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EX-32 - EX-32.2 - XINHUA CHINA LTDex32-2.txt
EX-32 - EX-32.1 - XINHUA CHINA LTDex32-1.txt
EX-31 - EX-31.2 - XINHUA CHINA LTDex31-2.txt
EX-31 - EX-31.1 - XINHUA CHINA LTDex31-1.txt




                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q


Mark One

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                For the six month period ended September 30, 2009

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934


                For the transition period from ______ to _______


                        COMMISSION FILE NUMBER: 000-33195


                                XINHUA CHINA LTD.
                 ______________________________________________
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


            NEVADA                                               88-0437644
_______________________________                              ___________________
(STATE OR OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)


                    B-26F, ORIENTAL KENZO DONGCHENG DISTRICT
                                 BEIJING 100027
                           PEOPLE'S REPUBLIC OF CHINA
                    ________________________________________
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)


                       86-10-64168816 OR 86-10-64168916
                       ________________________________
                           (ISSUER'S TELEPHONE NUMBER)


             SUITE 304, BUILDING #1, YUANJIA INTERNATIONAL APARTMENT
                    NO. 40 DONGZHONG ST., DONGCHENG DISTRICT
                                 BEIJING 100027
                           PEOPLE'S REPUBLIC OF CHINA
             _______________________________________________________
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT)


SECURITIES REGISTERED PURSUANT TO SECTION         NAME OF EACH EXCHANGE ON WHICH
            12(B) OF THE ACT:                              REGISTERED:
                   NONE


          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                        COMMON STOCK, $0.00001 PAR VALUE
                        ________________________________
                                (TITLE OF CLASS)



Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No[ ] Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS. N/A Indicate by checkmark whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding Outstanding as of November 13, 2009 of each of the issuer's classes of common stock, as of the most practicable date: Class Common Stock $0.00001 par value 499,911,400 2
XINHUA CHINA LTD. FORM 10-Q PART I - FINANCIAL INFORMATION 5 Item 1. Financial Statements 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Discloses About Market Risk 33 Item 4. Controls and Procedures 33 Item 4T. Controls and Procedures 35 PART II - OTHER INFORMATION 35 Item 1. Legal Proceedings 35 Item 1A. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 3. Defaults Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 36 Item 6. Exhibits 37 3
FORWARD LOOKING STATEMENTS Statements made in this Form 10-Q that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. AVAILABLE INFORMATION Xinhua China Ltd. files annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the "Commission"). You may read and copy documents referred to in this Quarterly Report on Form 10-Q that have been filed with the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission's website at http://www.sec.gov. 4
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XINHUA CHINA LTD. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND JUNE 30, 2009 (Stated in US Dollars) 5
XINHUA CHINA LTD. CONTENTS Pages Report of Registered Independent Public Accounting Firm 7 Consolidated Balance Sheet 8 - 9 Consolidated Statement of Income 10 Consolidated Statement of Stockholders' Equity 11 Consolidated Statement of Cash Flows 12 Notes to the Financial Statements 13 - 25 6
Board of Directors and Stockholders Xinhua China Ltd. Report of Registered Independent Public Accounting Firm We have reviewed the accompanying interim consolidated Balance Sheets of Xinhua China Ltd. ("the Company") as of September 30, 2009 and June 30, 2009, and the related statements of income, stockholders' equity, and cash flows for the three-months ended September 30, 2009 and 2008. These interim consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles. South San Francisco, California Samuel H. Wong & Co., LLP October 29, 2009 Certified Public Accountants 7
Xinhua China Ltd. Consolidated Balance Sheets As of September 30, 2009 and June 30, 2009 (Stated in US Dollars) (Audited) Notes September 30, 2009 June 30, 2009 __________________ _____________ ASSETS Current Assets Cash and Cash Equivalents 3D $ 12,086 $ 45,769 Accounts Receivable, net 3E 74,176 74,228 Other Receivables and Prepayments 4 224,630 224,535 ___________ ____________ Total Current Assets 310,892 344,532 Long-term Assets Property, Plant & Equipment, net 3F,5 51,350 55,156 ___________ ____________ Total Long-term Assets 51,350 55,156 ___________ ____________ Total Assets $ 362,242 $ 399,688 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Liabilities Current Liabilities Accounts Payable and Accrued Liabilities 6 $ 725,294 $ 754,025 Current portion of Loans Payable 7 1,479,475 1,490,911 ___________ ____________ Total Current Liabilities 2,204,769 2,244,936 Long-term Liabilities Loans Payable 7 1,058,261 1,058,261 Loans from Shareholders 8 6,078,455 5,945,061 ___________ ____________ Total Long-term Liabilities 7,136,716 7,003,322 ___________ ____________ Total Liabilities $ 9,341,485 $ 9,248,258 See Accompanying Notes to the Financial Statements and Accountant's Report 8
Xinhua China Ltd. Consolidated Balance Sheets As of September 30, 2009 and June 30, 2009 (Stated in US Dollars) (Audited) Notes September 30, 2009 June 30, 2009 __________________ _____________ Stockholders' Equity Common Stock $0.00001 Par Value 500,000,000 Shares Authorized; 499,911,400 and 490,311,400 shares issued and outstanding at September 30, 2009 and June 30, 2009, accordingly. 10 4,999 4,903 Additional Paid-In Capital 11,503,215 11,399,960 Accumulated Other Comprehensive Income 38,656 38,756 Accumulated Deficit (20,526,113) (20,292,189) ___________ ___________ Total Stockholders' (Deficit)/Equity (8,979,243) (8,848,570) ___________ ___________ Total Liabilities & Stockholders' Equity $ 362,242 $ 399,688 =========== =========== See Accompanying Notes to the Financial Statements and Accountant's Report 9
Xinhua China Ltd. Consolidated Statement of Income For the three months ended September 30, 2009 and 2008 (Stated in US Dollars) Note September 30, 2009 September 30, 2008 __________________ __________________ Revenue Revenue, net 3H $ - $ - Cost of Sales, net 3I - - Gross Profit - - Operating Expenses Selling, General, and Administrative Expenses 129,019 226,867 ____________ ____________ Total Operating Expense 129,019 226,867 ____________ ____________ Operating Income/(Loss) (129,019) (226,867) ____________ ____________ Other Income (Expenses) Other Income - 179,621 Interest Income 8 26 Gain on disposal of Beijing BoHeng - 73,427 Interest Expense 104,913 150,360 ____________ ____________ Loss before minority interest and income tax (233,924) (161,534) Loss before Income Tax (233,924) (124,153) Income Tax 3M,14 - - ____________ ____________ Net Loss $ (233,924) $ (124,153) ============ ============ Basic & Diluted Earnings Per Share 3N,17 $ (0.0004) $ ( 0.0028) ____________ ____________ Weighted Average Shares Outstanding 496,259,226 111,928,254 ____________ ____________ See Accompanying Notes to the Financial Statements and Accountant's Report 10
Xinhua China Ltd. Consolidated Statements of Stockholders' Equity For the three months ended September 30, 2009 (Stated in US Dollars) ADDITIONAL OTHER NUMBER OF COMMON PAID IN COMPREHENSIVE COMPREHENSIVE ACCUMULATED SHARES STOCK CAPITAL INCOME(LOSS) INCOME(LOSS) DEFICIT TOTAL ______________________________________________________________________________________________ Balance, July 1, 2008 98,655,733 987 10,903,997 (17,750,304) 38,149 (17,788,454) (6,845,321) Additional Paid-in Capital - - 109,444 - - - 109,444 Imputed interest on interest free advances from related party - - 386,519 - - - 386,519 Issuance of shares to Highgate 266,655,667 2,666 - - - - 2,666 Issuance of shares to Xianping Wang 125,000,000 1,250 - - - - 1,250 Foreign Currency translation - - - 607 607 - 607 Net Loss for year - - - (2,503,735) - (2,503,735) (2,503,735) ______________________________________________________________________________________________ Balance, June 30, 2009 490,311,400 4,903 11,399,960 (20,253,432) 38,756 (20,292,189) (8,848,570) ============================================================================================= Balance, July 1, 2009 490,311,400 4,903 11,399,960 (20,253,432) 38,756 (20,292,189) (8,848,570) Additional Paid-in Capital - - 11,339 - - - 11,399 Imputed interest on interest free advances from related party - - 91,916 - - - 91.916 Issuance of shares to Highgate 9,600,000 96 - - - - 96 Foreign Currency translation - - - (100) (100) - (100) Net Loss for quarter - - - (233,924) - (233,924) (233,924) ______________________________________________________________________________________________ Balance, September 30, 2009 499,911,400 4,999 11,503,215 (20,487,456) 38,656 (20,526,113) (8,979,243) ============================================================================================= September 30, 2009 June 30, 2009 __________________ _____________ COMPREHENSIVE INCOME(LOSS) Net Loss $ (233,924) $ (2,503,735) OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment (100) 607 __________ ____________ Total Comprehensive Income $ (234,024) $ (2,503,128) ========== ============ See Accompanying Notes to the Financial Statements and Accountant's Report 11
Xinhua China Ltd. Consolidated Statements of Cash Flows For the three months ended September 30, 2009 and 2008 (Stated in US Dollars) September 30, 2009 September 30, 2008 __________________ __________________ Cash Flow from Operating Activities: Net (Loss) $ (233,924) $ (124,153) Adjustments to reconcile net earnings(loss) to net cash used in operating activities: Depreciation 3,856 5,632 Imputed interest expense 104,708 111,725 Amortization of deferred imputed interest from note receivable - 13,768 Changes in assets and liabilities: Decrease/(Increase) Accounts receivable - 337,652 Decrease/(Increase) Other receivables and prepayments - (812) Decrease/(Increase) Accounts Payable and accrued liabilities (41,523) (506,684) Decrease/(Increase) in Deferred Revenue - (18,355) __________ __________ Cash Sourced/(Used) in Operating Activities (166,883) (181,227) __________ __________ Cash Flows from Investing Activities: Proceeds of note receivable - Boheng - 1,625,000 Purchase of plant and equipment - (396) Investment in subsidiary - Boheng - (1,625,000) __________ __________ Cash Used/(Sourced) in Investing Activities - (396) __________ __________ Cash Flows from Financing Activities: Stock Issue to Highgate on debt conversion 96 328 Repayment of Loan to Highgate (11,436) (44,000) Loans from shareholders 133,236 200,848 Additional Paid-in Capital 11,340 - __________ __________ Cash Sourced/(Used) in Financing Activities 133,236 157,176 __________ __________ Net Increase/(Decrease) in Cash & Cash Equivalents for the Year (33,647) (24,447) Effect of Currency Translation (36) 496 Cash & Cash Equivalents at Beginning of Year 45,769 38,733 __________ __________ Cash & Cash Equivalents at End of Year $ 12,086 $ 14,782 ========== ========== Cash paid for interest expenses $ - $ - ========== ========== See Accompanying Notes to the Financial Statements and Accountant's Report 12
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) 1. ORGANIZATION AND BUSINESS BACKGROUND Xinhua China Ltd. (the "Company", formerly Camden Mines Limited) was incorporated in the State of Nevada, United States of America, on September 14, 1999. Until September 2004, the Company was a non-operating shell company and considered as a development stage enterprise since its inception. Effective from October 12, 2004, the Company changed to its current name. The Company established an office in Vancouver, Canada; however, this office was closed down in December 2006. The Company established its principal executive office at B26-F, Oriental Kenzo, No. 48 Dongzhimenwai Street, Dongcheng District, Beijing 100027 People's Republic of China. As of May 31, 2006, the Company reduced its equity interest in Xinhua C&D from 56.14% to 7.98%. Subsequent to the deconsolidation of Xinhua C&D, the Company commenced the internet book distribution business through Beijing Joannes Information Technology Co., Ltd. ("Joannes"). Details of the Company's subsidiaries as of September 30, 2009 are described below: Place of incorporation Particulars of Effective and kind of Principal activities issued/registered interest Name legal entity and place of operation share capital held ________________________________________________________________________________________________________________ Sales and Beijing Joannes Information PRC, a company with distribution of Registered capital Technology Co., Ltd. limited liability books, PRC US$1,250,000 100% ________________________________________________________________________________________________________________ British Virgin Islands, a 10,000,000 ordinary Pac-Poly Investment Ltd. company with limited Investment holding, shares of US$1 par liability PRC value 100% ________________________________________________________________________________________________________________ 2. GOING CONCERN UNCERTAINTIES These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. As of September 30, 2009, the Company had no working capital but current liabilities exceeding current assets by $1,893,877 and an accumulated deficit of $20,526,113 because the Company continued to incur losses over the past several years. Management has taken certain action and continues to implement changes designed to improve the Company's financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in headcount and corporate overhead expenses; and (b) development of e-commerce business. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through September 30, 2009. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company's ability to continue as a going concern. 13
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A.) Basis of Presentation These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). (B.) Use of Estimates In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these Estimates. (C.) Basis of Consolidation The interest of the Company in the subsidiaries was acquired by means of exchange of shares in the Company pursuant to a share exchange agreement on September 14, 2004. The transaction is considered a transfer between entities under common control, within the meaning of US GAAP. Accordingly, the assets and liabilities transferred have been accounted for at historical cost or at their "fair value" at the date of their original acquisition and have been included in the foregoing financial statements as of the beginning of the periods presented. The consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meeting of directors. All significant inter-company balances and transactions within the Company have been eliminated on consolidation. (D.) Cash and Cash Equivalents Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments. (E.) Accounts Receivable, Net Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business, but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements' assessment of known requirements, aging of receivables, payment history, the customer's current credit worthiness, and the economic environment. 14
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) (F.) Property, Plant, and Equipment, Net Property, plant, and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational. Asset Classification Depreciable Life ____________________ ________________ Land Use right 50 years Buildings 50 years Motor Vehicles 8 - 10 years Equipment and Machinery 5 - 8 years Leasehold Improvement 2 years Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant, and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statement of operations. (G.) Impairment of Long-life Assets In accordance with SFAS No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of', a long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. The Company reviews long-lived assets, if any, to determine whether the carrying values are not impaired. (H.) Revenue Recognition Sales revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its customers for a specified amount of products at a specified price and considers delivery to have occurred when the customer takes possession of the products. Net sales incorporate offsets for discounts and sales returns. Revenue is recognized upon delivery, risk and ownership of the title is transferred and a reserve for sales returns is recorded even though invoicing may not be completed. The Company has demonstrated the ability to make reasonable and reliable estimates of products returns in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists". 15
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) Shipping and handling fees billed to customers are included in sales. Costs related to shipping and handling are part of selling, general, and administrative expenses in the consolidated statements of operations. EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs" allows for the presentation of shipping and handling expenses in line items other than cost of sales. For the period ended September 30, 2009, there were no shipping and handling costs included in selling, general and administrative expenses in the accompanying consolidated statements of operations. (I.) Cost of Sales Cost of sales includes depreciation of property, plant, and equipment and purchase costs to publishers. (J.) Value-Added Tax The Company is subject to value added tax ("VAT") imposed by the PRC on sales. The output VAT is charged to customers who purchase books from the Company and the input VAT is paid when the Company purchases books from publishers. The VAT rate is 13%. The input VAT can be offset against the output VAT. (K.) Advertising Expenses The Company expenses advertising costs as incurred in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 93-7, "Reporting for Advertising Costs". For the period ended September 30, 2009, advertising expenses amount to zero. (L.) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income, its components, and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statement of changes in owners' equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit. (M.) Income Taxes The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. 16
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) Income tax liabilities computed according to the United States and People's Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain. In respect of the Company's subsidiaries domiciled and operated in China: o Beijing Joannes Information Technology Co., Ltd. is located in the PRC and Pac-Poly Investment Ltd. is located in the British Virgin Islands; all of these entities are subject to the relevant tax laws and regulations of the PRC and British Virgin Islands in which the related entity domiciled. The maximum tax rates of the subsidiaries pursuant to the countries in which they domicile are: - Country of Income Tax Subsidiary Domicile Rate __________ __________ __________ Beijing Joannes Information Technology Co., Ltd. PRC 25.00% Pac-Poly Investment Ltd. British Virgin Islands 0.00% o Effective January 1, 2008, PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized. o The Company is subject to United States Tax according to Internal Revenue Code Sections 951 and 957. Corporate income tax is imposed on progressive rates in the range of: - TAXABLE INCOME Rate Over But Not Over Of Amount Over ____ ____ ____________ ______________ 15% 0 50,000 0 25% 50,000 75,000 50,000 34% 75,000 100,000 75,000 39% 100,000 335,000 100,000 34% 335,000 10,000,000 335,000 35% 10,000,000 15,000,000 10,000,000 38% 15,000,000 18,333,333 15,000,000 35% 18,333,333 - - Based on the consolidated net income for the period ended September 30, 2009, the Company shall not be subject to income tax. 17
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) (N.) Loss Per Share The Company calculates loss per share in accordance with SFAS No. 128, "Earnings per Share". Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive. The effect of outstanding stock options, stock purchase warrants and convertible debenture, which could result in the issuance of 499,911,400 and 490,311,400 of common stock at September 30, 2009 and June 30, 2009, respectively, are anti-dilutive. As a result, diluted loss per share data does not include the assumed exercise of outstanding stock options, stock purchase warrants, or conversion of convertible debenture and has been presented jointly with basic loss per share. (O.) Foreign Currencies Translation The functional and reporting currency of the Company is the United States dollars ("U.S. dollars"). The accompanying consolidated financial statements have been expressed in U.S. dollars. The functional currency of the Company's foreign subsidiaries is the Renminbi Yuan ("RMB"). The balance sheet is translated into United States dollars based on the rates of exchange ruling at the balance sheet date. The statement of operations is translated using a weighted average rate for the year. Translation adjustments are reflected as cumulative translation adjustments in stockholders' equity. September 30, June 30, September 30, Exchange Rates 2009 2009 2008 ______________ _____________ ________ _____________ Period/year end RMB: US$ exchange rate 6.8290 6.8319 6.8551 Average period/year RMB: US$ exchange rate 6.8310 6.8355 6.8529 (P.) Fair Value of Financial Instruments The carrying value of the Company's financial instruments, which include cash and cash equivalents, accounts receivables, other payable and accrued liabilities, approximate their fair values due to the short-term maturity of these instruments. 18
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) (Q.) Related Parties For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals or other entities. (R.) Convertible Debenture Issued with Stock Purchase Warrants The Company accounts for the issuance of and modifications to the convertible debt issued with stock purchase warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants , EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments and SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. Due to the indeterminate number of shares, which might be issued under the embedded convertible host debt conversion feature of these debentures, the Company is required to record a liability relating to both the detachable warrants and embedded convertible feature of the notes payable (included in the liabilities as a "derivative liability"). The accompanying consolidated financial statements comply with current requirements relating to warrants and embedded derivatives as described in SFAS 133 as follows: |X| The Company treats the full fair market value of the derivative and warrant liability on the convertible secured debentures as a discount on the debentures (limited to their face value). The excess, if any, is recorded as an increase in the derivative liability and warrant liability with a corresponding increase in loss on adjustment of the derivative and warrant liability to fair value. |X| Subsequent to the initial recording, the change in the fair value of the detachable warrants, determined under the Black-Scholes option pricing formula and the change in the fair value of the embedded derivative (utilizing the Black-Scholes option pricing formula) in the conversion feature of the convertible debentures are recorded as adjustments to the liabilities as of September 30, 2006. |X| The expense relating to the change in the fair value of the Company's stock reflected in the change in the fair value of the warrants and derivatives is included in interest expense in the accompanying consolidated statements of operations. 19
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) (S.) Recently Issued Accounting Standard In June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets and FASB Statement No. 167, a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities. Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. On July 1, 2009, FASB issued FASB Statement No. 168, The "FASB Accounting Standards Codification" and the Hierarchy of Generally Accepted Accounting Principles. The ASC has become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities and provides that all such guidance carries an equal level of authority. The ASC is not intended to change or alter existing GAAP. The ASC is effective for interim and annual periods ending after September 15, 2009. The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition. 4. OTHER RECEIVABLES AND PREPAYMENT September 30, 2009 June 30, 2009 __________________ _____________ Prepayments $ 224,630 $ 224,535 ========= ========= The carrying amounts of prepayments approximate their fair value. 5. PROPERTY, PLANT, AND EQUIPMENT, NET Property, plant, and equipment consist of the following: September 30, 2009 June 30, 2009 __________________ _____________ Equipment and machinery $ 53,441 $ 53,418 Motor vehicles 47,027 47,007 Leasehold Improvement 16,313 16,306 _________ _________ 116,781 116,731 Less: Accumulated Depreciation (65,431) (61,576) _________ _________ $ 51,350 $ 55,156 ========= ========= Depreciation expense for September 30, 2009 and June 30, 2009 were $3,856 and $26,585, respectively. 20
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities as of September 30, 2009 and June 30, 2009 consists of the following: September 30, 2009 June 30, 2009 __________________ _____________ Accounts Payable $ 725,294 $ 754,025 ========= ========= 7. LOANS PAYABLE/CONVERTIBLE DEBENTURE On November 23, 2005, the Company entered into a debt financing agreement (the "Agreement") with an institutional investor, and on March 23, 2006, the Agreement was modified to include an additional institutional investor, who is an affiliate of the original institutional investor (both institutional investors collectively referred to as "the Investors"). The Investors committed to purchase up to $4,000,000 of a secured convertible debenture ("the debenture") that shall be convertible into shares of the Company's common stock. After two closings on December 13, 2005 and March 23, 2006, the Company received gross proceeds of $3,250,000 (net proceeds $2,989,460) for the secured convertible debenture. The Company and debenture-holders entered into a Forbearance and Settlement Agreement on December 29, 2006 because of default in debt service, whereby the Company agreed to make cash payment and to grant rights to the creditors to cashless purchase the Company's common stock by exercising the warrant at 200,000 shares in every three month period beginning on December 29, 2006 according to the following payment plan: Conversion of Payment Date Cash Payment Debenture ____________ ____________ _____________ March 10, 2007 $ 250,000 250,000 September 30, 2007 375,000 375,000 October 31, 2007 375,000 375,000 January 31, 2008 250,000 250,000 July 31, 2008 625,000 625,000 ___________ _________ $ 1,875,000 1,875,000 =========== ========= 21
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) The Company paid $250,000 for the payment due March 10, 2007 and the debenture holders exercised 100,000 shares and 125,000 shares on March 1, 2007 and April 18, 2007, respectively. During the period ended September 30, 2009 and year ended June 30, 2009, the debenture holders converted 9,600,000 and 266,655,667 shares against outstanding loan at a total conversion price of $11,436 and $144,532, respectively. Loans Payable outstanding as of September 30, 2009 amount to $2,537,736 of which $1,479,475 and $1,058,261 were attributed to current portion and long-term, respectively. Loans Payable outstanding as of June 30, 2009 amount to $2,549,172 of which $1,490,911 and $1,058,261 were attributed to current portion and long-term, respectively. 8. LOANS FROM SHAREHOLDERS The total outstanding amount of $6,078,455 represents cash advanced from shareholders of the Company. These shareholders' loans are unsecured and not repayable within the next twelve months. For the period ended September 30, 2009, there was $91,916 imputed interest, at 6.00% annum, recorded. For the year ended June 30, 2009, there was $342,847 imputed interest, at 6.00% per annum, recorded. 9. COMMON STOCK AND WARRANTS A. Common Stock During 2005, the authorized capital stock of the Company increased from $1,000 consisting of 100,000,000 shares of common stock of par value $0.00001 each to $5,000 consisting of 500,000,000 shares of common stock of par value $0.00001 each. B. Warrants (1) The Company completed a private placement in 2005 with certain individuals for 622,690 units at $3.25 per unit for total cash proceeds of $2,023,800. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant. The warrant will expire on the earlier of: (i) two years from the date of issuance; and (ii) fifteen business days from date that the Company provides notice in writing to the subscriber that the Company's common shares have been trading or traded at a price of $7 or more for a period of ten days. 22
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) The warrant shares shall have an exercise price of $4.50 per warrant share for the first twelve months, and if still available after twelve months, the warrant shares shall have an exercise price of $4.60 per warrant share starting on the first day of the second twelve month period and increasing by $0.10 on the first day of each subsequent month thereafter until expiration of the warrants. (2) Share purchase warrant issued from convertible debenture On December 13, 2005, the Company issued to the holder of the convertible debenture 1,035,000 warrants. One share purchase warrant is exercisable for one common share at $0.00001 per share, until expiration on November 22, 2010. As of September 30, 2009, 374,911,400 shares of common stock have been converted by the convertible debenture holders at an aggregate amount of $533,168. (3) Share warrant issued for service On May 1, 2006, the Company issued 100,000 warrants at $1.47 per share to Mr. Peter Shandro, the VP Business Strategy of the Company, in association with the planning and execution of the on-line ecommerce initiative of the Company. Compensation expense of $94,775 was recorded with the issuance of these warrants. 10. CHINA CONTRIBUTION PLAN Full-time employees of the Company are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees' salaries. The total contributions made for such employee benefits were $21,887 and $53,457, for the period ended September 30, 2009 and the year ended June 30, 2009, respectively. 11. STATUTORY RESERVES The Company is required to make appropriations to reserves funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People's Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the Company's registered capital. Appropriation to the statutory public welfare fund is 10% of the after-tax net income determined in accordance with the PRC GAAP. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory public welfare fund is established for providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. The Company made no appropriations to the statutory reserve, as it did not have a pre-tax profit. 23
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) 12. GAIN ON DEBT RESTRUCTURING On December 29, 2006, the Company completed a debt restructuring with its Investors, namely Cornell Capital Partners, L.P. ("Cornell") and Highgate House Funds, Ltd. ("Highgate") under the Forbearance and Settlement Agreement (the "Forbearance and Settlement Agreement"). Pursuant to the Forbearance and Settlement Agreement, the Company agreed to make certain payments to the Investors, with respect to the Securities Purchase Agreement (the "Securities Purchase Agreement") entered into between the Company and the Investors on November 23, 2005, as amended on March 23, 2006, on the convertible debentures in the amounts of $1,250,000 (to Highgate on November 23, 2005) and $2,000,000 (to Cornell on March 23, 2006) (the "Convertible Debentures") in accordance with the terms and conditions set forth in the Forbearance and Settlement Agreement. In accordance with the Forbearance and Settlement Agreement, the Company agrees to use the proceeds from the disposal of Boheng to repay the principal and interest due to the Investors under the Convertible Debentures in exchange for the Investors agreeing to: (i) Waive on a one-time basis only any accrued liquidated damages owing to the Investors; (ii) Not apply the redemption premium on the scheduled repayments; (iii) Converting the Convertible Debentures in an amount equal to at least the amount of a scheduled repayment subject to certain conditions; (iv) No additional liquidated damages accruing during the term of the Forbearance and Settlement Agreement; (v) Permitting the Company to withdraw the Registration Statement filed on March 28, 2006 with the SEC in connection with the Convertible Debentures; (vi) During the term of the Forbearance and Settlement Agreement, waiving the requirement for the Company to receive written consent of each Buyer for any organizational change (as defined in the Securities Purchase Agreement) to be directly or indirectly consummated by the Company, and that the company will not effectuate any stock splits for at least nine months without the consent of the Investors; and (vii) Terminate the provisions for security shares as set forth in Section 9 of the Securities Purchase Agreement and in Section 2 of the Transfer Agent Instructions upon receipt by the Investors of the first scheduled repayment amount. As a result of the debt restructuring arrangement, the Company's liabilities on warrants, conversions, discounts were discharged resulting to a net gain of $1,500,132 attributable as follows: o Liabilities on Conversion discharged $ 2,334,198 o Liabilities on Warrants discharged 891,537 o Loans discharged 225,000 o Unamortized discounts (1,950,603) _____________ $ 1,500,132 24
Xinhua China Ltd. Notes to Consolidated Financial Statements For the three months ended September 30, 2009 (Stated in US Dollars) 13. CONCENTRATION OF RISK (A). Major Customers and Vendors 100% of the Company's revenues were derived from customers located in the PRC, and there are no customers and vendors who account for 10% or more of revenues and purchases. The Company's assets are all located in the PRC. (B). Credit Risk There are no concentrations of credit risk because the Company, while in operation, entered into large number of cash sale transactions without deploying financial instruments, which may potentially drive to significant concentrations. 14. COMMITMENT AND CONTINGENCIES The Company leases an office premise under a non-cancelable operating lease for a term of three years from January 1, 2009 to December 31, 2011. The cost incurred under this operating lease is recorded as rental expense and totaled $ 17,567 and $65,944 for the period ended September 30, 2009 and year ended June 30, 2009, respectively. Future minimum rental payments due according to the operating lease until termination at December 31, 2011 are: Within one year $ 52,713 Within year two until termination 105,418 __________ $ 158,131 ========== 15. NET LOSS PER SHARE Basic net loss per share is computed using the weighted average number of the ordinary shares outstanding during the year. Diluted net loss per share is computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the year. The following table sets forth the computation of basic and diluted net loss per share for the period indicated: Basic and diluted net loss per share calculation: September 30, 2009 September 30, 2008 __________________ __________________ (a). Numerator: Net loss used in computing basic net loss per share 233,924 124,153 (b). Denominator: Weighted-average ordinary shares outstanding 496,259,226 111,928,254 Basic and diluted net loss per share $0.0004 $0.0010 For the period ended September 30, 2009 and 2008 in which the Company had a net loss, inclusion of warrants outstanding would have been anti-dilutive and therefore not included in the computation of diluted losses per share. 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DEVELOPMENT Xinhua China Ltd. was incorporated September 14, 1999 under the laws of the State of Nevada as Camden Mines Limited ("Camden"). On October 12, 2004, Camden changed its name from "Camden Mines Limited" to its current corporate name "Xinhua China Ltd." We have certain digital media distribution and related rights in "China" where we mostly operate and seek to pursue our business. We are in the development stage seeking to grow our company. CURRENT SUBSIDIARIES PAC-POLY INVESTMENTS LIMITED On September 14, 2004, we signed two separate share purchase agreements (collectively, the "Share Purchase Agreements"), whereby we issued 35,000,000 shares of our restricted common stock in exchange for a 100% interest in Pac-Poly Investments Limited, a company incorporated under the laws of the International Companies Business Act Cap 291 of British Virgin Islands ("Pac-Poly"), and a 95% interest in Beijing Boheng Investments Limited, a company incorporated under the laws of China ("Beijing Boheng"), respectively. The shareholders of Pac-Poly and Beijing Boheng received 16,387,000 and 18,613,000 shares of our restricted common stock, respectively. In accordance with the terms and provisions of the Share Purchase Agreement, one of our shareholders returned to us 35,000,000 shares of common stock held of record by such shareholder and the shares were cancelled and returned to treasury. Immediately prior to consummation of the respective Share Purchase Agreements, Pac-Poly and Beijing Boheng were under common control. Subsequently, Beijing Boheng spun off all of its business and net assets to its president and became a non-operating shell company. Pac-Poly had no significant operations since its inception. As of the date of this Quarterly Report, we hold of record 10,000,000 shares of common stock at $1.00 par value, which constitutes 100% of the total issued and outstanding shares of Pac-Poly. Therefore, Pac-Poly is our wholly-owned subsidiary. Pac-Poly is an investment holding company. BEIJING JOANNES INFORMATION TECHNOLOGY CO. LT. On May 9, 2006, we formed Beijing Joannes Information Technology Co. Lt. ("Beijing Joannes"), as our Chinese wholly owned subsidiary, to launch a digital media content initiative. We hold of record 100% of the total issued and outstanding shares of Beijing Joannes. Beijing Joannes was formed for the purpose of launching a digital media content initiative with the web site branded WWW.GEEPIP.COM. The business focus is building online communities with connectivity to an ecommerce engine, which allows for the online purchase of e-books, e-audio, and computer games. Hard copies of books can also be purchase through the portal. A unique customer loyalty program and digital redemption or trade-in strategy will be a market differentiator. 26
As of the date of this Quarterly Report, we hold of record 1,250,000 shares of common stock at $1.00 par value, which constitutes 100% of the total issued and outstanding shares of Beijing Joannes. Therefore, Beijing Joannes is our wholly-owned subsidiary. RECENT BUSINESS OPERATIONS We are a company establishing ourselves as a leader in the digital media industry. We have refocused our strategic business operation plans to maximize our strategic position in the publishing industry. We believe that we will be able to establish ourselves as a leader in the digital media industry. In accordance with our refocused strategic plan, we intend to enter into certain contractual relationships. We are subject to many risks and there is no assurance of success in our plans. RESULTS OF OPERATION The summarized consolidated financial data set forth in the tables below and discussed in this section should be read in conjunction with our consolidated financial statements and related notes for the three month period ended September 30, 2009 and 2008, which financial statements are included elsewhere in this Quarterly Report. FOR THREE MONTH FOR THREE MONTH PERIOD ENDED PERIOD ENDED SEPTEMBER 30, 2009 SEPTEMBER 30, 2008 (UNAUDITED) (UNAUDITED) ________________________________________________________________________________ REVENUE Net revenue -0- -0- Cost of Sales -0- -0- GROSS PROFIT -0- -0- OPERATING EXPENSES Selling, general and administrative expenses $ 129,019 $ 226,867 OPERATING INCOME (LOSS) (129,019) (226,867) OTHER INCOME (EXPENSES) Other income -0- 179,621 Interest income 8 26 Gain on disposal of Beijing BoHeng -0- 73,427 Interest expense 104,913 150,360 NET LOSS (233,924) (124,153) 27
RESULTS OF OPERATION FOR THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTH PERIOD ENDED SEPTEMBER 30, 2008. REVENUES AND GROSS MARGIN AND COST OF SALES We had net sales of $-0- for both three month periods ended September 30, 2009 and September 30, 2009. OPERATING EXPENSES Our total operating expenses were $129,019 for the three month period ended September 30, 2009 as compared to total operating expenses of $226,867 for the three month period ended September 30, 2008. The decrease in operating expenses during the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008 was due to a decrease in a variety of expenditures relating to our restructuring efforts and decreased scope and scale of business operations. During the three month period ended September 30, 2009, our selling, general and administrative expenses consisted of: (i) legal and professional fees of $16,783 (2008: $19,901); (ii) office expenses of $1,664 (2008: $1,854); (iii) salaries and benefits of $51,900 (2008: $24,992); (iv) management fees of $30,000 (2008: $150,000); (v) vehicle expense of $187 (2008: $2,097); and (vii) other expenses of $28,485 (2008: $28,023). INTEREST EXPENSE We incurred $104,913 in interest expense during the three month period ended September 30, 2009 as compared to $150,360 incurred as interest expense during the three month period ended September 30, 2008. Interest expense of $104,913 incurred during the three month period ended September 30, 2009 consisted of: (i) $-0- (2008: $13,768) in interest expense from the amortization of note receivable; (ii) $104,708 (2008: $111,725) imputed interest charged on loans from related parties. IMPAIRMENT LOSS ON BOHENG INVESTMENT/OTHER INCOME As a result of the termination by the purchaser of the acquisition of Beijing Boheng Investments and Management Co., Ltd., we repossessed Boheng as our 95% interest subsidiary on August 25, 2008 at a value of $1,625,000, which was equal to the unpaid purchase price due by the purchaser. After the repossession of Boheng, we conducted an evaluation of our carrying value and determined that an impairment loss in the amount of $1,625,000 was incurred although Boheng still owns a 7.98% equity interest in Xinhua C&D. This impairment loss was accordingly reflected in the income statement for fiscal year ended December 31, 2008. Thus, $73,427 was recorded during the three month period ended September 30, 2008. 28
During the three month period ended September 30, 2008, we also recorded $179,621 in other income. Therefore, our net loss during the three month period ended September 30, 2009 was ($233,924) compared to a net loss of ($124,153) incurred during the three month period ended September 30, 2008. The increase in net loss during the three month period ended September 30, 2009 was due primarily to the recording during the three month period ended September 30, 2008 of a gain of $73,427 on disposal of the Boheng Investment and of $179,621 in other income. LIQUIDITY AND CAPITAL RESOURCES THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009 Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. As at the three month period ended September 30, 2009, our current assets were $310,892 and our current liabilities were $2,204,769, resulting in a working capital deficit of $1,893,877. As at the three month period ended September 30, 2009, current assets were comprised of: (i) $12,086 in cash and cash equivalents; (ii) $74,176 in net accounts receivable; and (iii) $224,630 in other receivables and prepayments. As at the three month period ended September 30, 2009, our current liabilities were comprised of: (i) $725,294 in accounts payable and accrued liabilities; and (ii) $1,479,475 in current portion of loans payable. See " - Material Commitments." As at the three month period ended September 30, 2009, our total assets were $362,242 comprised of: (i) $310,892 in current assets; and (ii) $51,350 in net property, plant and equipment. The decrease in total assets during the three month period ended September 30, 2009 from fiscal year ended June 30, 2009 was primarily due to the decrease in cash. As at the three month period ended September 30, 2009, our total liabilities were $9,341,485 comprised of: (i) $2,204,769 in current liabilities; (ii) $1,058,261 in loans payable; and (iii) $6,078,455 in loans from shareholders. The slight increase in total liabilities during the three month period ended September 30, 2009 from fiscal year ended June 30, 2009 was primarily due to the increase in loans from shareholders. Stockholders' deficit increased from ($8,848,570) for June 30, 2009 to ($8,979,243) for September 30, 2009. OPERATING ACTIVITIES We have not generated positive cash flows from operating activities. For the three month period ended September 30, 2009, net cash flow used in operating activities was ($166,883) compared to net cash used operating activities of ($181,227) during the three month period ended September 30, 2008. Net cash flow from operating activities during the three month period ended September 30, 2009 consisted primarily of a net loss of ($233,924) adjusted by $3,856 in depreciation and $104,708 in imputed interest expense. Further changes in assets and liabilities consisted of a decrease of $41,523. 29
Net cash flow from operating activities during the three month period ended September 30, 2008 consisted primarily of a net loss of ($124,153) adjusted by $5,632 in depreciation, $111,725 in imputed interest expense and $13,768 in amortization of deferred imputed interest from note receivable. Further changes in assets and liabilities consisted of a decrease of $337,652 in accounts receivable and an increase of $812 in other receivables and prepayments, $506,684 in accounts payable and accrued liabilities and $18,355 in deferred revenue. INVESTING ACTIVITIES During the three month period ended September 30, 2009, net cash flow used in investing activities was $-0- compared to net cash flow sourced from investing activities of ($396) for the three month period ended September 30, 2008. Net cash flow used in investing activities during the three month period ended September 30, 2008 was primarily the result of $1,625,000 as proceeds from note receivable - Boheng Investment which was offset by $1,625,000 as the impairment loss of the Boheng Investment and a further $396 as purchase of plant and equipment. FINANCING ACTIVITIES During the three month period ended September 30, 2009, net cash flow provided by financing activities was $133,236 compared to net cash flow provided by financing activities of $137,176 for the three month period ended September 30, 2008. Net cash flow provided from financing activities during the three month period ended September 30, 2009 pertained primarily to $133,236 received as loan from shareholders, $96 in stock issued to Highgate on debt conversion and $11,340 as additional paid-in capital, which was offset by $11,436 in repayment of loan to Highgate. PLAN OF OPERATION The local and regional distribution business for books is competitive and fragmented in the People's Republic of China. Estimates range up to 500 as to the number of entrants in this field. It is our plan that economy of scale, relationships with Chinese publishers and also with sub-distributors and retailers and our nationwide scope which allows us the flexibility to distribute books in any region will assist us in maintaining and enhancing our competitive position. Our goal is to expand our business to include electronic sales, delivery and distribution of media contents. We also plan to partner with foreign publishers to provide foreign media contents in China. We seek to achieve our goal on a national scale to maximize opportunities in one of the largest and fastest growing economies in the world. To execute on our strategy to become a digital media company we formed our new subsidiary, Beijing Joannes. Beijing Joannes is intended to be our digital media company and it is expected to distribute all digital content for Xinhua C&D and others. Beijing Joannes has anticipated in operating its business to consumer (B2C) e-commerce portal as www.geezip.com, and expects to allow customers to purchase electronic and hard copies of books on-line. 30
We expect to also establish a co-publishing company which anticipates on co-publishing agreements with both domestic and foreign publishers, publishing both hard copy and digital works. Existing working capital, further advances and possible debt instruments, warrant exercises, further private placements, monetization of existing assets, and anticipated cash flow are expected to be adequate to fund our operations over the next two months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt securities and loans from our shareholders. In connection with our business plan, management will delay additional increases in operating expenses and capital expenditures. We intend to utilize our best efforts to settle current finance accounts payables and liabilities with further issuances of securities, debt and or advances, monetization of existing assets, and revenues from operations. We will need to raise additional capital and increase revenues to meet both short term and long-term operating requirements. We have undertaken certain actions and continue to implement changes designed to improve our financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including: (i) reductions in headcounts and corporate overhead expenses; and (ii) continue to develop e-commerce business through Beijing Joannes. We believe that these actions will enable us to improve future profitability and cash flow in our continuing operations through June 30, 2009. Furthermore, the restructure of debt pertaining to Cornell and Highgate has been advantageous to our over financial outlook. Ultimately, we have released the burden on cash flow for further contribution and intend to put our resources in co-publishing and e-commerce business opportunities. The report of the independent registered public accounting firm that accompanies our June 30, 2009 and June 30, 2008 consolidated financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. MATERIAL COMMITMENTS LOANS PAYABLE/CONVERTIBLE DEBENTURE During 2009/10, a material commitment for us relates to the Forbearance and Settlement Agreement with Cornell and Highgate. On December 29, 2006, we completed the debt restructuring with Cornell and Highgate under the Forbearance and Settlement Agreement. Pursuant to the Forbearance and Settlement Agreement, we agreed to make certain payments to Cornell and Highgate with respect to the Securities Purchase Agreement previously entered into by us with Cornell and Highgate dated November 23, 2005 and amended on March 23, 2006, and the two convertible debentures in the amounts of $1,250,000 to Highgate dated November 23, 2005 and $2,000,000 to Cornell dated March 23, 2006 (collectively, the "Convertible Debentures") in accordance with the terms and conditions set forth in the Forbearance and Settlement Agreement. 31
In further accordance with the Forbearance and Settlement Agreement, we agreed to use the proceeds from the disposal of Beijing Boheng to repay the principal and interest due to Cornell and Highgate under the Convertible Debentures in exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no application of the redemption premium on the scheduled repayments; (iii) conversion of the Convertible Debentures in an amount equal to at least the amount of a scheduled repayment subject to certain conditions; (iv) no additional liquidated damages accruing during the term of the Forbearance and Settlement Agreement; (v) permitting us to withdraw the registration statement filed on March 28, 2006 with the Securities and Exchange Commission in connection with the Convertible Debentures; (vi) during the term of the Forbearance and Settlement Agreement, waiving the requirement for us to receive written consent of Cornell and Highgate for any organizational change (as defined in the Securities Purchase Agreement) to be directly or indirectly consummated by us, and that we will not effectuate any stock splits for at least nine months without the consent of Cornell and Highgate; and (vii) terminating the provisions for security shares as set forth in Section 9 of the Securities Purchase Agreement and in Section 2 of the transfer agent instructions upon receipt by Cornell and Highgate of the first scheduled repayment amount. The payment plan under the Forbearance and Settlement Agreement is as follows: CONVERSION OF PAYMENT DATE CASH PAYMENT DEBENTURE March 10, 2007 $ 250,000 250,000 June 30, 2007 375,000 375,000 October 31, 2007 375,000 375,000 January 31, 2008 250,000 250,000 July 31, 2008 625,000 625,000 __________ _________ $1,875,000 1,875,000 ========== ========= As of June 30, 2007, we paid $250,000 for the payment due March 10, 2007 and issued 100,000 shares and 125,000 shares of our common stock on March 1, 2007 and April 18, 2007, respectively, pursuant to exercise rights. During fiscal year ended June 30, 2009 and the three month period ended September 30, 2009, Cornell and Highgate converted an aggregate of 266,655,668 and 15,620,252 shares, respectively, against the outstanding amount at a total conversion price of $144,532 and $18,699, respectively. LOANS FROM SHAREHOLDERS During fiscal year 2009/10, a material commitment for us relates to the loans from shareholders. The outstanding amount of $6,078,455 represents cash advanced to us from our shareholders. These shareholder loans are unsecured, interest-free and not repayable within the next twelve months. For fiscal year ended June 30, 2009, we calculated imputed interest expense of $342,847 in relation to interest-free shareholders loans at its effective interest rate and accounted for it in the consolidated financial statements. For the three month 32
period ended September 30, 2009, we calculated imputed interest expense of $91,916 in relation to interest-free shareholders loans at its effective interest rate and accounted for it in the consolidated financial statements. During fiscal year ended June 30, 2009, the shareholders converted an aggregate of 125,000,000 shares against the shareholders' loan at a total conversion price of $12,500. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse change in foreign currency and interest rates. EXCHANGE RATE Our reporting currency is United States Dollars ("USD"). The Chinese Renminbi ("RMB") has been informally pegged to the USD. However, China is under international pressure to adopt a more flexible exchange rate system. If the RMB were no longer pegged to the USD, rate fluctuations may have a material impact on the Company's consolidated financial reporting and make realistic revenue projections difficult. Recently (July 2005) the Renminbi was allowed to rise 2%. This has not had an appreciable effect on our operations and seems unlikely to do so. As Renminbi is the functional currency of Joannes and Boheng, the fluctuation of exchange rates of Renminbi may have positive or negative impacts on the results of operations of the Company. However, since all sales revenue and expenses of these two subsidiary companies are denominated in Renminbi, the net income effect of appreciation and devaluation of the currency against the US Dollar will be limited to the net operating results of the subsidiary companies attributable to us. INTEREST RATE Interest rates in China are low and stable and inflation is well controlled, due to the habit of the population to deposit and save money in the banks (among with other reasons, such as the People's Republic of China's perennial balance of trade surplus). Our loans relate mainly to trade payables and are mainly short-term. However our debt is likely to rise with physical plant in connection with expansion and, were interest rates to rise at the same time, this could become a significant impact on our operating and financing activities. We have not entered into derivative contracts either to hedge existing risks or for speculative purposes. ITEM 4. CONTROLS AND PROCEDURES FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the SECURITIES EXCHANGE ACT OF 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange 33
Commission's rules and forms, and that such information is accumulated and communicated to our management, including our president (also our principal executive officer) and our secretary, treasurer and chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure. As of September 30, 2009, the end of our first quarter covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our president (also our principal executive officer and our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president (also our principal executive officer and chief financial officer also our principal financial and accounting officer) concluded that our disclosure controls and procedures were effective in providing reasonable assurance in the reliability of our financial reports as of the end of the period covered by this Quarterly Report. INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no significant changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2009 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting. AUDIT COMMITTEE Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. We are contemplating establishment of an audit committee during fiscal year 2009. When established, the audit committee's primary function will be to provide advice with respect our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the 34
audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors. ITEM 4T. CONTROLS AND PROCEDURES Not applicable. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDING Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. None of our directors, officers or affiliates are (i) a party adverse to us in any legal proceedings, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties. ITEM 1A. RISK FACTORS Not applicable. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. CORNELL CAPITAL PARTNERS LP/HIGHGATE HOUSE FUNDS LTD. We previously entered into a forbearance and settlement agreement (the "Forbearance and Settlement Agreement") with Cornell Capital Partners LP ("Cornell") and Highgate House Funds, Ltd. ("Highgate"). On December 29, 2006, we completed a debt restructuring with Cornell and Highgate under the Forbearance and Settlement Agreement. Pursuant to the Forbearance and Settlement Agreement, we agreed to make certain payments to Cornell and Highgate with respect to the Securities Purchase Agreement previously entered into by us with Cornell and Highgate dated November 23, 2005 and amended on March 23, 2006, and the two convertible debentures in the amounts of $1,250,000 to Highgate dated November 23, 2005 and $2,000,000 to Cornell dated March 23, 2006 (collectively, the "Convertible Debentures") in accordance with the terms and conditions set forth in the Forbearance and Settlement Agreement. In further accordance with the Forbearance and Settlement Agreement, we agreed to use the proceeds from the disposal of Beijing Boheng to repay the principal and interest due to Cornell and Highgate under the Convertible Debentures in exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no application of the redemption premium on the scheduled repayments; (iii) conversion of the Convertible Debentures in an amount equal to at least the amount of a scheduled repayment subject to certain conditions; (iv) no additional liquidated damages accruing during the term of the Forbearance and 35
Settlement Agreement; (v) permitting us to withdraw the registration statement filed on March 28, 2006 with the Securities and Exchange Commission in connection with the Convertible Debentures; (vi) during the term of the Forbearance and Settlement Agreement, waiving the requirement for us to receive written consent of Cornell and Highgate for any organizational change (as defined in the Securities Purchase Agreement) to be directly or indirectly consummated by us, and that we will not effectuate any stock splits for at least nine months without the consent of Cornell and Highgate; and (vii) terminating the provisions for security shares as set forth in Section 9 of the Securities Purchase Agreement and in Section 2 of the transfer agent instructions upon receipt by Cornell and Highgate of the first scheduled repayment amount. The payment plan under the Forbearance and Settlement Agreement is as follows: CONVERSION OF PAYMENT DATE CASH PAYMENT DEBENTURE March 10, 2007 $ 250,000 250,000 June 30, 2007 375,000 375,000 October 31, 2007 375,000 375,000 January 31, 2008 250,000 250,000 July 31, 2008 625,000 625,000 __________ _________ $1,875,000 1,875,000 ========== ========= As of March 31, 2008, we paid $250,000 for the payment due March 10, 2007 and issued 100,000 shares of our common stock on March 1, 2007 and 125,000 shares on April 18, 2007, respectively, pursuant to exercise rights. The scheduled payments of $375,000 due on September 30, 2007 and October 31, 2007, respectively, were not paid as of March 31, 2008. During the three month period ended September 30, 2009 and fiscal year ended June 30, 2009, an aggregate of 15,620,252 and 266,655,667 shares, respectively, of our common stock were issued pursuant to conversion of the debt at a total conversion price of $18,699 and $144,532. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 36
ITEM 6. EXHIBITS The following exhibits are filed as part of this Quarterly Report: Exhibit 31.1 Certification under Rule 13a-14(a). 31.2 Certification under Rule 13a-14(a). 32.1 Certification under Section 1350. 32.2 Certification under Section 1350. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. XINHUA CHINA LTD. Dated: November 13, 2009 By: /s/ XIANPING WANG _________________________________________ Xianping Wang President/Chief Executive Officer Dated: November 13, 2009 By: /s/ XIANPING WANG _________________________________________ Xianping Wang Acting as Interim Chief Financial Officer 3