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U. S. Securities and Exchange Commission
Washington, D. C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2011
 
[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File No. 0-51012

XINYINHAI TECHNOLOGY, LTD.
(Exact Name of Registrant as Specified in its Charter)
 
 Utah
87-0427336
 (State or Other Jurisdiction of  incorporation or organization)
(I.R.S. Employer I.D. No.)
   
   
No. 4, Yantai Road, Centralized Park Haping Road, Harbin Development Zone, China 150060
(Address of Principal Executive Offices)

86-451-868-11118
Issuer's Telephone Number:

Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 13 or 15(d) of the  Securities Exchange Act of 1934  during  the  preceding  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 o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes x No o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
  
Large accelerated filer      Accelerated filer__Non-accelerated filer      Smaller reporting company X  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o  No x
  
APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
  
August 15, 2011
Common Voting Stock: 19,484,029

 
 

 

XINYINHAI TECHNOLOGY, LTD.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010



Index to Condensed Consolidated Financial Statements

 

   
PAGES
     
Condensed Consolidated Balance Sheets
 
1
     
Consolidated Statements of Operations and Comprehensive (Loss)/Income
 
2
     
Condensed Consolidated Statements of Cash Flows
 
3
     
Notes to Condensed Consolidated Financial Statements
 
4 - 16

 
 

 

XINYINHAI TECHNOLOGY, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2011 AND DECEMBER 31, 2010
(Stated in US Dollars)

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 385,403     $ 3,692,174  
Trade receivables (Net allowance for doubtful accounts of
               
$4,689 for 2011 and $4,598 for 2010)
    3,419,057       2,199,189  
Inventories (Note 7)
    1,512,304       1,675,516  
Other receivables, deposits and prepayments (Note 8(a))
    378,748       973,066  
Loan to a third party (Note 8(b))
    5,027,750       6,371,400  
                 
Total Current Assets
    10,723,262       14,911,345  
                 
Deposits paid for acquisition of property, plant and equipment     583,333        -  
Property, plant and equipment, net (Note 9)
    5,502,413       5,380,708  
Land-use-right
    1,055,418       1,049,161  
                 
TOTAL ASSETS
  $ 17,864,426     $ 21,341,214  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Collateralized bank loan (Note 10)
  $ -     $ 4,551,000  
Trade payables
    1,041,578       368,062  
Customer deposits
    27,800       17,664  
Other payables and accrued liabilities (Note 11)
    203,507       134,884  
Value added tax payable
    51,647       10,722  
Income tax payable
    27,793       27,253  
                 
TOTAL LIABILITIES
    1,352,325       5,109,585  
                 
COMMITMENTS AND CONTINGENCIES (NOTE 12)
               
                 
STOCKHOLDERS’ EQUITY
               
                 
Common stock (Note 13)
    19,484       19,484  
Additional paid-in capital
    3,294,543       3,294,543  
Statutory reserves
    1,565,971       1,565,971  
Accumulated other comprehensive income
    2,093,321       1,805,479  
Retained earnings
    7,839,328       7,877,721  
                 
TOTAL XINYINHAI TECHNOLOGY, LTD. STOCKHOLDERS' EQUITY
    14,812,647       14,563,198  
                 
NONCONTROLLING INTERESTS
    1,699,454       1,668,431  
                 
TOTAL EQUITY
    16,512,101       16,231,629  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 17,864,426     $ 21,341,214  
 
See the accompanying notes to condensed consolidated financial statements

 
1

 

XINYINHAI TECHNOLOGY, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
(Stated in US Dollars)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 1,891,254     $ 1,888,981     $ 3,803,994     $ 4,063,359  
Cost of revenues
    (1,389,135 )     (1,202,001 )     (3,009,439 )     (2,565,291 )
                                 
Gross profit
    502,119       686,980       794,555       1,498,068  
                                 
Operating expenses
                               
Selling and distribution expenses
    36,084       47,369       116,489       118,358  
General and administrative expenses
    301,834       242,169       595,258       391,460  
Research and development expenses
    16,146       -       32,882       -  
                                 
Total operating expenses
    354,064       289,538       744,629       509,818  
                                 
Income from operations
    148,055       397,442       49,926       988,250  
Interest income
    21,135       1,779       25,315       2,998  
Other income
    18,817       1,737       56,791       3,012  
Finance costs (Note 4)
    (77,052 )     (63,315 )     (144,098 )     (102,521 )
                                 
Income/(loss) before income taxes and
                               
noncontrolling interests
    110,955       337,643       (12,066 )     891,739  
Income taxes (Note 5)
    (27,438 )     (39,275 )     (28,273 )     (103,520 )
                                 
Net income/(loss) before noncontrolling interests
    83,517       298,368       (40,339 )     788,219  
Net (income)/loss attributable to noncontrolling interests
    (9,792 )     (30,755 )     1,946       (80,643 )
                                 
Net income/(loss) attributable to Xinyinhai Technology, Ltd. common stockholders
  $ 73,725     $ 267,613     $ (38,393 )   $ 707,576  
                                 
Net income/(loss) before noncontrolling interests
  $ 83,517     $ 298,368     $ (40,339 )   $ 788,219  
Other comprehensive income
                               
Foreign currency translation adjustments
    267,423       63,115       320,811       63,239  
                                 
Comprehensive income
    350,940       361,483       280,472       851,458  
Comprehensive income attributable to
                               
  noncontrolling interests
    (37,293 )     (37,217 )     (31,023 )     (87,122 )
                                 
Comprehensive income attributable to
                               
  Xinyinhai Technology, Ltd. common
                               
  stockholders
  $ 313,647     $ 324,266     $ 249,449     $ 764,336  
 
                               
Earnings/(loss) per share attributable to Xinyinhai Technology, Ltd. stockholders
                               
(Note 6) : basic and diluted
  $ 0.004     $ 0.01     $ (0.002 )   $ 0.04  
                                 
Weighted average number of
                               
common stock outstanding
    19,484,029       19,484,029       19,484,029       19,484,029  
 
See the accompanying notes to condensed consolidated financial statements

 
2

 

XINYINHAI TECHNOLOGY, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
(Stated in US Dollars)

   
Six months ended June 30,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net (loss)/income attributable to Xinyinhai Technology, Ltd.
           
  common stockholders
  $ (38,393 )   $ 707,576  
    Adjustments to reconcile net (loss)/income attributable to Xinyinhai                
Technology, Ltd. common stockholders to net cash provided by operating activities :
               
Allowance for obsolete inventories
    30,540       -  
Depreciation and amortization
    259,822       231,836  
Loss on disposal of property, plant and equipment
    -       3,822  
Noncontrolling interests
    (1,946 )     80,643  
Changes in operating assets and liabilities
               
Trade receivables
    (1,161,169 )     (497,493 )
Inventories
    163,268       (585,515 )
Other receivables, deposits and prepayments
    29,838       31,358  
Trade payables
    657,624       304,990  
Customer deposits
    9,661       21,209  
Other payables and accrued liabilities
    65,500       (52,909 )
Income tax payable
    1       12,099  
Value added tax payable
    40,186       54,349  
                 
Net cash flows provided by operating activities
    54,932       311,965  
                 
Cash flows from investing activities
               
Loans to third parties
    (6,413,400 )     (2,739,444 )
Loans repaid by third parties
    7,864,050       3,128,896  
Payments to acquire property, plant and equipment
    (260,617 )     (60,581 )
Sales proceed from disposal of property, plant and equipment
    -       755  
                 
Net cash flows provided by investing activities
    1,190,033       329,626  
                 
Cash flows from financing activities
               
Repayment of bank loan
    (4,581,000 )     (2,933,800 )
                 
Net cash flows used in financing activities
    (4,581,000 )     (2,933,800 )
                 
Effect of foreign currency translation on cash and cash equivalents
    29,264       1,191  
                 
Net decrease in cash and cash equivalents
    (3,306,771 )     (2,291,018 )
                 
Cash and cash equivalents, beginning of period
    3,692,174       2,624,780  
                 
Cash and cash equivalents, end of period
  $ 385,403     $ 333,762  
                 
Supplemental disclosures for cash flow information :-
               
Cash paid for :-
               
Interest expenses
  $ 141,221     $ 79,220  
Income taxes
  $ 28,272     $ 91,421  
 
See the accompanying notes to condensed consolidated financial statements

 
3

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)


1.           Corporation information

 
(a)
Xinyinhai Technology, Ltd. (“Xinyinhai” or the “Company”) was incorporated in Utah on October 18, 1985. It currently has two subsidiaries, Winner Sea Group Limited (“Winner Sea”) and Harbin Golden Sea Technology Printing Co., Ltd. (“Harbin Golden Sea”).

Winner Sea is a business company organized under the laws of the British Virgin Islands on January 12, 2006. It has conducted no business and is a holding company whose only asset is 90% equity interest in Harbin Golden Sea. Ms. Xie Guihong, a director of the Company, owns the remaining 10% equity interest in Harbin Golden Sea.

Harbin Golden Sea is a company located in Harbin City, Heilongjiang Province, the People’s Republic of China (“PRC”). Founded in 1998, Harbin Golden Sea has developed into a leading participant in the PRC’s financial note printing industry. It is one of the companies to which the PRC government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in the PRC.

The Company ended its development stage after the share exchange transaction as detailed in note 1(b) to the condensed consolidated financial statements.

 
(b)
On June 29, 2006, the Company executed a share exchange agreement (the “Share Exchange”) with the stockholders of Winner Sea whereby the stockholders of Winner Sea exchanged all their Winner Sea shares for 18,000,000 shares of the Company’s common stock, representing 98.3% of the then outstanding stock of the Company.

The purchase method under reverse takeover accounting has been applied for the Share Exchange. These condensed consolidated financial statements issued under the name of the legal parent, Xinyinhai, are a continuation of the financial statements of Winner Sea, which include Winner Sea’s majority owned subsidiary Harbin Golden Sea.


2.           Description of business

The Company, through Harbin Golden Sea, is a leading participant in the PRC’s financial notes printing industry. It provides printing services whose quality equals the highest standards worldwide and imports state-of-the-art printing equipment from overseas that is installed on its advanced software systems, such as anti-falsification software.

The Company also earned approximately 4% of its revenue for the current reporting period from its position as a distributor of plasma arc cutting machinery and consumable parts. The plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.
 
 
4

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

3.           Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulation and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three and six month periods have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade receivables and loan to a third party. As of June 30, 2011 and December 31, 2010, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade receivables and loan to a third party, the Company extends credit based on an evaluation of the debtor’s financial condition, generally without requiring collateral. The Company maintains an allowance for doubtful accounts of trade receivables. Additional specific provision will be made against trade receivables to the extent that they are considered to be doubtful.
 
During the reporting periods, customers representing 10% or more of the Company’s consolidated sales are :-

   
Three months ended
June 30,
(Unaudited)
   
Six months ended
June 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Company A
  $ 276,803     $ 322,201     $ 812,365     $ 744,605  
Company B
    1,066       123,250       180,846       481,326  
Company C
    329,255       204,853       561,615       448,923  
Company D
    149,615       141,977       311,104       424,447  
Company E
    295,121       67,103       424,867       420,423  
                                 
    $ 1,051,860     $ 859,384     $ 2,290,797     $ 2,519,724  
 
 
5

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)


3.           Summary of significant accounting policies (Cont’d)

Concentrations of credit risk (Cont'd)

As of June 30, 2011 and December 31, 2010, customers representing 10% or more of the Company’s gross trade receivables are as follows :-

   
June 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Company A
  $ 1,009,520     $ 278,013  
Company B
    369,831       -  
Company C
    105,765       265,747  
Company D
    24,298       295,082  
                 
    $ 1,509,414     $ 838,842  

Property, plant and equipment

Property, plant and equipment (except construction in progress) are stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.

Depreciation is provided to write off the cost of the assets to the estimated residual value on a straight-line basis over their estimated useful lives as follows :-

 
Depreciable life
   
Buildings
20 years
Plant and machinery
10 years
Motor vehicles
10 years
Furniture, fixtures and equipment
5 years

Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.

Construction in progress mainly represents expenditures in respect of the Company’s renovation works of factories. All direct costs relating to the renovation works in progress are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.

Research and development expenses

Research and development expenses are charged to expenses as incurred.
 
 
6

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)


3.           Summary of significant accounting policies (Cont’d)

Foreign currency translation

The functional currency of the Company and Winner Sea is United States dollars (“US$”) while that of Harbin Golden Sea is RMB.  The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements of Harbin Golden Sea, which are prepared using the functional currency, have been translated into US$. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustments to other comprehensive income, a component of stockholders’ equity. The exchange rates in effect as of  June 30, 2011 and December 31, 2010 were RMB1 for US$0.1547 and US$0.1517 respectively. There is no significant fluctuation in exchange rate for the conversion of RMB to US$ after the balance sheet date.
 
 
7

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)


3.           Summary of significant accounting policies (Cont’d)

Recently issued accounting standards

The FASB issued ASU 2011-01 “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”.  The amendments in this Update temporarily delay the effective date of the disclosure about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructuring for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The adoption of this ASU has no material impact on the Company’s financial statements.
 
 
8

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

3.           Summary of significant accounting policies (Cont’d)

Recently issued accounting standards (Cont'd)

In April 2011, the FASB issued ASU 2011-02 “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies - Loss Contingencies. The guidance in this ASU is anticipated to be effective for interim and annual periods beginning on or after June 15, 2011. The management is assessing the impact of this ASU on the Company’s financial statements.
 
In April 2011, the FASB issued ASU 2011-03 “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The management is assessing the impact of this ASU on the Company’s financial statements.
 
In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The FASB and the International Accounting Standard Board (IASB) work together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.  The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.  The management is assessing the impact of this ASU on the Company’s financial statements.
 
 
9

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

3.           Summary of significant accounting policies (Cont’d)

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The management is assessing the impact of this ASU on the Company’s financial statements.
 

4.           Finance costs

   
Three months ended
June 30,
(Unaudited)
   
Six months ended
June 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Bank interest
  $ 74,721     $ 40,284     $ 141,221     $ 79,220  
Bank charges
    2,331       23,031       2,877       23,301  
                                 
    $ 77,052     $ 63,315     $ 144,098     $ 102,521  

5.           Income taxes

The Company is subject to the United States of America tax law at a tax rate of 34%.  It had no taxable income for income tax purposes for the six months ended June 30, 2011 and 2010.  The Company has not provided deferred taxes on undistributed earnings of its non-U.S. subsidiaries as of June 30, 2011 as it is the Company’s current policy to reinvest these earnings in non-U.S. operations.

Winner Sea was incorporated in the BVI and, under the current law of the BVI, it is not subject to income taxes.

Harbin Golden Sea is subject to PRC enterprise income tax that is computed according to the relevant laws and regulations in the PRC. It is registered as a new and high technology enterprise in the Harbin region of the PRC and is entitled to a 50% preferential reduction of the income tax rate. On May 1, 2006, Harbin Golden Sea became a wholly-owned foreign enterprise under a reorganization plan and the Taxation Bureau of Harbin City approved its income tax exemption.  The new arrangement of exemption began in the first two years after Harbin Golden Sea became profitable, being 2006 and 2007, and a 50% income tax reduction for the following three years, being 2008 through 2010.
 
 
10

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

5.           Income taxes (Cont'd)
 
On March 16, 2007, the PRC’s legislative body, the National People’s Congress, adopted the unified enterprise income tax ("EIT") Law. This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the EIT Law. Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires. Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law. Accordingly, as approved by the Taxation Bureau of Harbin City, Harbin Golden Sea was still entitled to two years’ exemption from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“tax holiday”). The tax holiday of Harbin Golden Sea commenced in the fiscal year of 2006.  Accordingly, Harbin Golden Sea was subject to preferential tax rate of 9% for 2008, 10% for 2009 and 11% for 2010 respectively. Starting from the fiscal year 2011, Harbin Golden Sea is subject to enterprise income tax at a preferential rate of 15% for three years due to its engagement in an advance technology industry. The relevant authority granted it a certificate at the end of 2010.

ASC 740 “Accounting for Uncertainty in Income Taxes” requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered no provision for uncertainty in income taxes was necessary as of June 30, 2011 and December 31,2010


6.           Earnings/(loss) per share - basic and diluted

The basic and diluted earnings/(loss) per share is calculated using the net income/(loss) attributable to Xinyinhai Technology, Ltd. common stockholders and the weighted average number of common stock outstanding during the reporting periods.

There were no dilutive instruments as of June 30, 2011 and 2010.  Accordingly, the basic and diluted earnings/(loss) per share are the same for the six months ended June 30, 2011 and 2010.


7.           Inventories

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Raw materials
  $ 831,038     $ 830,663  
Work in progress
    240,135       301,245  
Finished goods
    472,071       543,608  
                 
    $ 1,543,244     $ 1,675,516  
Less: allowance for obsolete inventories
    (30,940     -  
      1,512,304       1,675,516  
 
Allowance for obsolete inventories amounted to $30,540 was recognized in the cost of revenues during the six months ended June 30, 2011.

 
11

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

8.           Other receivables, deposits and prepayments and loan to a third party

(a)           Other receivables, deposits and prepayments

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Deposits
  $ 69,535     $ 713,097  
Retention money
    82,673       17,865  
Advances to staff
    186,631       202,083  
Prepayments
    1,083       2,629  
Other receivables
    38,826       37,392  
                 
    $ 378,748     $ 973,066  

(b)           Loan to a third party

As of December 31, 2010, the outstanding loan balance of RMB42,000,000 (equivalent to $6,371,400) represented a loan to Heilongjiang Jindi Real Estate Development Co., Ltd. (“Heilongjiang Jindi”). Mr. Xia Songlin, the accountant of Harbin Golden Sea, is one of the shareholders of Heilongjiang Jindi. Pursuant to the loan agreement, the amount is unsecured, interest-free and repayable within 6 months after the drawdown date. During January and February 2011, Heilongjiang Jindi repaid the amount of RMB42,000,000 (equivalent to $6,413,400), resulting in no outstanding balance as of June 30, 2011.

On January 28, 2011, Harbin Golden Century Hotel Co., Ltd (“Harbin Golden Century”) and Harbin Golden Sea entered into a loan agreement. Mr. Xia Songlin, the accountant of Harbin Golden Sea, is one of the shareholders of Harbin Golden Century. Pursuant to the loan agreement, the amount is unsecured, interest-free and repayable within 12 months after the drawdown date. During January, February and June 2011, Harbin Golden Century had drawn down a total amount of RMB42,000,000 (equivalent to $6,413,400) and repaid the amount of RMB9,500,000 (equivalent to $1,450,650), resulting in an outstanding balance of RMB32,500,000 (equivalent to $5,027,750) as of June 30, 2011.
 
 
9.           Property, plant and equipment, net

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Buildings
  $ 4,422,242     $ 4,336,485  
Construction in progress
    259,123       -  
Plant and machinery
    3,118,496       3,053,208  
Motor vehicles
    456,109       447,264  
Furniture, fixtures and equipment
    98,568       96,658  
                 
      8,354,538       7,933,615  
Accumulated depreciation
    (2,852,125 )     (2,552,907 )
                 
Property, plant and equipment, net
  $ 5,502,413     $ 5,380,708  


 
12

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

9.           Property, plant and equipment, net (Con't)

Notes :-

 
(a)
As of June 30, 2011, there was no pledged property, plant and equipment. As of December 31, 2010, property, plant and equipment with net book value of $4,639,379 were pledged for a bank loan granted to Harbin Golden Sea (Note 10).

 
(b)
Construction in progress mainly comprises capital expenditure for the renovation of the Company’s factories.


10.         Collateralized bank loan

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Bank loan repayable within 1 year
    -     $ 4,551,000  

The bank loan as of December 31, 2010 was denominated in RMB, carried an average interest rate at 5.841% per annum and was fully repaid during the current reporting period.  The bank loan was secured by the following assets of the Company :-

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Buildings
  $ -     $ 3,684,961  
Plant and machinery
    -       954,418  
                 
    $ -     $ 4,639,379  


11.         Other payables and accrued liabilities

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Other payables
  $ 124,228     $ 42,489  
Accrued statutory staff welfare and salaries
    72,619       45,235  
Accrued liabilities
    6,660       47,160  
                 
    $ 203,507     $ 134,884  
 
 
13

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

12.         Commitments and contingencies

As of June 30, 2011 and December 31, 2010, the Company had capital commitments in respect of the acquisition of plant and machinery amounting to $1,361,110 and $1,334,715 respectively, which were contracted for but not provided in these condensed consolidated financial statements.

As of December 31, 2010, there were operating lease payments of $49,303 which represented rentals receivable within 2011 by the Company from its building under a non-cancelable operating lease.


13.         Common stock

   
No. of shares
   
Amount
 
Authorized:-
           
             
Common stock at USD0.001 par value
    40,000,000     $ 40,000  
                 
Issued and outstanding:-
               
                 
As of June 30, 2011 and December 31, 2010
    19,484,029     $ 19,484  
 

14.         Defined contribution plan

The Company has a defined contribution plan for all its qualified employees in the PRC. The Company and its employees are each required to make contributions to the plan at the rates specified in the plan. The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in future years. The defined contribution plan contributions were charged to the statement of operations. The Company contributed $45,617 and $2,847 for the six months ended June 30, 2011 and 2010 respectively.


15.         Segment information

The Company currently operates in two reportable segments, sales of printed products and trading of equipment. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on income from operations. As a result, the components of operating income for one segment may not be comparable to another segment. The following is a summary of the Company’s segment information :-
 
 
14

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

15.         Segment information (Con't)


   
Printing Products
   
Trading of Equipment
   
Total
 
   
Six months ended June 30,
(Unaudited)
   
Six months ended June 30,
(Unaudited)
   
Six months ended June 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
                                     
Revenues
  $ 3,651,426     $ 3,813,388     $ 152,568     $ 249,971     $ 3,803,994     $ 4,063,359  
Segment income/(loss)
  $ 278,385     $ 967,865     $ (245,180 )   $ (65,922 )   $ 33,205     $ 901,943  
                                                 
   
Three months ended June 30,
(Unaudited)
   
Three months ended June 30,
(Unaudited)
   
Three months ended June 30,
(Unaudited)
 
      2011       2010       2011       2010       2011       2010  
                                                 
Revenues
  $ 1,811,549     $ 1,786,178     $ 79,705     $ 102,803     $ 1,891,254     $ 1,888,981  
Segment income/(loss)
  $ 297,783     $ 379,431     $ (160,161 )   $ (40,640 )   $ 137,622     $ 338,791  
                                                 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
      2011       2010       2011       2010       2011       2010  
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
                                                 
Segment assets
  $ 10,920,461     $ 12,954,100     $ 830,175     $ 923,472     $ 11,750,636     $ 13,877,572  

A reconciliation is provided for unallocated amounts relating to corporate operations which are not included in the segment information.

   
Three months ended
June 30,
(Unaudited)
   
Six months ended
June 30,
(Unaudited)
 
   
2011
   
2010
   
2011
   
2010
 
                         
Total consolidated revenue
  $ 1,891,254     $ 1,888,981     $ 3,803,994     $ 4,063,359  
                                 
Total income for reportable
                               
  segments
  $ 137,622     $ 338,791     $ 33,205     $ 901,943  
Unallocated amounts relating to
                               
  operations :-
                               
    Depreciation and amortization
    (12,268 )     -       (24,394 )     -  
    General and administrative
                               
      expenses
    (14,399 )     (1,148 )     (20,877 )     (10,204 )
                                 
Income before income taxes
                               
  and noncontrolling interests
  $ 110,955     $ 337,643     $ 12,066     $ 891,739  
 
 
15

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Stated in US Dollars)

15.         Segment information (Cont’d)

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Assets
           
             
Total assets for reportable segments
  $ 11,750,636     $ 13,877,572  
Unallocated amounts relating to operations :-
               
Building and land-use-right
    1,044,350       1,051,886  
Other receivables
    38,826       37,393  
Loan a third party
    5,027,750       6,371,400  
Cash and cash equivalents
    2,864       2,963  
                 
Total
  $ 17,864,426     $ 21,341,214  

All of the Company’s long-lived assets and customers are located in the PRC. Accordingly, no geographic information is presented.

 
16.         Related party transactions

The Company had no material transactions with its related parties during the periods.
 

17.         Subsequent events

The Company has evaluated all subsequent events from the balance sheet date through the date the financial statements were issued and determined that there were no subsequent events or transactions that required recognition or disclosure in the condensed consolidated financial statements.

 
16

 

ITEM 2.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations
 
The recent global recession reduced demand for capital goods in China.  Since late 2008, this situation has had a negative impact on both of our business segments.  During the first half of 2011 (i.e. the six months ended June 30, 2011), the effect of the recession was most dramatic in our equipment distribution business, where revenues declined by 39% to $152,568 from the already low revenue level of $249,971 in the first six months of 2010.  Revenue in the first six months of 2010 was, in turn, 67% lower than in the first half of 2009.  This two year slide in equipment distribution reflects two factors.  First, there have been delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived.  In addition, however, our designated market has been reduced by the equipment manufacturer from the entirety of northeast China to Heilongjiang Province alone.  These factors spurred a decline in sales that reversed a surge in equipment sales that we had experienced in 2008, and reduced this business segment to a 4% contribution to our overall revenue during the first half of 2011.  The future of this business segment will depend, in part, on the success of the economic stimulus initiated by the Government of China.  However, our expectation is that equipment sales revenue will stay at the current level for the forseeable future.
 
Revenue from our printing business also declined, albeit not so precipitously.  Printing revenue fell by 4% from $3,813,388 in the first six months of 2010 to $3,651,426 in the first six months of 2011, although printing revenue increased in the second quarter by 1% from $1,786,178 to $1,811,549.  The printing segment of our business had declined significantly in 2008 and 2009, in part due to the weakening of the Chinese banking industry, as many of our customers were conserving cash pending stabilization of the international credit markets.  Although we experienced a modest recovery in 2010, we have not yet been able to recapture the market position we occupied in 2007.
 
The modest changes in our revenue were accompanied by a much more significant reduction in the profitability of the sales.  Sales in the first half of 2011 generated only 20.9% gross margin and sales in the second quarter generated 26.5%, both being far below our target margin of 45%.  In contrast, sales in the first half of 2010 generated 36.9% gross margin and sales in the second quarter of 2010 generated 36.9% gross margin.  The 2011 gross margin was adversely affected by the decline of our equipment business, which lost more than $1.60 for every dollar of sales.  However, margins from our printing business also remained far lower than optimal.  Our business plan contemplates that gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business.  In recent periods, however, three factors caused margins from printing operations to fall below that standard:
 
 
·
the disruption in the Chinese banking industry and the rise of strong competition in our field have forced us to price our products much more aggressively;
 
 
·
we have experienced sharp increases in the prices of certain raw materials; and
 
 
·
the reduction in our sales volume led to inefficient use of the new larger facility.
 
As the Chinese banking industry is moving towards stabilization, our expectation is that we will be able to revive our sales growth.  The increase in competition and pressure from rising raw material costs, however, will challenge our ability to return our printing operations to the levels of profitability that they sustained prior to the international credit crisis.
 
 
17

 
 
We operated less efficiently during the first half and second quarter of 2011 than during the comparable periods of 2010.  Total operating expenses during the six months ended June 30, 2011 were $744,629, an increase of 46% from the $509,818 in operating expenses that we incurred during the first half of 2010.  Quarter-to-quarter operating expenses likewise increased by 22%.  The increases were attributable to several factors:
 
 
·
Our overall salaries, allowances and social insurance expense for staff increased approximately $87,000 during the first half of 2011.
 
 
·
We incurred approximately $34,000 in expenses related to efforts of our management to investigate and secure new business opportunities.
 
 
·
We incurred approximately $33,000 in research and development expenses related to those same efforts to expand our product lines.
 
 
·
A particularly cold winter led to increased fuel costs.
 
As the growth in operating expenses abated somewhat in the second quarter, our expectation is that the sharp rise in first quarter operating expenses was primarily a result of these special factors, and that our level of operating expenses for the year will gradually return to 2010 levels in the remainder of the year.
 
Our reduced gross margin and increased operating expenses resulted in reduction of operating income from $988,250 in the first six months of 2010 to $49,926 in the first six months of 2011, and from $397,442 in the three months ended June 30, 2010 to $148,055 in the three months ended June 30, 2011.  That decline in our financial results was exacerbated by a sharp increase in interest expense.  During the third quarter of 2010 we obtained a $4.6 million bank loan.  The finance charges attributable to that bank loan, $141,221 in the first half of 2011, led to a net loss before income taxes and noncontrolling interests of $12,066 in the first six months of 2011, compared to net income before taxes and noncontrolling interests of $891,739 in the first six months of 2010.  Again, the loss was incurred in the first quarter, as we achieved net income before income taxes and noncontrolling interests of $110,955 in the second quarter of 2011, albeit a 67% decline from net income before income taxes and noncontrolling interests in the second quarter of 2010.
 
The operations of our subsidiary, Harbin Golden Sea, produced net income of $97,920 in the second quarter of 2011 and a net loss of $19,460 in the first six months of 2011.  However, because we own only 90% of Harbin Golden Sea, we allocate 10% of the income or loss to the “noncontrolling interests” before recognizing the net income or loss on our Consolidated Statements of Operations and Comprehensive (Loss)/Income.  After that allocation and taking into account the income and expenses incurred by the parent corporation, our net income for the second quarter of 2011 was $73,725, representing $.004 per share, and our net loss for the first six months of 2011 was $38,393, representing $.002 per share.  In the second quarter of 2010, we had net income of $.01 per share, and $.04 in the first half of 2010.
 
 
18

 

Liquidity and Capital Resources
 
After our subsidiary, Harbin Golden Sea, was organized in 1998, the growth of its operations was funded by contributions to capital by our Chairman, Mrs. Tian.  With the $2.4 million that she invested, Harbin Golden Sea built its facilities and funded its operations, resulting in profitable operations for the past several years.  As a result, at June 30, 2011, we had working capital totaling $9,954,270 (an increase of $152,510 since the end of 2010) and no long-term liabilities.
 
The largest portion of our working capital is now invested in developing strategic relationships that will, we hope, benefit us in the future.  Within the Chinese business community, the extension of interest-free loans is a normal method of securing good relations and future opportunities.  For that reason, as of December 31, 2010, we had outstanding an unsecured, interest-free loan of $6,371,400 to Heilongjiang Jindi Real Estate Development Co., Ltd., in anticipation of future benefits to our real estate assets.  That loan was repaid in January and February of 2011, and we do not anticipate further lending to Heilongjiang Jindi Real Estate Development Co., Ltd.  In 2011, however, we have made a series of loans to the Harbin Golden Century Hotel Co., Ltd., the balance of which was $5,027,750 at June 30, 2011.  The loan is interest free and due in twelve months.
 
Over the longer term, the continued revenue growth in our printing services business will require further capital investment.  As China’s banking industry rapidly modernizes, our customers will demand higher quality products similar to those available to the banking industry in Europe and the U.S.  Our ability to meet that demand will determine the long term growth of our business.  Immediately, the development of these new products will require substantial capital investment.  From the end of 2010 into June 30, 2011, therefore, we have signed commitments to purchase a total of $1,361,110 in plant and machinery.  We plan to fund these purchases with cash flow from our operations and repayments of our third party loans, if financing is not available.
 
Our operations during the first half of 2011 provided us $54,932 in net cash, representing a surplus of $93,325 over our net income for the period.  The positive cash flow was achieved, despite an increase of $1,161,169 in our accounts receivable, primarily by delaying payment of our payables, increasing that account by $657,624.
 
During the second quarter of 2011, we repaid our $4.5 million bank loan, As a result, our cash and cash equivalents at June 30, 2011 were only $385,403.  If we require funds to satisfy the $1,361,110 equipment purchase commitment mentioned above or for other purposes, we have two primary resources:
 
·  
In recent years we have loaned money to a number of local businesses in order to develop good long-term relationships.  We could approach them for short-term loans if needed.
 
·  
For the past several years we have been cash positive in our operations and, except in 2011, have operated profitably.  We believe we would be able to secure bank financing if our operations require capital for expansion.
 
For these reasons, we expect that our liquidity will be sufficient in the next year to fund our ongoing operations as well as our near-term growth.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 
19

 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.                  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  Tian Ling, our Chief Executive Officer, and Du Song, our Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2011.  Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by the Company in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules.  “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insure that information the Company is required to disclose in the reports it files with the Commission is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.  Based on his evaluation, Mrs. Tian and Ms. Du concluded that the Company’s system of disclosure controls and procedures was effective as of June 30, 2011 for the purposes described in this paragraph.

Changes in Internal Controls.  There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during the Company’s second fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 PART II   -   OTHER INFORMATION

Item 1A      Risk Factors

There have been no material changes from the risk factors disclosed in response to Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 6.                 Exhibits
 
31.1
Rule 13a-14(a) Certification – Chief Executive Officer
31.2
Rule 13a-14(a) Certification – Chief Financial Officer
32
Rule 13a-14(b) Certification
101.INS
XBRL Instance
101.SCH
XBRL Schema
101.CAL
XBRL Calculation
101.DEF
XBRL Definition
101.LAB
XBRL Label
101.PRE
XBRL Presentation

 
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SIGNATURES

Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.

 
 
XINYINHAI TECHNOLOGY, LTD.

Date: August 15, 2011
 
By: /s/ Tian Ling
 
 
  Tian Ling, Chief Executive Officer
     
   
By: /s/ Du Song
 
 
  Du Song, Chief Financial Officer
 
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