10QSB 1 xinyin10qjun07.htm XINYINHAI 10-QSB 6-30-2007 U

U. S. Securities and Exchange Commission

Washington, D. C. 20549


       FORM 10-QSB


[X]    

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

             For the quarterly period ended June 30, 2007


[  ]    

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.

(Name of Small Business Issuer in its Charter)

Utah

87-0427336

(State of Other Jurisdiction of

incorporation or organization)

(I.R.S.  Employer

Identification No.)


41-40 Union Street, Suite 6J, Flushing, NY                                                                                          11355

(Address of principal executive offices)

(Zip Code)

718-359-2682

(Registrant’s telephone number including area code)


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 [  ]    


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [    ]   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 10, 2007

Common Voting Stock: 24,317,899


Transitional Small Business Disclosure Format (check one):      Yes [   ]     No [X]  






XINYINHAI TECHNOLOGY, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2007 AND DECEMBER 31, 2006

(Stated in US Dollars)



 

   June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$1,585,828

 

$1,553,139

 

Accounts receivable (Note 6)

1,626,279

 

1,027,676

 

Inventories (Note 7)

1,079,937

 

873,988

 

Deposits and prepayments

92,996

 

503,482

 

Current portion of prepaid expenses (Note 8)

296,328

 

780,901

 

Other receivable

952,719

 

-

 

 

 

 

 

 

Total Current Assets

5,634,087

 

4,739,186

 

Property, plant and equipment, net (Note 9)

1,794,953

 

1,832,590

 

Land use rights

27,721

 

-

 

Prepaid expenses (Note 8)

1,215,578

 

1,281,330

 

 

 

 

 

 

TOTAL ASSETS

$8,672,339

 

$7,853,106

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable

$245,819

 

$373,655

 

Customers deposit

14,430

 

202,943

 

Other payables and accrued liabilities (Note 10)

64,097

 

104,083

 

Value added tax payable

-

 

107,590

 

 

 

 

 

 

TOTAL LIABILITIES

324,346

 

788,271

 

 

 

 

 

 

MINORITY INTERESTS (NOTE 3)

694,893

 

503,951

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Common stock

24,317

 

24,317

 

Authorized 40,000,000 shares in 2007 and 2006; issued and

 

 

 

 

outstanding 24,317,899 shares in 2007 and 2006

 

 

 

 

Additional paid-in capital

4,540,335

 

4,540,335

 

Retained earnings

1,887,793

 

1,264,221

 

Statutory reserves

847,118

 

509,411

 

Accumulated other comprehensive income

353,537

 

222,600

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

7,653,100

 

6,560,884

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$8,672,339

 

$7,853,106

 



See the accompanying notes to condensed consolidated financial statements





- 1 -






XINYINHAI TECHNOLOGY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Stated in US Dollars)



 

   Three months ended June 30, (Unaudited)

 

Six months ended June 30, (Unaudited)

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

Revenues (Note 3)

$2,878,962

 

$2,325,080

 

$5,019,079

 

$3,423,296

 

Cost of sales

(1,624,896

)

(1,828,688

)

(2,874,944

)

(2,727,720

)

 

 

 

 

 

 

 

 

 

Gross profit

1,254,066

 

496,392

 

2,144,135


 

695,576

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Selling and distribution

130,408

 

99,749

 

226,813

 

198,985

 

General and administrative

199,375

 

54,792

 

796,488

 

118,396

 

 

 

 

 

 

 

 

 

 

Total expenses

329,783

 

154,541

 

1,023,301

 

317,381

 

 

 

 

 

 

 

 

 

 

Operating income

924,283

 

341,851

 

1,120,834

 

378,195

 

Interest income

4,280

 

213

 

9,298

 

880

 

Other expenses

-

 

(245,912

)

-

 

(245,912

)

 

 

 

 

 

 

 

 

 

Income before income taxes and

   minority interests

928,563

 

96,152

 

1,130,132

 

133,163

 

Income taxes (Note 4)

-

 

(51,312

)

-

 

(56,864

)

 

 

 

 

 

 

 

 

 

Income before minority interest

     928,563

 

44,840

 

1,130,132

 

76,299

 

Minority interests

(113,745

)

(29,075

)

(168,853

)

(32,221

)

 

 

 

 

 

 

 

 

 

Net income

814,818

 

15,765

 

961,279

 

44,078

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

  - Foreign currency translation

89,399

 

28,184

 

130,937

 

28,184

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$904,217

 

$43,949

 

$1,092,216

 

$72,262

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic and diluted

 

 

 

 

 

 

 

 

(Note 5)

$0.03

 

$0.00

 

$0.04

 

$0.00

 

 

 

 

 

 

 

 

 

 

Weighted average number of

common stock outstanding

24,317,899


18,307,000


24,317,899

 

18,307,000

 



See the accompanying notes to condensed consolidated financial statements








- 2 -






XINYINHAI TECHNOLOGY, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Stated in US Dollars)


 

Six months ended June 30,

(Unaudited)

 

 

2007

 

2006

 

Cash flows from operating activities

 

 

 

 

Net income

$961,279 

 

$44,078 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 provided by (used in) operating activities:

 

 

 

 

Depreciation on property, plant and equipment

124,731 

 

116,360 

 

Amortization of land use rights

1,055 

 

 

Amortization of prepaid expenses

550,325 

 

 

Minority interests

168,853 

 

32,221 

 

Changes in operating assets and liabilities

 

 

 

 

Accounts receivable

(564,361)

 

(663,790)

 

Prepaid expenses

 

(138)

 

Inventories

(180,954)

 

395,410 

 

Deposits and prepayments

389,284 

 

(19,030)

 

Other receivable

(939,750)

 

 

Accounts payable

(135,583)

 

4,497 

 

Customers deposit

(191,647)

 

 

Other payables and accrued liabilities

(40,008)

 

(35,170)

 

  

Deferred revenue

 

136,504 

 

Income tax payable

 

(86,062)

 

Payable to minority interests

 

15,333 

 

Value added tax payable

(109,252)

 

 

 

 

 

 

 

Net cash flows provided by (used in) operating activities

33,972 

 

(59,787)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

  

Loans to a director

 

(376,978)

 

Payments to acquire property, plant and equipment

 

 

 

 

     and land use rights

(41,076)

 

(24,753)

 


 

 

 

 

Net cash flows used in investing activities

(41,076)

 

(401,731)

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

  

Dividend and dividend tax paid

 

(279,516)

 

 

 

 

 

 

Net cash flows used in financing activities

 

(279,516)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

(7,104)

 

(741,034)

 

 

 

 

 

 

Effect of foreign currency translation on cash and cash equivalents

39,793 

 

36,655 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

1,553,139 

 

1,023,983 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$1,585,828 

 

$319,604 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

Interest paid

$              - 

 

$          - 

 

Income taxes paid

$              - 

 

$   3,990 

 


See the accompanying notes to condensed consolidated financial statements





- 3 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



1.

Corporation information


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 only fifteen 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.  Harbin Golden Sea changed its name from Harbin Yinhai Technology Development Company Limited to its present name on April 29, 2006.



2.

Description of business


The Company, through Harbin Golden Sea, is a leading participant in 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 earns approximately 22% 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.



3.

Summary of significant accounting policies


Basis of presentation and consolidation


The accompanying condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America.


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 month periods have been made.  Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year.  These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Form 10KSB as filed with the Securities and Exchange Commission on April 17, 2007.






- 4 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



3.

Summary of significant accounting policies (Cont’d)


Basis of presentation and consolidation (cont’d)


The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.


Use of estimates


In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.  These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories and the estimation on useful lives of property, plant and equipment and intangible assets.  Actual results could differ from those estimates.


Accounts receivable


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 recorded based on managements’ assessment of the credit history with the customers and current relationships with them.


Inventories


Inventories are stated at the lower of cost or market.  Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.  In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels.  


Property, plant and equipment


Property, plant and equipment 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

Residual value

 

 

 

Building

20 years

5%

Plant and machinery

10 years

5%

Furniture, fixtures and equipment

5 years

5%

Motor vehicles

10 years

5%






- 5 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



3.

Summary of significant accounting policies (Cont’d)


Property, plant and equipment (cont’d)


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.


Land use rights


Land use rights are stated at cost less accumulated amortization.  Amortization is provided using the straight-line method over the respective terms of the leases.


Prepaid expenses


Prepaid expenses represent the unamortized aggregate fair value of the Company’s common stock issued in return for the consultancy works provided by certain consultants to the Company.  The fair value is determined by reference to the closing price of the Company’s common stock as quoted on the OTC Bulletin Board (“OTCBB”) on the date of grant.  


Prepaid expenses related to services provided over a period of time are amortized on a straight-line basis over the terms of the service period and those for one-off services are written off to the statement of operations upon completion of the services by the consultants.


Minority interests


Minority interests are resulted from the consolidation of 90% owned subsidiary, Harbin Golden Sea, where the Company has control over its operations.


Stock-based compensation


The Company adopted SFAS No. 123R “Share-Based Payment” using the modified prospective method. Under SFAS 123R, equity instruments issued to service providers for their services are measured at the grant-date fair value and recognized in the statement of operations over the vesting period.


Revenue recognition


The Company derives revenues from the sales of printed products and re-sale of purchased third parties equipment.  The Company recognizes its revenues net of related business taxes and value added taxes and when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.


(a)

Sales of printed products


The Company recognizes revenue from the sale of printed forms upon delivery to the customers and the transfer of title and risk of loss.  Because the majority of products are customized to meet customer specifications, product returns are not significant.






- 6 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



3.

Summary of significant accounting policies (Cont’d)


Revenue recognition (cont’d)


(b)

Re-sale of purchased third parties equipment, plasma arc cutting machines, does not require significant modification or customization.  Revenue from sale of the equipment and associated spare parts is recognized at the time of delivery of products to customers and when the title and ownership are passed to the customers.


Basic and diluted earnings per share


The Company reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”.  Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented.  The weighted average number of shares of the Company represents the common stock outstanding during the periods.


Recently issued accounting standards


In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The adoption of FIN 48 does not have a material effect on our consolidated financial statements.


In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for the fiscal year beginning January 1, 2008. The management is in the process of evaluating this guidance and therefore has not yet determined the impact that SFAS 159 will have on the Company’s financial statements upon adoption.



4.

Income taxes


No income taxes is calculated on the estimated assessable profits of the subsidiary operating in the PRC as the Taxation Bureau of Harbin City approved its income tax exemption.







- 7 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



5.

Earnings per share - basic and diluted


The basic and diluted earnings per share is calculated using the net income and the weighted average number of common stock outstanding during the reporting periods.  The Company has no dilutive instruments and accordingly, the basic and diluted earnings per share are the same.



6.

Accounts receivable


The majority of the Company’s sales are on open account terms and in accordance with terms specified in the contracts governing the relevant transactions.  The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible.  If actual collections experience changes, revisions to the allowance may be required.  Based upon the aforementioned criteria, management has determined that no provision for uncollectible accounts is required as of June 30, 2007 and December 31, 2006.



7.

Inventories

 

June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

Raw materials

$522,670 

 

$392,966 

 

Work in progress

422,270 

 

274,289 

 

Finished goods

134,997 

 

206,733 

 

 

 

 

 

 

 

$1,079,937 

 

$873,988 

 



8.

Prepaid expenses

 

June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

Prepaid consultancy fees

$2,219,000 

 

$2,219,000 

 

Accumulated amortization

(707,094)

 

(156,769)

 

 

 

 

 

 

 

1,511,906 

 

2,062,231 

 

Amount to be amortized within one year

(296,328)

 

(780,901)

 

 

 

 

 

 

Amount to be amortized over one year

$1,215,578 

 

$1,281,330 

 






- 8 -






XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



9.

Property, plant and equipment, net

 

June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

Buildings

$573,609 

 

$559,214 

 

Plant and machinery

1,830,451 

 

1,745,286 

 

Motor vehicles

477,519 

 

465,536 

 

Furniture, fixtures and equipment

53,985 

 

51,262 

 

 

 

 

 

 

 

2,935,564 

 

2,821,298 

 

Accumulated depreciation

(1,140,611)

 

(988,708)

 

 

 

 

 

 

Property and equipment, net

$1,794,953 

 

$1,832,590 

 



10.

Other payables and accrued liabilities

 

June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

Other payables

$         - 

 

$16,604 

 

Accrued statutory staff welfare and salaries

18,972 

 

45,306 

 

Accrued liabilities

45,125 

 

42,173 

 

 

 

 

 

 

Total other payables and accrued liabilities

$64,097 

 

$104,083 

 

 


11.

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 $10,049 and $11,625 for the six month periods ended June 30, 2007 and 2006 respectively.






- 9 -





XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



12.

Segment information


The Company currently operates in two reportable segments, Sales of printed products and Re-sale of purchased 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:


 

Printing Products

 

Equipment Trading

 

Total

 

 

Six months ended June 30,

(Unaudited)

 

Six months ended June 30,

(Unaudited)

 

Six months ended June 30,

(Unaudited)

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$3,929,608

 

$2,357,319

 

$1,089,471

 

$1,065,977

 

$5,019,079

 

$3,423,296

 

Segment profit

$1,593,755

 

$322,541

 

$94,778

 

$56,534

 

$1,688,533

 

$379,075

 


 

Three months ended June 30,

(Unaudited)

 

Three months ended June 30,

(Unaudited)

 

Three months ended June 30,

(Unaudited)

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$2,177,191

 

$1,629,553

 

$701,771

 

$695,527

 

$2,878,962

 

$2,325,080

 

Segment profit

$999,511

 

$296,142

 

$137,944

 

$45,922

 

$1,137,455

 

$342,064

 


 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

(Unaudited)

 

(Audited)

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets

$6,563,803

 

$5,397,314

 

$596,630

 

$393,561

 

$7,160,433

 

$5,790,875

 


XINYINHAI TECHNOLOGY, LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 (Unaudited)

(Stated in US Dollars)



12.

Segment information (Cont’d)


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


 

Three months ended June 30, (Unaudited)

 

Six months ended June 30, (Unaudited)

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

Total consolidated revenue

$2,878,962

 

$2,325,080

 

$5,019,079

 

$3,423,296

 

 

 

 

 

 

 

 

 

 

Total income for reportable

 

 

 

 

 

 

 

 

segments

$1,137,455

 

$342,064

 

$1,688,533

 

$379,075

 

Unallocated amounts relating to

 

 

 

 

 

 

 

 

operations:

 

 

 

 

 

 

 

 

Amortization of prepaid

 

 

 

 

 

 

 

 

expenses and professional

 

 

 

 

 

 

 

 

fee

(208,892

)

-

 

(558,401

)

-

 

Dividend tax paid

-

 

(245,912

)

-

 

(245,912

)

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

 

  and minority interests

$928,563

 

$96,152

 

$1,130,132

 

$133,163

 


 

June 30,

 

December 31,

 

 

2007

 

2006

 

 

(Unaudited)

 

(Audited)

 

Assets

 

 

 

 

 

 

 

 

 

Total assets for reportable segments

$7,160,433 

 

$5,790,875 

 

Unallocated amounts relating to operations:

 

 

 

 

Prepaid expenses

1,511,906 

 

2,062,231 

 

 

 

 

 

 

Total assets

$8,672,339

 

$7,853,106

 



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





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ITEM 2.  MANAGEMENT DISCUSSION AND ANALYSIS


Results of Operations

Our revenue in the first six months of 2007 increased by 47% over the revenue realized in the first six months of 2006.  The increase was attributable primarily to our printing business (67% increase), with a modest increase in our equipment distribution business (2% increase).  The increase in printing revenue resulted primarily from our investment in added capacity during 2006, which enabled us to market our services more aggressively.  

Continued revenue growth in our printing services business will depend on whether we secure the capital needed to further expand our printing capacity.  Our production facilities are currently working near to capacity.  So an additional production line (estimate cost - $2,000,000) will be necessary if we are to sustain growth.  We are currently exploring financing possibilities, but have not yet received a commitment for the funds.

The 43% gross margin realized by our subsidiary, Harbin Golden Sea, on sales in the six months ended June 30, 2007 was an improvement over the 20% gross margin realized in the six months ended June 30, 2006.  The increase in gross margin from printing primarily reflected the pricing of the particular contracts, which were particularly profitable in the first six months of 2007.  Our expectation for the future is that our gross margin from printing services will average approximately 33%, albeit within a range of 27% to 40%, depending on the components of the business.

Our gross margin from equipment distribution continues to lag behind its historical level, and will do so in the future.  In the first six months of 2007 equipment sales produced gross margin of 9%, compared to 14% in 2006, 15% in 2005 and 23% in fiscal year 2004.  Gross margin from equipment sales fell in 2005 and 2006 primarily as a result of our growing use of selling agents, whose compensation is a reduction to our margin.  If we obtain the funding necessary to expand our printing capacity, we expect the printing portion of its business to grow faster than the equipment sales business.  If that occurs, overall gross margin should increase towards the higher margins that printing has historically produced.

Operating expenses as a percentage of revenue increased to 20.4% in the first six months of 2007 from 9.3% in the first six months of 2006.  The primary reason for the increase was the issuance of shares to consultants in the 4th quarter of 2006.  We utilized our equity in this manner in order to acquire the services of certain leaders in the printing industry.  However the issuance added a prepaid asset of $2,219,000 to our balance sheet, which we must amortize as expense over the duration of the consulting agreements.  During the first six months of 2007, the amortization of consulting fees added $550,325 to our general and administrative expenses, as the terms of one of the agreements expired in the first quarter.  For the remainder of 2007, the amortization of the value of the shares issued in 2006 will add $148,164 to our expenses.  

Partially counterbalancing the effect of the consulting fees on our operations was the improvement in the efficiency of our marketing operations.  During the first six months of 2007, while our revenues increased by 47%, our selling expenses increased by only 14%. This disparity between our fixed costs and our revenue reflected our ability to increase our production without a proportionate increase in our administrative overhead.  Similarly we expect that if we obtain the funds needed to further increase our printing production capacity, the resulting increase in our revenue will not require a corresponding increase in administrative expenses, with the exception that new investment in equipment will cause an increase in depreciation expense.

In May 2006, our operating subsidiary qualified for a two year exemption from Chinese income taxes.  When those two years end on December 31, 2007, we will then be eligible for three years of taxation at 50% of the statutory rate.  As a result of this government allowance, there were no income taxes payable on account of income in the first six months of 2007, compared to $56,864 in taxes payable in the first six months of 2006.

The operations of our subsidiary, Harbin Golden Sea, produced $1,688,533 in income during the first six months of 2007.  However, because we own only 90% of Harbin Golden Sea, we deducted a “minority interest” of $168,853 on our Statement of Operations.  After that deduction and taking into account the expenses incurred by the parent corporation, our net income for the first six months of 2007 was $961,279, an increase over net income of $44,078 realized in the first six months of 2006.  

Our business operates primarily in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income.  The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  In the first six months of 2007, the effect of converting our financial results to Dollars was to add $130,937 to our comprehensive income.


Liquidity and Capital Resources  

Since our subsidiary, Harbin Golden Sea, was organized in 1998, the growth of its operations has been 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, 2007 we had working capital totaling $5,309,741, an increase of $1,358,826 over working capital at December 31, 2006.  We also had no debt.  

During the six months quarter of 2007, despite net income of $961,279, Harbin Golden Sea’s operations produced only $33,972 in cash.  This inconsistency occurred because we increased our accounts and other receivable by $1,504,111 and increased our inventories by $180,954, while reducing our accounts payable by $135,583.  

Harbin Golden Sea’s business plan calls for significant investment in the growth of Harbin Golden Sea during 2007.  We have budgeted $2,000,000 to purchase an additional production line.  We also plan to spend $1,500,000 to purchase additional land on which to expand our production facilities.  And we intend to devote $800,000 to increase our marketing program.  It is our desire that the funds be obtained by the sale of equity.  To date, however, we have not received any commitment of funds.

Our capital is sufficient to fund our operations at their current level for the foreseeable future.  Significant growth, however, will require that we obtain additional capital or incur debt.  


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.


Risk Factors That May Affect Future Results


You should carefully consider the risks described below before buying our common stock.  If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.  


I.  Risks attendant to our business


We are operating at full capacity and must build additional facilities in order to grow.

At the present, our printing facilities are operating at close to capacity.  We will not be able to meet the demand for our services or to grow significantly unless we invest substantial sums in increasing our production capacity.  If we cannot obtain the funds needed for that investment, our business may stagnate.


Currency fluctuations may adversely affect our business.

We generate revenues and (with one exception) incur expenses and liabilities in Chinese RMB. However we report our financial results in the United States in U.S. Dollars.  As a result, we are subject to the effects of exchange rate fluctuations between these currencies.  Recently, there have been suggestions made to the Chinese government that it should adjust the exchange rate and end the linkage that in recent years has held the RMB-U.S. dollar exchange rate constant. If the RMB exchange rate is adjusted or is allowed to float freely against the U.S. dollar, our revenues, which are denominated in RMB, may fluctuate significantly in U.S. dollar terms. We have not entered into agreements or purchased instruments to hedge our exchange rate risks.

The one exception to our practice of doing business in Chinese RMB is the fact that we pay U.S. Dollars for the plasma arc cutting equipment that we distribute.  If the RMB is allowed to float against the U.S. Dollar, it is likely to reduce the price we pay for the equipment, which will make the equipment easier to sell in China.  If the adjustment becomes too great, however, it is possible that Hypertherm may alter its marketing arrangements to accommodate the effect of the falling Dollar on its overall marketing strategy.


Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.

Our future success depends on our ability to attract and retain highly skilled engineers, draftsmen, and technicians, as well as sales personnel experienced in international sales.  Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.


We may have difficulty establishing adequate management and financial controls in China.

The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.


Government regulations could increase our expenses.

We market our printing services to the financial services industry, which is highly regulated in China.  The government of China has many regulations that govern the documents that we print, the way we print them, and the companies that are permitted to print them.  The government is considering additional regulations, as it strives to modernize the Chinese financial services industry.  One or more of those regulations could impose compliance costs on us that would adversely affect our profits.

 

Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.   

The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.   


We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.


II.  Risks attendant to our management


Our business development would be hindered if we lost the services of our Chairman.

Tian Ling is the Chief Executive Officer of Xinyinhai Technology, Ltd. and of its operating subsidiary, Harbin Golden Sea Technology Printing Co., Ltd.  Mrs. Tian is responsible for strategizing not only our business plan but also the means of financing it.  If Mrs. Tian were to leave Xinyinhai or become unable to fulfill her responsibilities, our business would be imperiled.  At the very least, there would be a delay in the development of Xinyinhai until a suitable replacement for Mrs. Tian could be retained.


Xinyinhai is not likely to hold annual shareholder meetings in the next few years.

Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved.  The current members of the Board of Directors were appointed to that position by the previous directors.  If other directors are added to the Board in the future, it is likely that the current directors will appoint them.  As a result, the shareholders of Xinyinhai will have no effective means of exercising control over the operations of Xinyinhai.

 

Your ability to bring an action against us or against our directors, or to enforce a judgment against us or them, will be limited because we conduct all of our operations in China and because our management resides outside of the United States.

We conduct all of our operations in China through our wholly-owned subsidiary. All of our directors and officers reside in China and all of the assets of those Chinese residents are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the United States and of China may render you unable to enforce a judgment against our assets or the assets


ITEM 3.  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, 2007.  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, Ms. Tian and Ms. Du concluded that the Company’s system of disclosure controls and procedures was effective as of June 30, 2007 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 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


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 10, 2007

By: /s/ Tian Ling

                                  

      Tian Ling, Chief Executive Officer


By: /s/ Du Song

                                  

Du Song, Chief Financial Officer, Chief Accounting Officer  






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