Xinhua China Ltd. - Recent Material Event
<![CDATA[Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. [ ]
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 if no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of issuer'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 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
State the aggregate market value of the voting and non-voting common equity held
by non-affiliate computes by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter September 28, 2007: US $333,635.30
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 October 1, 2007
of each of the issuer's classes of common
stock, as of the most practicable date:
Class
Common Stock, $0.00025 par value 54,638,890
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933 "Securities Act"). The listed documents should
be clearly described for identification purposes (e.g. annual report to security
holders for fiscal year ended December 24, 1980). None.
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XINHUA CHINA LTD.
FORM 10-K
Item 1. Business
Item 1A. Risk Factors
Item 3. LEGAL PROCEEDINGS.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Item 6. Selected Financial Data
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Item 8. FINANCIAL STATEMENTS.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Item 9A. CONTROLS AND PROCEDURES.
Item 9B OTHER INFORMATION.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
COMPENSATION.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Item 15. EXHIBITS.
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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.
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 report, and unless otherwise noted, the
words "we," "our," "us," or the "Company" refer to Xinhua China Ltd.
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SUBSIDIARIES
PAC-POLY INVESTMENTS LIMITED
BEJING BOHENG 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.
The acquisition was accounted for as a recapitalization of Pac-Poly and Beijing
Boheng because their shareholders and management have actual and effective
operating control of the combined entity after the transaction. Pac-Poly and
Beijing Boheng were jointly treated as the acquiring entity for accounting
purposes and we were the surviving entity for legal purposes, with net
liabilities of $16,371 being assumed by Pac-Poly and Beijing Boheng. The
combined company is considered to be a continuation of the operations of
Pac-Poly and Beijing Boheng. The issued and outstanding common stock of Pac-Poly
and Beijing Boheng prior to the completion of acquisition was restated to
reflect the 35,000,000 shares of stock issued by us.
As of the date of this Annual Report, we hold of record 100% of the total issued
and outstanding shares of Pac-Poly, which is our wholly-owned subsidiary.
Pac-Poly is an investment holding company.
On September 30, 2006, as amended December 25, 2006, we entered into a disposal
agreement (the "Disposal Agreement") with Beijing Meixinda Science & Trade
Development Ltd. ("Beijing Meixinda"), whereby we agreed to dispose of our
equity interest of 95% in Beijing Boheng to Beijing Meixinda for a cash
consideration of approximately $1,875,000 (equivalent to RMB15,000,000).
Pursuant to the Disposal Agreement, the consideration was to be settled by
Beijing Meixinda paying interest-free installments over a two-year period. An
initial deposit of $252,000 was received by us. The disposal of Beijing Boheng
was subject to us receiving the consent of the holders of certain convertible
debentures. Effective December 29, 2006, we entered into a forbearance and
settlement agreement (the "Forbearance and Settlement Agreement") with Cornell
Capital Partners, L.P. and Highgate House Funds, Ltd. and received the required
consent of the holders of the certain convertible debentures in order to have
the Disposal Agreement effective. This disposal transaction was completed on
December 31, 2006 and resulted in a net gain of $2,155,519. See "Item 7.
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Management's Discussion and Analysis of Financial Condition or Plan of
Operation."
We maintain a 7.98% effective interest in Xinhua C&D through Pac-Poly and
Beijing Boheng.
BEIJING JOANNES INFORMATION TECHNOLOGY CO. LT.
On May 9, 2006, we formed Beijing Joannes Information Technology Co. Lt.
("Beijing Joannes"), as our Chinese wholly owned subsidiary, to launch a digital
media content initiative. We held of record 100% of the total issued and
outstanding shares of Beijing Joannes. Beijing Joannes was formed for the
purpose of launching a digital media content initiative with the web site
branded WWW.GEEZIP.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.
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 & DISTIRBUTION
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"). Pac-Poly and Beijing Boheng agreed to contribute
$20,900,000 (RMB 173,000,000) in cash in exchange for the 57.67% interest in
Xinhua C&D. Twenty percent (20%) of the $20,900,000 was due and owing within two
months of closing the transaction and the remaining amount was payable within
six months of closing. As of June 30, 2005, a total of $4,340,000 had been paid
by Pac-Poly, Beijing Boheng and other investors group in accordance with the
payment schedule. The due date for the remaining cash contribution of 80%
aggregating $17,360,000 originally expired on August 1, 2005 and had been
extended to July 31, 2006. Pursuant to a letter of confirmation dated October 7,
2005, Xinhua Bookstore agreed to reduce the long-term loan it extended to Xinhua
C&D should any receivables acquired by Xinhua C& D become uncollectible. The
acquisition was completed on February 1, 2005.
Xinhua C&D is presently primarily a book distribution enterprise. For the eleven
month period ended May 31, 2006, Xinhua C&D generated $37,627,191 in revenues
from book distributions with a gross profit of $4,326,070. 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
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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. See
"Item 7. Management's Discussion and Analysis or Plan of Operation."
As a result of the decision to focus on digital media and co-publishing, we were
able to renegotiate our financial commitment to Xinhua C&D and eliminate the
requirement to invest a further $16,700,000 into Xinhua C&D to build their new
distribution warehouse along with all other obligations related to the long term
leasing of approximately 128 acres of land on which the warehouse was to be
built. This change reduced our equity interest in Xinhua C&D to 7.98% and
resulted in compensation to us in the amount of $1,237,520.
At the same time we reduced our equity interest in Xinhua C&D, four of our major
shareholders surrendered to us for cancellation in the aggregate 10,000,000
shares of our common stock, resulting in a total of approximately 51,700,000
shares outstanding. 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 have entered into certain contractual relationships as follows:
DIAL A BOOK, INC.
On November 4, 2005, we entered into a consulting services agreement with Dial a
Book Inc. Branded as Chapter One, online readers are offered the opportunity to
read the first chapter of over seventeen thousand books. Retailer book stores
can connect directly to the site and offer readers the opportunity to order
directly from the Retailer once they have previewed the book online.
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.
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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 ($608,030) for fiscal
year ended June 30, 2007. We had a working capital deficit of $1,165,112 and
shareholders' deficit of $6,664,709 as of June 30, 2007. 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, 2007 includes an
explanatory paragraph that states that we have generated net losses and have a
shareholders' deficit factors which raise substantial doubt about our ability to
continue as a going concern. We have been dependent on sales of our equity
securities and debt financing to meet our cash requirements. Further, we do not
expect positive cash flow from operations in the near term. There is no
assurance that actual cash requirements will not exceed our estimates. In
particular, additional capital may be required in the event that: (i) operating
costs may be more than we currently anticipate; or (ii) we encounter greater
costs associated with general and administrative expenses or offering costs.
WE ARE OPERATING IN A DEVELOPING MARKET AND THERE IS UNCERTAINTY AS TO MARKET
ACCEPTANCE OUR TECHNOLOGY AND PRODUCTS.
We researched the markets for our products involving the digital media industry.
We have conducted limited test marketing and thus have relatively little
information on which to estimate our levels of sales, the amount of revenue our
planned operations will generate and our operating and other expenses. There can
be no assurance that we will be successful in our efforts to market our products
or to develop our markets in the manner we contemplate within the digital media
industry.
The markets for our products and technology are developing and rapidly evolving
and are characterized by an increasing number of market entrants who have
developed or are developing a wide variety of products and technologies, a
number of which offer certain of the features that our products offer. Because
of these factors, demand and market acceptance for new products are subject to a
high level of uncertainty. There can be no assurance that our technology and
products will become widely accepted. It is also difficult to predict with any
assurance the future growth rate, if any, and size of the market. If a
substantial market fails to develop, develops more slowly than expected or
becomes saturated with competitors or if our products do not achieve market
acceptance, our business, operating results and financial condition will be
materially and adversely affected.
OUR DIGITAL MEDIA INDUSTRY AND MARKET IS CHARACTERISED BY NEW ENTRANTS AND RAPID
TECHNOLOGICAL CHANGE.
The digital media industry and market for our products is characterized by
rapidly changing technology and frequent new product introductions. Our success
will depend in part on our ability to enhance our technologies and products and
to introduce new products and technologies to meet changing customer
requirements. We are currently devoting, and intend to continue to devote,
significant resources toward the development of digital media technology and
products. There can be no assurance that we will successfully complete the
development of these technologies and related products in a timely fashion or
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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.
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,
10
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
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.
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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.
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.
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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 $2,554,277 as of June 30, 2007 of which
approximately $693,207 is due within the next year unless extended. Such
substantial debt obligations could affect our status as a going concern and also
represent a concentration of risk which could pose a serious concern. Our
ability to repay debt will be dependent on cash flow from the business and our
ability to raise new funds in the form of loans, debt or equity in the next
year. We have $6,138,691 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 "
13
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.
EXCHANGE RATE FLUCTUATIONS 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
14
regulations at a rate determined by the board of directors of the respective
subsidiaries, and recorded as a component of shareholders' equity. The dedicated
reserves are not distributable other than upon liquidation. As our Chinese
subsidiaries and Xinhua C&D have recorded losses for the fiscal year ended June
30, 2007, no appropriation to the dedicated reserves was made. Moreover,
pursuant to the same Chinese company law, our Chinese subsidiaries are required
to transfer at the discretion of their boards of directors, a certain amount of
its annual net income after taxes as determined under the relevant Chinese
accounting regulations to a staff welfare and bonus fund. Since our Chinese
subsidiaries and Xinhua C&D have recorded losses for the fiscal year ended June
30, 2007, no transfer to the staff welfare and bonus fund was made.
AS A RESULT OF A MAJORITY OF OUR DIRECTORS AND OFFICERS BEING RESIDENTS OF OTHER
COUNTRIES OTHER THAN THE UNITED STATES, INVESTORS MAY FIND IT DIFFICULT TO
ENFORCE WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR OUR
DIRECTORS AND OFFICERS.
We do not currently maintain a permanent place of business within the United
States. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States, and all or a
substantial portion of such persons' assets are located outside the United
States. As a result, it may be difficult for investors to enforce within the
United States any judgments obtained against our company or our officers or
directors, including judgments predicated upon the civil liability provisions of
the securities laws of the United States or any state thereof.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION MAY PROTECT OUR DIRECTORS FROM
CERTAIN TYPES OF LAWSUITS.
Nevada law provides that our officers and directors will not be liable to us or
our stockholders for monetary damages for all but certain types of conduct as
officers and directors. Our Bylaws permit us broad indemnification powers to all
persons against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
officers and directors caused by their negligence, poor judgment or other
circumstances. The indemnification provisions may require us to use our limited
assets to defend our officers and directors against claims, including claims
arising out of their negligence, poor judgment, or other circumstances.
A DECLINE IN THE PRICE OF OUR SHARES OF COMMON STOCK COULD AFFECT OUR ABILITY TO
RAISE FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A prolonged decline in the price of our shares of common stock could result in a
reduction in the liquidity of our shares of common stock and a reduction in our
ability to raise capital. Any reduction in our ability to raise equity capital
in the future would force us to reallocate funds from other planned uses and
would have a significant negative effect on our business plans and operations,
including our ability to develop our business and continue our current
operations. If the stock price declines, there can be no assurance that we can
raise additional capital or generate funds from operations sufficient to meet
our obligations.
15
IF WE ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, THIS MAY RESULT IN
DILUTION TO OUR EXISTING STOCKHOLDERS.
Our articles of incorporation, as amended, authorize the issuance of 500,000,000
shares of common stock. Our board of directors has the authority to issue
additional shares of common stock up to the authorized capital stated in the
articles of incorporation. Our board of directors may choose to issue some or
all of such shares to acquire one or more businesses or to provide additional
financing in the future. The issuance of any such shares may result in a
reduction of the book value or market price of the outstanding shares of our
common stock. It will also cause a reduction in the proportionate ownership and
voting power of all other stockholders.
BECAUSE OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES, THE LIQUIDITY OF YOUR
INVESTMENT MAY BE RESTRICTED.
Our common stock is now, and may continue to be in the future, subject to the
penny stock rules under the Securities Exchange Act of 1934. These rules
regulate broker/dealer practices for transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00. The
penny stock rules require broker/dealers to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations and the broker/dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction, the broker and/or dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These additional penny stock disclosure requirements are burdensome and may
reduce the trading activity in the market for our common stock. As long as the
common stock is subject to the penny stock rules, holders of our common stock
may find it more difficult to sell their securities.
NASD SALES PRACTIVE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR SHARES OF COMMON STOCK.
In addition to the "penny stock" rules described above, the National Association
of Securities Dealers Inc. has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the National
Association of Securities Dealers Inc. believes that there is a high probability
that speculative low priced securities will not be suitable for at least some
customers. The National Association of Securities Dealers Inc. requirements make
it more difficult for broker-dealers to recommend that their customers buy our
shares of common stock, which may limit your ability to buy and sell our shares
of common stock and have an adverse effect on the market for its shares.
16
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.
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 A-11 Chaowai
Men Office Building No. 26 Chaoyangmen Wai Street, Chaoyang District, Beijing,
occupying about 240 square meters with monthly rent of $5,500.
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, 2007, 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
17
Shares of our common stock are traded on the OTC Bulletin Board under the symbol
"LXRS". 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
March 31, 2006 $3.10 $1.20
June 30, 2006 $2.50 $0.90
September 30, 2006 $1.03 $0.90
December 31, 2006 $0.65 $0.36
March 31, 2007 $0.38 $0.22
June 30, 2007 $0.12 $0.04
September 30, 2007 $0.06 $0.02
As of October 8, 2007, 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
18
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, 2007:
<TABLE>
<CAPTION>
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))
PLAN CATEGORY (A) (B) (C)
<S> <C> <C> <C>
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
Stock Options 292,000 $ 2.28 15,352,300
Total Stock Options 292,000
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 1,849,690
</TABLE>
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
19
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
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.
20
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
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, 2007,
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
21
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, 2007, we issued an aggregate
of 2,859,125 shares of our common stock to Highgate pursuant to the exercise by
Highgate of its rights to purchase warrant shares pursuant to the Warrant.
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, 2007 and
2006, which financial statements are included elsewhere in this Annual Report.
FOR FISCAL YEAR ENDED FOR FISCAL YEAR
JUNE 30, 2007 ENDED JUNE 30, 2006
(AUDITED) (AUDITED)
_____________________ ___________________
Net Sales $ 153,286 $ 35,091,024
Loss from Operations (608,030) (10,837,629)
Loss from Operations per Share 0.01 (0.17)
Total Assets 2,028,259 1,914,674
Long Term Liabilities 6,138,691 8,131,666
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
On May 31, 2006, we reduced our equity interest in Xinhua C&D from 56.14% to
7.98%. Therefore, effective May 31, 2006, the financial statements of Xinhua C&D
were no longer consolidated into our financial statements. The deconsolidation
of Xinhua C& D resulted in a net gain of $1,769,742 incurred during fiscal year
ended June 30, 2006. Moreover, effective December 31, 2006, we disposed of our
95% equity interest in our subsidiary, Beijing Boheng, which resulted in a net
gain of $2,155,519 incurred during fiscal year ended June 30, 2007.
RESULTS OF OPERATION
FOR FISCAL YEAR ENDED JUNE 30, 2007 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2006.
REVENUES AND GROSS MARGIN
22
We had net sales of $153,286 for fiscal year ended June 30, 2007, after taking
into account sales discounts and sales return allowances, compared to net sales
of $37,627,291 for fiscal year ended June 30, 2006, after taking into account
sales discounts and sales return allowances. Net sales decreased substantially
due to the divesture of our interest in Xinhua C& D. Gross profit margin was
5.4% and 11.4% for fiscal year ended June 30, 2007 and 2006, respectively.
COST OF SALES
Our cost of sales for fiscal year ended June 30, 2007 was $144,982 compared to
cost of sales of $31,239,179 for fiscal year ended June 30, 2006. Cost of sales
consisted of purchased costs to publishers and depreciation of property, plant
and equipment. Cost of sales decreased proportionately with the decrease in
revenues during fiscal year ended June 30, 2007 compared with fiscal year ended
June 30, 2006 due to the divesture of our interest in Xinhua C&D.
OPERATING EXPENSES
Our total operating expenses were $2,997,598 for fiscal year ended June 30, 2007
as compared to total operating expenses of $18,765,837 for fiscal year ended
June 30, 2006. The decrease in operating expenses during fiscal year ended June
30, 2007 as compared June 30, 2006 was due to the corresponding decrease in net
revenues. Selling, general and administrative expenses decreased based on a
substantial decrease in stock-based compensation. Stock-based compensation
decreased from $3,562,086 during fiscal year ended June 30, 2006 to $-0- during
fiscal year ended June 30, 2007. Stock-based compensation expense is
attributable to the valuation of our Stock Option Plan under the fair value
method in accordance with SFAS No. 123. Selling, general and administrative
expenses decreased also based on a decrease in legal and professional fees.
Legal and professional fees decreased from $1,009,920 during fiscal year ended
June 30, 2006 to $279,815 during fiscal year ended June 30, 2007. The fees
represent payments to consultants and professional in relation to our fund
raising of issuance of convertible debentures primarily to Cornell and Highgate
and other legal and financial matters.
Included in selling, general and administrative expenses are also the major
categories of: (i) salaries and benefits of $286,015 incurred during fiscal year
ended June 30, 2007 as compared to $2,621,736 incurred during fiscal year ended
June 30, 2006; (ii) allowance for doubtful accounts of $1,500,000 incurred
during fiscal year ended June 30, 2007 as compared to $2,540,008 incurred during
fiscal year ended June 30, 2006; (iii) provision on slow moving inventory of
$-0- incurred during fiscal year ended June 30, 2007 as compared to $4,765,218
incurred during fiscal year ended June 30, 2006; (iv) shipping and freight of
$241 incurred during fiscal year ended June 30, 2007 as compared to $149,173
incurred during fiscal year ended June 30, 2006; (v) office expenses of $91,085
incurred during fiscal year ended June 30, 2007 as compared to $443,644 incurred
during fiscal year ended June 30, 2006; (vi) vehicle expense of $33,761 incurred
during fiscal year ended June 30, 2007 as compared to $108,751 incurred during
fiscal year ended June 30, 2006; and (vii) other miscellaneous expenses of
$516,767 incurred during fiscal year ended June 30, 2007 as compared to
$3,175,536 incurred during fiscal year ended June 30, 2006. These associated
expenses included in selling, general and administrative expenses
correspondingly decreased due to the divesture of our interest in Xinhua C&D.
23
NET GAIN ON DISPOSAL OF BEIJING BOHENG
Effective December 2006 and in accordance with the terms and provisions of the
Disposal Agreement, we disposed of our 95% equity interest in our subsidiary,
Beijing Boheng, for cash consideration of approximately $1,875,000/ The disposal
of our equity interest was to assist in the repayment of funds due and owing to
Cornell and Highgate. Effective Decemebr 29, 2006, we entered into athe
Forbearance and Settlement Agreement with Cornell and Highgate. See "--Material
Commitments". This disposal provided a gain in the amount of $2,055,947 during
fiscal year ended June 30, 2007, which is calculated below:
Purchase price $1,875,000
Less: net liabilities disposed as of December 31, 2006
Fixed Assets, net 99,572
Current Assets 251,685
Current Liabilities (619,399)
___________
(268,142)
Gain on disposal of Beijing Boheng $2,143,142
Less: Imputed interest on note receivable (87,195)
___________
Net gain on disposal of Beijing Boheng $2,055,947
NET GAIN ON DECONSOLIDATION OF XINHUA C&D
On May 30, 2006, we resolved to give up 49.49% equity interest in Xinhua C&D and
its effective equity interest was reduced from 57.67% to 8.18%. The reduction in
equity interest was to discharge us from an obligation to contribute further
capital of $16.7 million into Xinhua C&D in accordance with the terms and
conditions of the Investment Agreement dated September 22, 2004. Ultimately, we
intended to concentrate our resources in co-publishing and e-commerce business
opportunities, while maintaining a strategic partnership with Xinhua C&D. This
reduction in capital also led the Company to a compensation of $1.24 million to
other shareholders of Xinhua C&D.
Effective May 31, 2006, we did not consolidate the financial statements of
Xinhua C&D and accounted for its investment using cost method under the
provision of SFAS No. 115.
The deconsolidation of Xinhua C&D was completed on May 31, 2006 and resulted in
a net gain of $1.77 million which is calculated as follows:
Investment in Xinhua C&D at date of acquisition $4,170,000
Share of accumulated losses as of May 31, 2006
(from the date of acquisition as of February 1, 2005) (5,940,000)
___________
Net gain from deconsolidation of Xinhua C&D $1,770,000
24
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
INTEREST EXPENSE
We incurred $1,032,448 in interest expense during fiscal year ended June 30,
2007 as compared to $2,642,611 incurred as interest expense during fiscal year
ended June 30, 2006. Interest expense of $1,032,448 incurred during fiscal year
ended June 30, 2007 consisted of: (i) $961,544 in imputed interest charged on
loans from shareholders; and (ii) $70,904 in interest on loans from related
parties. Interest expense of $2,642,611 incurred during fiscal year ended June
30, 2006 consisted of: (i) $1,357,774 in interest expense from the amortization
of deferred financing cost and discount on convertible debenture; (ii) $267,296
in imputed interest charged on loans from shareholders; and (iii) $1,017,541 in
interest on loans from related parties.
During fiscal year ended June 30, 2006, we allocated $3,785,756 of losses
applicable to the minority shareholders of Xinhua C&D before consolidation as
compared to $-0- during fiscal year ended June 30, 2006.
We incurred a net loss of ($608,030) for fiscal year ended June 30, 2007
compared to a net loss of ($10,837,629) incurred during fiscal year ended June
30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED JUNE 30, 2007
Our financial statements have been prepared assuming that we will continue as a
going concern and, accordingly, do not include adjustments relating to the
recoverability and realization of assets and classification of liabilities that
might be necessary should we be unable to continue in operation.
25
As at fiscal year ended June 30, 2007, our current assets were $1,389,165 and
our current liabilities were $2,554,277, resulting in a working capital deficit
of $1,165,112. As at fiscal year ended June 30, 2007, current assets were
comprised of: (i) $2,733 in cash and cash equivalents; (ii) $185,246 in net
accounts receivable; (iii) $1,000,000 in note receivable; and (iv) $201,186 in
other receivables and prepayments. As at fiscal year ended June 30, 2007, our
current liabilities were comprised of: (i) $693,207 in accounts payable and
accrued liabilities; (ii) 1,787,643 in current portion of loans payable; and
(iii) $73,427 in deferred revenue.
See " - Material Commitments."
As at fiscal year ended June 30, 2007, our total assets were $2,028,259
comprised of: (i) $1,389,165 in current assets; (ii) $625,000 in long-term
portion of note receivable; and (iii) $14,094 in net property, plant and
equipment. The increase in total assets during fiscal year ended June 30, 2007
from fiscal year ended June 30, 2006 was primarily due to the long-term portion
of note receivable in the amount of $625,000.
As at fiscal year ended June 30, 2007, our total liabilities were $8,692,968
comprised of: (i) $2,554,277 in current liabilities; (ii) $1,058,261 in loans
payable; and (iii) $5,080,430 in loans from shareholders. The slight decrease in
total liabilities during fiscal year ended June 30, 2007 from fiscal year ended
June 30, 2006 was primarily due to the decrease in loans from shareholders.
Stockholders' deficit decreased from ($6,784,496) for June 30, 2006 to
($6,664,709) for June 30, 2007.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. For the
fiscal year ended June 30, 2007, net cash flow used in operating activities was
($2,908,974). Net cash flow used in operating activities during fiscal year
ended June 30, 2007 consisted primarily of a net loss of ($608,030) adjusted by
($2,055,947) relating to net gain on deconsolidation of Xinhua C&D, $1,032,448
in imputed interest expense, $1,500,000 in allowance for doubtful accounts.
Changes in assets and liabilitites consisted of an increase of $1,625,000 in
note receivable, $185,246 in accounts receivable and $140,270 in other
receivables and prepayments.
During fiscal year ended December 31, 2006, net cash flow used in investing
activities was ($4,077,287) compared to net cash flow used in investing
activities of ($3,510,559) for fiscal year ended December 31, 2005. Net cash
flow used in investing activities during fiscal year ended December 31, 2006 was
primarily the result of ($3,845,864) in oil and gas property expenditures
relating to our oil and gas properties and ($350,967) relating to the purchase
of equipment, offset by $119,544 of cash acquired on acquisition of Oak Hills.
During fiscal year ended December 31, 2006, net cash flow from financing
activities was $8,584,229 compared to net cash flow from financing activities of
$5,133,150 for fiscal year ended December 31, 2005. Net cash flow from financing
activities during fiscal year ended December 31, 2006 pertained primarily to
$9,426,250 received as proceeds from the sales of shares of our common stock,
($763,735) in convertible note repayments, and ($222,423) in long term debt
repayments.
26
FINANCING ACTIVITIES
During fiscal year ended June 30, 2007, cash from financing activities was
$2,723,151 consisting of receipt of $2,902,247 as loans from shareholders, which
was offset by repayment of loan payable in the amount of ($179,096).
PLAN OF OPERATION
The local and regional distribution business for books is competitive and
fragmented in the People's Republic of China. Estimates range up to 500 as to
the number of entrants in this field. It is our plan that economy of scale,
relationships with Chinese publishers and also with sub-distributors and
retailers and our nationwide scope which allows us the flexibility to distribute
books in any region will assist us in maintaining and enhancing our competitive
position.
Our goal is to expand our business to include electronic sales, delivery and
distribution of media contents. We also plan to partner with foreign publishers
to provide foreign media contents in China. We seek to achieve our goal on a
national scale to maximize opportunities in one of the largest and fastest
growing economies in the world.
To execute on our strategy to become a digital media company we formed our new
subsidiary, Beijing Joannes. Beijing Joannes is intended to be our digital media
company and it is expected to distribute all digital content for Xinhua C&D and
others. Beijing Joannes has anticipated in operating its business to consumer
(B2C) e-commerce portal as www.geezip.com, and expects to allow customers to
purchase electronic and hard copies of books on-line.
We expect to also establish a co-publishing company which anticipates on
co-publishing agreements with both domestic and foreign publishers, publishing
both hard copy and digital works.
Existing working capital, further advances and possible debt instruments,
warrant exercises, further private placements, monetization of existing assets,
and anticipated cash flow are expected to be adequate to fund our operations
over the next two months. We have no lines of credit or other bank financing
arrangements. Generally, we have financed operations to date through the
proceeds of the private placement of equity and debt securities and loans from
our shareholders. In connection with our business plan, management will delay
additional increases in operating expenses and capital expenditures. We intend
to utilize our best efforts to settle current finance accounts payables and
liabilities with further issuances of securities, debt and or advances,
monetization of existing assets, and revenues from operations. We will need to
raise additional capital and increase revenues to meet both short term and
long-term operating requirements.
We have undertaken certain actions and continue to implement changes designed to
improve our financial results and operating cash flows. The actions involve
certain cost-saving initiatives and growing strategies, including: (i)
reductions in headcounts and corporate overhead expenses; and (ii) continue to
27
develop e-commerce business through Beijing Joannes. We believe that these
actions will enable us to improve future profitability and cash flow in our
continuing operations through June 30, 2008. Furthermore, the commitment to
contribute further capital of $16,700,000 to Xinhua C&D and the restructure of
debt pertaining to Cornell and Highgate has been advantageous to our over
financial outlook. Ultimately, we have released the burden on cash flow for
further contribution and intend to put our resources in co-publishing and
e-commerce business opportunities.
The report of the independent registered public accounting firm that accompanies
our June 30, 2007 and June 30, 2006 consolidated financial statements contains
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. The consolidated financial statements have been
prepared "assuming that we will continue as a going concern," which contemplates
that we will realize our assets and satisfy our liabilities and commitments in
the ordinary course of business.
MATERIAL COMMITMENTS
LOANS PAYABLE/CONVERTIBLE DEBENTURE
During 2007/8, a material commitment for us relates to the Forbearance and
Settlement Agreement with Cornell and Highgate. On December 29, 2006, we
completed the debt restructuring with Cornell and Highgate under the Forbearance
and Settlement Agreement. Pursuant to the Forbearance and Settlement Agreement,
we agreed to make certain payments to Cornell and Highgate with respect to the
Securities Purchase Agreement previously entered into by us with Cornell and
Highgate dated November 23, 2005 and amended on March 23, 2006, and the two
convertible debentures in the amounts of $1,250,000 to Highgate dated November
23, 2005 and $2,000,000 to Cornell dated March 23, 2006 (collectively, the
"Convertible Debentures") in accordance with the terms and conditions set forth
in the Forbearance and Settlement Agreement.
In further accordance with the Forbearance and Settlement Agreement, we agreed
to use the proceeds from the disposal of Beijing Boheng to repay the principal
and interest due to Cornell and Highgate under the Convertible Debentures in
exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time
basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no
application of the redemption premium on the scheduled repayments; (iii)
conversion of the Convertible Debentures in an amount equal to at least the
amount of a scheduled repayment subject to certain conditions; (iv) no
additional liquidated damages accruing during the term of the Forbearance and
Settlement Agreement; (v) permitting us to withdraw the registration statement
filed on March 28, 2006 with the Securities and Exchange Commission in
connection with the Convertible Debentures; (vi) during the term of the
Forbearance and Settlement Agreement, waiving the requirement for us to receive
written consent of Cornell and Highgate for any organizational change (as
defined in the Securities Purchase Agreement) to be directly or indirectly
consummated by us, and that we will not effectuate any stock splits for at least
nine months without the consent of Cornell and Highgate; and (vii) terminating
the provisions for security shares as set forth in Section 9 of the Securities
Purchase Agreement and in Section 2 of the transfer agent instructions upon
receipt by Cornell and Highgate of the first scheduled repayment amount.
28
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 of our common stock on March 1, 2007 and April 18, 2007,
respectively, pursuant to exercise rights.
LOANS FROM SHAREHOLDERS
During fiscal year 2007/8, a material commitment for us relates to the loans
from shareholders. The outstanding amount of $5,080,430 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, 2007, we calculated imputed interest expense of $961,544 in
relation to interest-free shareholders loans at its effective interest rate and
accounted for it in the consolidated financial statements.
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.
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.
29
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.
30
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.
31
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 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND ERROR
CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. These requirements apply to all
voluntary changes and changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for fiscal years beginning after December 15,
2005. As such, the Company has adopted these provisions, if any, at the
beginning of the fiscal year ended December 31, 2006.
In February 2006, the FASB issued SFAS Statement No. 155, "ACCOUNTING FOR
CERTAIN HYBRID FINANCIAL INSTRUMENTS--AN AMENDMENT OF FASB STATEMENTS NO. 133
AND 140" ("SFAS 155"). This Statement amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This Statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." This Statement permits fair value re-measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement 133,
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives and amends Statement 140 to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS 155 is effective for all financial instruments
acquired or issued for the Company for fiscal year begins after September 15,
2006. The adoption of this standard is not expected to have a material effect on
the Company's results of operations or financial position.
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes--an Interpretation of FASB Statement No. 109, which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
the Company recognizes in its consolidated financial statements the impact of a
tax position if that position is more likely than not of being sustained on
32
audit, based on the technical merits of the position. The provisions of FIN 48
are effective for the Company on January 1, 2007, with the cumulative effect of
the change in accounting principle, if any, recorded as an adjustment to opening
retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS 115"
(SFAS No. 159), which allows for the option to measure financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. The
objective of SFAS 159 is to provide opportunities to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply hedge accounting provisions. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of SFAS No. 159 on our consolidated financial
statements.
The Company does not anticipate that the adoption of the above standards will
have a material impact on these consolidated financial statements.
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
33
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 8. FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm dated July 28, 2007.
Consolidated Balance Sheet.
Consolidated Statement of Income.
Consolidated Statement of Stockholders' Equity.
Consolidated Statement of Cash Flows.
Notes to Consolidated Financial Statements.
34
XINHUA CHINA LTD.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(STATED IN US DOLLARS)
35
XINHUA CHINA LTD.
CONTENTS PAGES
Report of Registered Independent Public Accounting Firm F-1
Consolidated Balance Sheet F-2 - 3
Consolidated Statement of Income F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to the Financial Statements F-7 - 31
36
Board of Directors and Stockholders
Xinhua China Ltd.
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Xinhua China Ltd.
and its subsidiaries ("the Company") as of June 30, 2007, and the related
consolidated statement of operations, stockholders' equity and comprehensive
income and cash flows for the year ended June 30, 2007. 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, 2007 and the consolidated results of operations and cash
flows for the year ended June 30, 2007 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
July 28, 2007 Certified Public Accountants
F-1
<TABLE>
<CAPTION>
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 2007 2006 2005
__________ __________ ____________
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents 3E,5 $ 2,733 224,192 1,336,269
Restricted Cash - - 362,516
Accounts Receivable, NET 3F 185,246 - 39,125,170
Value-added tax receivable 3N - - 5,964,445
Receivable from trustee 6 - 1,500,000 -
Note receivable 7 1,000,000 - -
Inventories, NET 3G, - - 17,445,410
Other receivables and prepayments 8 201,186 60,916 167,989
__________ __________ ____________
Total Current Assets $1,389,165 1,785,108 64,401,799
LONG-TERM ASSETS
Property, Plant & Equipment, NET 3H,9 14,094 129,566 26,000,804
Note receivable, long-term portion 7 625,000 - -
Distribution network right, NET 3I - - 6,167,000
Goodwill, NET 3J - - 6,173,992
__________ __________ ____________
Total Long-term Assets 639,094 129,566 38,341,796
__________ __________ ____________
Total Assets $2,028,259 $1,914,674 $102,743,595
========== ========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities 11 693,207 567,504 76,231,392
Deferred revenue 7 73,427 - -
Current portion of loans payable 12 1,787,643 - -
Due to related parties 3V - - 1,510,965
__________ __________ ____________
Total Current Liabilities 2,554,277 567,504 77,742,357
LONG-TERM LIABILITIES
Loans Payable 12 1,058,261 4,347,234 -
Loans from related parties 3v - - 16,989,910
Loans from shareholders 13 5,080,430 3,784,432 2,833,319
__________ __________ ____________
Total Long-term Liabilities 6,138,691 8,131,666 19,823,229
Total Liabilities 8,692,968 8,699,170 97,565,586
__________ __________ ____________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
F-2
<TABLE>
<CAPTION>
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2007
(STATED IN US DOLLARS)
NOTES 2007 2006 2005
__________ __________ ____________
<S> <C> <C> <C> <C>
Minority Interest - - 4,973,683
STOCKHOLDERS' EQUITY
Common Stock $0.0001 Par Value
500,000,000 Shares Authorized;
54,638,890 issued and outstanding at
June 30, 2007; 61,779,765 Shares
at June 30, 2006 and 2005 14 546 618 618
Additional Paid in Capital 10,423,526 9,684,907 5,855,525
Accumulated Other Comprehensive Income 8,749 19,478 53
Accumulated Deficit (17,097,530) (16,489,499) 5,651,870
__________ __________ ____________
Total Stockholders' (Deficit)/Equity (6,664,709) (6,784,496) 204,326
__________ __________ ____________
Total Liabilities & Stockholders' Equity $2,028,259 $1,914,674 $102,743,595
========== ========== ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
F-3
<TABLE>
<CAPTION>
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 2007
(STATED IN US DOLLARS)
NOTE
REVENUE 2007 2006 2005
____________ ____________ ____________
<S> <C> <C> <C>
Revenue, NET $ 153,286 $ 35,091,024 $ 13,889,824
Revenue, NET - related parties - 2,536,167 1,606,713
Cost of Sales, NET 3M 144,982 31,239,179 12,636,786
Cost of Sales, NET - related parties 3M - 2,087,027 947,680
____________ ____________ ____________
Gross Profit 8,304 4,300,985 1,912,071
OPERATING EXPENSES
Selling, General, and Administrative
Expenses 16 2,707,684 18,376,072 7,576,242
Stock-based Compensation 265,080 - -
Depreciation of Equipment 24,834 - -
Rental Expenses - related parties - 389,765 169,745
____________ ____________ ____________
Total Operating Expense 2,997,598 18,765,837 7,745,987
____________ ____________ ____________
Operating Income/(Loss) (2,989,294) (14,464,852) (5,833,916)
____________ ____________ ____________
OTHER INCOME (EXPENSES)
Other Income - 410,981 65,878
Interest Income 41,792 303,355 552
Net gain from deconsolidation of a
subsidiary 4 - 1,769,742 -
Gain on disposal of Beijing BoHeng 17 2,055,947 - -
Gain on debt restructuring 18 1,500,132 - -
Interest Expense 19 (1,032,448) (2,642,611) (520,875)
____________ ____________ ____________
Loss before minority interest and income (423,871) (14,623,385) (6,288,361)
Loss on discontinued Operations:
Loss on discontinued operation of
Vancouver office, NET OF TAX 184,159 - -
____________ ____________ ____________
Income/(Loss) before minority interest and (608,030) (14,623,385) (6,288,361)
income tax
Minority interest in net loss of
consolidated subsidiaries - 3,785,756 636,491
____________ ____________ ____________
Loss before Income Tax (608,030) (10,837,629) (5,651,870)
Income Tax 3Q,20 - - -
____________ ____________ ____________
Net Loss $ (608,030) $(10,837,629) $ (5,651,870)
============ ============ ============
____________ ____________ ____________
Basic & Diluted Earnings Per Share 21 $ 0.01 $ (0.17) $ (0.10)
____________ ____________ ____________
Weighted Average Shares Outstanding 57,723,668 61,779,765 55,733,786
____________ ____________ ____________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
F-4
<TABLE>
<CAPTION>
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF JUNE 30, 2007
(STATED IN US DOLLARS)
NO. ADDITIONAL OTHER
OF COMMON PAID IN COMPREHENSIVE COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL INCOME(LOSS) INCOME(LOSS) DEFICIT TOTAL
___________ ______ __________ _____________ _____________ ___________ ___________
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 2004 - - - - - - -
Recapitalization as a result
of reverse acquisition 35,000,000 350 (350) -
Recapitalization to effect the
acquisition of Camden 61,056,375 611 (16,982) (16,372)
Cancellation of common stock
in connection with reverse
acquisition (35,000,000) (350) 350 -
Issuance of common stock due
to option exercise 100,700 1 243,373 243,374
Issuance of common stock due
to private placement 622,690 6 2,023,794 2,023,800
Stock-based compensation - - 3,534,507 3,534,507
Imputed interest on interest
free advances from related
parties - - 70,833 70,833
Components of comprehensive
income(loss) - Foreign
currency translation - - - 53 53 - 53
Net Loss for year - - - (5,651,870) - (5,651,871) (5,651,870)
=========== ====== ========== =========== ======= =========== ===========
Balance, June 30, 2005 61,779,765 618 5,855,525 (5,651,817) 53 (5,651,871) 204,325
=========== ====== ========== =========== ======= =========== ===========
Balance, July 1, 2005 61,779,765 618 5,855,525 (5,651,817) 53 (5,651,871) 204,325
Stock-based compensation - - 3,526,086 - - - 3,526,086
Imputed interest on interest
free advances from related
parties - - 267,296 - - - 267,296
Components of comprehensive
income(loss) - Foreign
currency translation - - - 19,425 19,425 - 19,425
Net Loss for year - - - (10,837,629) - (10,837,629) (10,837,629)
___________ ______ __________ ___________ _______ ___________ ___________
Balance, June 30, 2006 61,779,765 618 9,684,907 (16,470,021) 19,478 (16,489,500) (6,784,497)
=========== ====== ============== =========== ======= =========== ===========
Balance, July 1, 2006 61,779,765 618 9,684,907 (16,470,021) 19,478 (16,489,500) (6,784,497)
Additional Paid-in Capital 738,619 738,619
Cancellation of outstanding
shares (10,000,000) (100) (100)
Issuance of shares to Highgate 2,859,125 28 28
Foreign Currency translation (10,729) (10,729) (10,729)
Net Loss for year (608,030) (608,030) (608,030)
___________ ______ __________ ___________ _______ ___________ ___________
Balance, June 30, 2007 54,638,890 546 10,423,526 (17,088,780) 8,749 (17,097,530) (6,664,709)
=========== ====== ========== =========== ======= =========== ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
</TABLE>
F-5
<TABLE>
<CAPTION>
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2007
(STATED IN US DOLLARS)
2007 2006 2005
____________ ____________ ____________
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss/(Loss) $ (608,030) $(10,837,629) $ (5,651,870)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 24,834 614,054 116,061
Stock-based compensation 265,080 3,562,086 3,534,507
Net gain on deconsolidation of a subsidiary (2,055,947) (1,769,743) -
Minority interest in net loss of consolidated subsidiaries - (3785756) (636,491)
Amortization of deferred financing costs and fair value
conversion feature - 1,357,774 -
Imputed interest expense 1,032,448 267,296 70,833
Allowance for doubtful accounts 1,500,000 - -
Loss on Vancouver office discontinuation 184,159 2,540,008 -
Provision on slow moving inventories - 4,765,219 -
Changes in assets and liabilities:
Decrease/(Increase) Accounts receivable (185,246) - (4,863,919)
Decrease/(Increase) Note Receivable (1,625,000) - -
Decrease/(Increase) Other receivables and prepayments (140,270) (53,312) 556,439
Decrease/(Increase) Accounts Payable and accrued liabilities 125,703 32,254 3,876,497
Decrease/(Increase) in Deferred Revenue Inventory 73,427 - -
Inventory - - 412,080
____________ ____________ ____________
Cash Sourced/(Used) in Operating Activities (2,908,974) (3,307,749) (2,585,863)
____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with acquisition of Xinhua C&D - - 353,249
Advances to trustee - (1,500,000) -
Purchase of plant and equipment - (147,715) (153,153)
____________ ____________ ____________
Cash Used/(Sourced) in Investing Activities - 1,647,715 200,096
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from minority interests of Xinhua C&D - - 169,174
Common Stocks issued for cash - - 2,267,174
Proceeds from convertible debenture - 2,989,460 -
Repayment of Loan Payable (179,096) - -
Loans from shareholders 2,902,247 832,860 2,833,318
____________ ____________ ____________
Cash Sourced/(Used) in Financing Activities 2,723,151 3,822,320 3,722,036
____________ ____________ ____________
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR THE YEAR (185,823) (1,133,144) 1,336,269
EFFECT OF CURRENCY TRANSLATION (35,636) 19,425 -
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 224,192 1,336,269 -
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