholders loans at its effective interest rate and
accounted for it in the consolidated financial statements. For the three month
32
period ended September 30, 2009, we calculated imputed interest expense of
$91,916 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse change in foreign currency
and interest rates.
EXCHANGE RATE
Our reporting currency is United States Dollars ("USD"). The Chinese Renminbi
("RMB") has been informally pegged to the USD. However, China is under
international pressure to adopt a more flexible exchange rate system. If the RMB
were no longer pegged to the USD, rate fluctuations may have a material impact
on the Company's consolidated financial reporting and make realistic revenue
projections difficult. Recently (July 2005) the Renminbi was allowed to rise 2%.
This has not had an appreciable effect on our operations and seems unlikely to
do so.
As Renminbi is the functional currency of Joannes and Boheng, the fluctuation of
exchange rates of Renminbi may have positive or negative impacts on the results
of operations of the Company. However, since all sales revenue and expenses of
these two subsidiary companies are denominated in Renminbi, the net income
effect of appreciation and devaluation of the currency against the US Dollar
will be limited to the net operating results of the subsidiary companies
attributable to us.
INTEREST RATE
Interest rates in China are low and stable and inflation is well controlled, due
to the habit of the population to deposit and save money in the banks (among
with other reasons, such as the People's Republic of China's perennial balance
of trade surplus). Our loans relate mainly to trade payables and are mainly
short-term. However our debt is likely to rise with physical plant in connection
with expansion and, were interest rates to rise at the same time, this could
become a significant impact on our operating and financing activities.
We have not entered into derivative contracts either to hedge existing risks or
for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
FINANCIAL 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
33
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.
As of September 30, 2009, the end of our first quarter covered by this Quarterly
Report, we carried out an evaluation, under the supervision and with the
participation of our president (also our principal executive officer and 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 (also our principal executive officer and chief financial officer
also our principal financial and accounting officer) concluded that our
disclosure controls and procedures were effective in providing reasonable
assurance in the reliability of our financial reports as of the end of the
period covered by this Quarterly Report.
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes in our internal controls over financial
reporting that occurred during the quarter ended March 31, 2009 that have
materially or are reasonably likely to materially affect, our internal controls
over financial reporting.
AUDIT COMMITTEE
Our Board of Directors has not established an audit committee. The respective
role of an audit committee has been conducted by our Board of Directors. We are
contemplating establishment of an audit committee during fiscal year 2009. When
established, the audit committee's primary function will be to provide advice
with respect 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
34
audit efforts of our independent accountants; (iii) evaluate our quarterly
financial performance as well as its 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 our Board of Directors.
ITEM 4T. CONTROLS AND PROCEDURES
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. None
of our directors, officers or affiliates are (i) a party adverse to us in any
legal proceedings, or (ii) has an adverse interest to us in any legal
proceedings. Management is not aware of any other legal proceedings pending or
that have been threatened against us or our properties.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
CORNELL CAPITAL PARTNERS LP/HIGHGATE HOUSE FUNDS LTD.
We previously entered into a forbearance and settlement agreement (the
"Forbearance and Settlement Agreement") with Cornell Capital Partners LP
("Cornell") and Highgate House Funds, Ltd. ("Highgate"). On December 29, 2006,
we completed a 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
35
Settlement Agreement; (v) permitting us to withdraw the registration statement
filed on March 28, 2006 with the Securities and Exchange Commission in
connection with the Convertible Debentures; (vi) during the term of the
Forbearance and Settlement Agreement, waiving the requirement for us to receive
written consent of Cornell and Highgate for any organizational change (as
defined in the Securities Purchase Agreement) to be directly or indirectly
consummated by us, and that we will not effectuate any stock splits for at least
nine months without the consent of Cornell and Highgate; and (vii) terminating
the provisions for security shares as set forth in Section 9 of the Securities
Purchase Agreement and in Section 2 of the transfer agent instructions upon
receipt by Cornell and Highgate of the first scheduled repayment amount.
The payment plan under the Forbearance and Settlement Agreement is as follows:
CONVERSION OF
PAYMENT DATE CASH PAYMENT DEBENTURE
March 10, 2007 $ 250,000 250,000
June 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
__________ _________
$1,875,000 1,875,000
========== =========
As of March 31, 2008, we paid $250,000 for the payment due March 10, 2007 and
issued 100,000 shares of our common stock on March 1, 2007 and 125,000 shares on
April 18, 2007, respectively, pursuant to exercise rights. The scheduled
payments of $375,000 due on September 30, 2007 and October 31, 2007,
respectively, were not paid as of March 31, 2008.
During the three month period ended September 30, 2009 and fiscal year ended
June 30, 2009, an aggregate of 15,620,252 and 266,655,667 shares, respectively,
of our common stock were issued pursuant to conversion of the debt at a total
conversion price of $18,699 and $144,532.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
36
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report:
Exhibit
31.1 Certification under Rule 13a-14(a).
31.2 Certification under Rule 13a-14(a).
32.1 Certification under Section 1350.
32.2 Certification under Section 1350.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
XINHUA CHINA LTD.
Dated: November 13, 2009
By: /s/ XIANPING WANG
_________________________________________
Xianping Wang
President/Chief Executive Officer
Dated: November 13, 2009
By: /s/ XIANPING WANG
_________________________________________
Xianping Wang
Acting as Interim Chief Financial Officer
37