SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2002
Commission file number 0-26559
CIK No. 0001082603
XIN NET CORP.
(Exact name of registrant as specified in this charter)
Florida 330-751560
------------------------------- --------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
#950 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 632-9638
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 the filing
requirements for at least the past 90 days.
YES X NO
----- -----
As of June 30, 2002, there were 21,360,010 shares of $0.001 par value common
stock outstanding.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
Stated in U.S. dollars 2002 2001
-----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $762,146 $1,360,071
Investments 1,317 64,077
Accrued Interest Receivables 890 701
Loan to ProtectServe Pacific Ltd. - 360,400
Inventory 6,031 5,985
Prepaid Expenses and Other Current Assets 209,684 183,188
Net Assets of Discontinued Operations 293,469 293,341
Deferred Costs 649,971 571,678
----------------------- ----------------------
Total Current Assets
1,923,508 2,839,441
Investment - at equity (Note 4) 719,508 -
Property and Equipment, Net (Note 2) 530,679 714,171
Goodwill - 200,000
----------------------- ----------------------
Total Assets $3,173,695 $3,753,612
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $620,953 $683,828
Deferred Revenue 1,801,608 1,861,700
Security Deposit 500,000 500,000
Capital Lease Obligation (Note 3)
- 58,840
----------------------- ----------------------
2,922,561 3,104,368
Commitments and Contingencies - -
Stockholders' Equity
Common Stock : $0.001 Par Value
Authorized : 50,000,000
Issued and Outstanding : 21,360,010 21,360 21,360
Additional Paid In Capital 7,214,045 7,214,045
Accumulated Deficit (6,834,172) (6,437,572)
Accumulated Other Comprehensive Income (150,099) (148,589)
----------------------- ----------------------
Total Stockholders' Equity
251,134 649,244
----------------------- ----------------------
Total Liabilities and Stockholders' Equity $3,173,695 $3,753,612
======================= ======================
F-1
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
Stated in U.S. dollars 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Revenue
Domain Name Registration $782,190 $599,036 $1,505,377 $1,087,878
E-Solutions 329,096 269,131 614,499 456,120
----------------------------------------------------
1,111,286 868,167 2,119,876 1,543,998
Cost of Revenue
Domain Name Registration 395,184 229,494 774,594 502,355
E-Solutions 51,060 14,764 67,235 25,269
----------------------------------------------------
446,244 244,258 841,829 527,624
Gross Profit 665,042 623,909 1,278,047 1,016,374
Expenses
Advertising and promotion 45,054 104,198 76,009 238,948
Depreciation and Amortization 94,442 47,685 151,471 93,972
General and administrative 166,639 143,478 304,198 304,083
Rent 90,017 117,152 186,591 234,761
Salaries, wages and benefits 313,421 387,910 660,672 812,363
Telephone and communication 76,894 48,868 154,429 182,557
----------------------------------------------------
786,467 849,291 1,533,370 1,866,684
----------------------------------------------------
Operating Loss
(121,425) (225,382) (255,323) (850,310)
Other Income and Expenses
Interest income 697 12,805 1,712 41,517
Other income 12,463 - 12,463 -
Equity loss in undistributed earnings of investee company
(Note 4) (105,144) - (80,792) -
Loss on disposal of capital assets (74,660) - (74,660) -
----------------------------------------------------
(166,644) 12,805 (141,277) 41,517
Loss from Continuing Operations (288,069) (212,577) (396,600) (808,793)
Loss from Discontinued Operations - (210,713) - (442,828)
----------------------------------------------------
Net Loss Available to Common Stockholders $(288,069) $(423,290) $(396,600) $(1,251,621)
====================================================
Loss per share attributable to common stockholders:
Loss from continuing operations $(0.01) ($0.01) $(0.02) $(0.04)
Loss from discontinued operations - (0.01) - (0.02)
----------------------------------------------------
Total basic and diluted $(0.01) $(0.02) $(0.02) $(0.06)
====================================================
Weighted average number of common shares outstanding:
Basic and diluted 21,360,010 21,360,010 21,360,010 21,360,010
====================================================
F-2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
( Unaudited )
Stated in U.S. dollars 2002 2001
--------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(396,600) $(1,251,621)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 151,471 135,028
Loss on disposal of capital assets 74,660 -
Translation adjustments (1,510) (270)
Equity income of The Link Group, Inc. 80,792 -
Changes in assets and liabilities
Increase in accrued interest receivables (189) 4,441
(Increase) Decrease in prepaid expenses and other current (26,496) (105,520)
assets
(Increase) Decrease in inventory (46) 36,156
Decrease in net assets of discontinued operations - 59,742
Increase in deferred costs (78,293) (22,958)
Increase (Decrease) in accounts payable (62,875) 237,242
Increase (Decrease) in deferred revenue (60,092) 222,590
Increase in security deposits - 100,000
---------------------------------
Net cash used in operating activities (319,178) (585,170)
---------------------------------
Cash flows from investing activities
Purchases of property and equipment (72,722) (99,008)
Reduction in investment 62,760 15
Reduction in loan to ProtectServe Pacific Ltd. 360,400 -
Investment in The Link Group, Inc. (600,300) -
---------------------------------
Net cash flows used in investing activities (249,862) (98,993)
---------------------------------
Cash flows from financing activities
Principal payments on capital lease obligations (28,885) (31,345)
---------------------------------
Net cash flows used in financing activities (28,885) (31,345)
---------------------------------
Decrease in cash and cash equivalents (597,925) (715,508)
Cash and cash equivalents - beginning of period 1,360,071 2,619,288
---------------------------------
Cash and cash equivalents - end of period $762,146 $1,903,780
=================================
Supplemental Information :
Cash paid for :
Interest $7,003 $9,299
Income taxes 7,176 -
F-3
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND THE YEARS ENDED DECEMBER 31, 2001 AND 2000
( Unaudited )
Accumulated
Stock Additional Other
Common Amount At Paid In Accumulated Comprehensive
Stated in U.S. dollars Shares Par Value Capital Deficit Income Total
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 21,360,000 $21,360 $7,214,025 $(1,318,945) $(107,219) $5,809,221
Exercise of Warrant for cash at 10 - 20 20
$2.00 per share in September 2000
Net loss (3,607,724) (3,607,724)
Translation Adjustments (45,037) (45,037)
---------------------------------------------------------------------------------------
Balance, December 31, 2000 21,360,010 21,360 7,214,045 (4,926,669) (152,256) 2,156,480
Net loss (1,510,903) (1,510,903)
Translation Adjustments 3,667 3,667
---------------------------------------------------------------------------------------
Balance, December 31, 2001 21,360,010 21,360 7,214,045 (6,437,572) (148,589) 649,244
Net loss (396,600) (396,600)
Translation Adjustments (1,510) (1,510)
---------------------------------------------------------------------------------------
Balance, June 30, 2002 $21,360,010 $21,360 $7,214,045 $(6,834,172) $(150,099) $251,134
=======================================================================================
F-4
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
( Unaudited )
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted or
condensed pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). In the opinion of the management all adjustments of a normal
recurring nature necessary for a fair presentation have been included. The
results for interim periods are not necessarily indicative of results for the
entire year. These condensed consolidated financial statements and accompanying
notes should be read in conjunction with the Company's annual consolidated
financial statements and the notes thereto for the fiscal year ended December
31, 2001 included in its Annual Report on Form 10-KSB.
The unaudited condensed consolidated financial statements include Xin Net Corp.
and its subsidiaries. Significant inter-company transactions and accounts have
been eliminated.
2. Property and Equipment
Property and equipment consists of the following :
June 30, 2002 December 31, 2001
------------- -----------------
Office equipment $ 222,432 $ 229,349
Equipment 705,997 757,625
Computer software 86,380 83,299
Furniture 27,976 27,976
-------------------------------------------------
Total 1,042,785
1,098,249
Less : Accumulated depreciation (512,106) (384,078)
-------------------------------------------------
Net book value $ 530,679 $ 714,171
=================================================
The depreciation expense charged to continuing operations for the three-month
and six-month periods ended June 30, 2002 are $94,442 and $151,471 respectively.
F-5
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
( Unaudited )
3. Capital Lease Obligation
The Company leases computer equipment, through its wholly owned subsidiary
company Infornet Investment Corp., repayable at approximately $5,330 (CND 8,407)
per month to June 30, 2002. The liability includes imputed interest at an
average rate of 6.12% per annum. The computer equipment has been returned to the
leaser upon the completion of the terms of the lease agreement.
4. Investment in The Link Group, Inc. ("Link")
Pursuant to a Subscription Agreement dated January 18, 2002, the Company paid
$600,300 in a private placement of Link for 14,500,000 (pre-reverse one for four
split) common shares at $0.0414 per share, as well as 10,875,000 special
warrants convertible into 10,875,000 post-reverse one for four split common
shares on or before January 31, 2004 at no additional consideration. The Company
exercised the 10,875,000 special warrants on March 12, 2002. An option to
purchase an additional 7,500,000 post-reverse one for four split common shares
at $0.04 per share, or $300,000, until February 15, 2002, was also granted to
the Company, which was not exercised.
By an agreement dated January 21, 2002, Link agreed to purchase all of the
outstanding shares of Protectserve Pacific Ltd. ("PSP") through the issuance of
37,500,000 (post-reverse one for four split) common shares. Link has the right
to buy back its shares at $0.001 per share from these individuals if PSP's after
tax profit is less than Hong Kong $9 million dollars ("HKD") for the twelve
months ending December 31, 2002. The buy back formula is for every HKD $333,333
that PSP falls short of the HKD $9 million after tax profit, Link can buy back
one million (post-reverse one for four split) common shares from these
individuals.
On February 18, 2002, the shareholders of Link approved the reverse split of the
issued and outstanding common shares of Link at the ratio of one for four,
thereby making the Company's total Link shares held equal to 15,370,675 shares,
representing 28.8% of the total issued and outstanding shares of Link. The
Company therefore accounted for its investment in Link on the equity basis,
which is carried at cost, adjusted for the Company's proportionate share of
their undistributed earnings or losses as follow:
Original cost of 15,370,675 shares of The Link Group, Inc. $ 800,300
Equity in undistributed earnings of investee company (80,792)
------------
Investment - at equity $ 719,508
============
F-6
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
( Unaudited )
5. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The following table sets forth the computations of shares and net loss used in
the calculation of basic and diluted loss per share for the three-month and
six-month periods ended June 30, 2002 and 2001:
Three months ended Six months ended
6/30/2002 6/30/2001 6/30/2002 6/30/2001
--------- --------- --------- ---------
Loss from continuing operations $ (288,069) $ (212,577) $ (396,600) $ (808,793)
Loss from discontinued operations - (210,713) - (442,828)
--------------- --------------- ---------------- ----------------
Net loss for the period (288,069) (423,290) (396,600) (1,251,621)
Weighted-average shares outstanding 21,360,010 21,360,000 21,360,010 21,360,000
Effect of dilutive securities :
Dilutive options - $1.30 - - - -
Dilutive warrants - $1.00 - - - -
Dilutive warrants - $1.50 - - - -
--------------- --------------- ---------------- ----------------
Dilutive potential common shares - - - -
--------------- --------------- ---------------- ----------------
Adjusted weighted-average shares
and assumed conversions 21,360,010 21,360,000 21,360,010 21,360,000
Loss per share attributable to common shareholders:
Loss from continuing operations (0.01) (0.01) (0.02) (0.04)
Loss from discontinued operations - (0.01) - (0.02)
--------------- --------------- ---------------- ----------------
Total basic and diluted loss per share $ (0.01)$ (0.02)$ (0.02)$ (0.06)
=============== =============== ================ ================
F-7
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
( Unaudited )
5. Basic and Diluted Loss Per Share - Continued
Due to the loss for the three-month and six-month periods ended June 30, 2002
and 2001, the effect of outstanding options and warrants was not included as the
effect would be anti-dilutive.
6. Total Amount Advanced to Joint Venture
As at June 30, 2002, the total amount advanced to the joint venture project is
$3,132,973.
7. Segment and Geographic Data
The Company's reportable segments are geographic areas that provide
internet-related services and products to the Chinese markets. Summarized
financial information concerning the Company's reportable segments is shown in
the following table. The "Other" column includes corporate related items, and,
as it relates to segment profit (loss), income and expenses not allocated to
reportable segments.
China Canada Other Total
For the three months ended June 30, 2002
----------------------------------------
Revenue from continuing operations $ 1,111,286 $ - $ -$ 1,111,286
Operating Loss (81,823) (3,042) (36,560) (121,425)
Total Assets 2,347,030 8,885 817,780 3,173,695
For the three months ended June 30, 2001
----------------------------------------
Revenue from continuing operations $ 868,167 $ - $ - $ 868,167
Operating Loss (179,066) (3,424) (42,892) (225,382)
Total Assets 2,448,671 22,797 1,274,694 3,746,162
F-8
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
( Unaudited )
7. Segment and Geographic Data - Continued
For the six months ended June 30, 2002
--------------------------------------
Revenue from continuing operations $ 2,119,876 $ - $ - $ 2,119,876
Operating Loss (152,000) (8,351) (94,972) (255,323)
Total Assets 2,347,030 8,885 817,780 3,173,695
For the six months ended June 30, 2001
--------------------------------------
Revenue from continuing operations $ 1,543,998 $ - $ - $ 1,543,998
Operating Loss (764,315) (6,541) (79,454) (850,310)
Total Assets 2,448,671 22,797 1,274,694 3,746,162
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of Xin Net
Corp. and Subsidiaries (the "Company") financial condition, changes in financial
condition and results of operations. The MD&A is organized as follows:
o Caution concerning forward-looking statements. This section discusses
how certain forward-looking statements made by the Company throughout
the MD&A and in the consolidated financial statements are based on
management's present expectations about future events and are
inherently susceptible to uncertainty and changes in circumstances.
o Recent accounting pronouncements - This sections provides an update on
the Financial Accounting Standards Board's recent accounting
pronouncements.
o Critical accounting policies. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
o Liquidity and capital resources. This section provides an analysis of
the Company's financial condition and cash flows as of and for the six
months ended June 30, 2002.
o Results of operations. This section provides an analysis of the
Company's results of operations for the second quarter of 2002 relative
to that of 2001. A brief description is provided of transactions and
events that impact the comparability of the results being analyzed.
o Nature of the Company's present operation and future trends. This
section provides a general description of the Company's business, as
well as recent developments that the Company believes are important in
understanding the results of operations, as well as to anticipate
future trends in those operations.
o Future trends. This section provides a discussion on events that are
likely to have an impact on short-term or long-term liquidity.
Caution concerning forward-looking statements
The following discussion should be read in conjunction with Xin Net Corp.'s
("we," "us," or the "Company") financial statements and the notes thereto and
the other financial information appearing elsewhere in this document. In
addition to historical information, the following discussion and other parts of
this document contain certain forward-looking information. When used in this
discussion, the words "believes," "anticipates," "expects," "intends," "will"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those projected due to a number
of factors beyond the Company's control. The Company does not undertake to
publicly update or revise any of its forward-looking statements even if
experience or future changes show that the indicated results or events will not
be realized. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Readers are
also urged to carefully review and consider the Company's discussions regarding
the various factors, which affect its business, included in this section and
elsewhere in this report.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," effective for exit or disposal
activities initiated after December 31, 2002. The standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS 146 essentially requires a liability to be recognized and
measured initially at its fair value in the period in which the liability is
incurred for a cost associated with an exit or disposal activity. The Company
has not had a chance to review what impact this standard may have on its
financial statements.
Critical Accounting Policies And Estimates
Our discussion and analysis or plan of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to bad debts, inventories,
intangible assets, deferred costs and revenue, income taxes and contingencies.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be affected by managements
estimates and/or judgments.
Deferred revenue and deferred costs: The Company's revenue is primarily derived
from the sale of nonrefundable subscription services (Internet access usage
cards and content services) and domain name registration services, and is
recognized over the period the services are provided. Deferred revenue consists
primarily of prepaid subscription agreements and domain name registration fees.
End users receive certain elements of the Company's revenues over a period of
time. As a result, the Company's revenue recognized represents the fair value of
these elements over the product's life cycle. Deferred cost consists primarily
of amounts paid to various Registrars for domain name registration fees and are
deferred on the same basis as revenue. Deferred revenue represents 62% of the
Company's total current liabilities at June 30, 2002 and deferred costs
represent 34% of the Company's total current assets at June 30, 2002, or 20% of
the Company's total assets.
Investment in "The Link Group, Inc." ("Link"): The Company's investment in The
Link Group, Inc. will be subject to market volatility. The Company owns 28.8% of
the total issued and outstanding shares of Link and accounts for the investment
on the equity basis, which is carried at cost, adjusted for the Company's
proportionate share of their undistributed earnings or losses. The assets cost
at June 30, 2002, was $719,508, representing 23% of the Company's total assets.
Liquidity and capital resources
-------------------------------
Liquidity. The Company had net cash, receivables and investments of $764,353 at
June 30, 2002. The Company has no other capital resources other than the ability
to use its common stock to raise additional capital. It did not raise any
additional capital during the first quarter or second quarter of 2002. It has
equipment of $530,679 on the books, which is not necessarily liquid at such
value. It has an investment in The Link Group, Inc. acquired at a cost of
$800,300. Other than cash capital, its other assets would be illiquid.
At the end of the quarter, it had $1,923,508 in current assets. It had current
liabilities of $2,922,561, which included deferred revenues of $1,801,608 and a
security deposit of $500,000 from the sale of its Internet Access Provision
business in June 2001. (The Company continues to experience some delays in
obtaining new funding; it plans to close the sale of its Internet Access
Provision services when this issue is resolved).
The cash capital at the end of the quarter of $762,146 will be used to fund
continued operations, which management believes is adequate to satisfy its cash
requirements for the next twelve months. The trend of operating losses could
continue due to costs of equipment and telecommunications, design of new
value-added services, start up operations for new locations and advertising &
marketing which precede development of additional revenue for the Company.
Cash flows. Net cash flows used in operating activities decreased to $319,178 in
the first six months in 2002 from $585,170 in the corresponding period in 2001.
The single most important item which contributed to this result was the decrease
in net loss to $396,600 in the first six months in 2002, as compared to
$1,251,621 in the first six months in 2001. Net cash flow used in investing
increased to $249,862 in first six months in 2002 as compared $98,993 in first
six months 2001 primarily due to an investment of $600,300 in The Link Group,
Inc., combined with the repayment of a $360,400 loan to the Company by
ProtectServe Pacific Ltd. Purchases of equipment decreased to $72,722 in first
six months 2002 from $99,008 in first six months 2001. Net cash flow used in
financing activities decreased marginally to $28,885 in first six months 2002,
compared to $31,345 in first six months 2001.
Changes in Financial Condition. At the end of the second quarter 2002 Company
assets had decreased to $3,173,695 compared to $3,753,612 at year-end 2001. The
current assets totaled $1,923,508 at the end of second quarter 2002 compared to
$2,839,441 at year-end 2001. Total liabilities at end of second quarter 2002
were $2,922,561 compared to $3,104,368 at year-end 2001. At June 30,2002 the
Company had $762,146 in cash compared to $1,360,071 at year-end 2001; $200,000
in net cash was used in the first quarter 2002 as the Company's investment in
The Link Group, Inc. Net cash, investments and receivables at June 30, 2002
totaled $764,353.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2002 AS COMPARED TO THE
QUARTER ENDED JUNE 30, 2001.
Revenues. Revenues (excluding those generated by Internet Access Provision
services which the Company ceased providing since June 2001) in second quarter
2002 rose 28% to $1,111,286 in the form of net sales from its joint venture with
Xin Hai Technology Ltd, as compared to net sales of $868,167 in second quarter
2001. The increase is a result of the Company's continued efforts in expanding
its customer base due to sales and marketing strategies in the areas of domain
name registration and e-solutions services.
Cost of revenues and gross margin. The Company had cost of revenues of $446,244
in second quarter 2002, as compared to $244,258 in second quarter 2001. Gross
profit in second quarter 2002 was $665,042 compared to $623,909 in second
quarter 2001.
Operating expenses. The Company incurred operating expenses of $786,467 in
second quarter 2002 compared to operating expenses of $849,291 in second quarter
2001, a decrease of 7%. This result, achieved against the backdrop of an
increase in revenues of 28%, was made possible by the cost-cutting measures
which the Company implemented throughout 2001 and continued in the first six
months 2002. Expenses which increased were: amortization, to $94,442 in the
second quarter of 2002 from $47,685 in the corresponding quarter in 2001;
telephone and communications, to $76,894 in second quarter 2002 from $48,868 in
the corresponding 2001 period; and general & administrative, to $166,639 in
second quarter 2002 from $143,478 in the second quarter 2001. All other expense
categories saw a decrease: advertising and promotion to $45,054 from $104,198;
rent to $90,017 from $117,152; and salaries, wages and benefits to $313,421 from
$387,910.
Net loss and loss per share. Operating loss for second quarter 2002 decreased by
46% to $121,425 compared to the second quarter 2001 operating loss of $225,382.
The company had "other loss" of $166,644 in second quarter 2002 compared to
"other gain" of $12,805 in second quarter 2001. The net loss in second quarter
2002 was $288,069 ($0.01/share) compared to the net loss in second quarter 2001
of $423,290 ($0.02/share).
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SAME
PERIOD IN 2001.
Revenues. Revenues (excluding those generated by Internet Access Provision
services which the Company ceased providing since June 2001) in the six months
2002 rose to $2,119,876 in the form of net sales from its joint venture with
Xin Hai Technology Ltd, as compared to net sales of $1,543,998 in the same
period in 2001. The increase is a result of the Company's continued efforts in
expanding its customer base due to sales and marketing strategies in the areas
of domain name registration and e-solutions services.
Cost of revenues and gross margin. The Company had cost of revenues of $841,829
in the period in 2002, as compared to $527,624 in the period in 2001. Gross
profit in the period in 2002 was $1,278,047 compared to $1,016,374 in the period
in 2001.
Future Trends
Need for Additional Financing. The Company believes it has sufficient capital to
meet its short-term cash needs, including the costs of compliance with the
continuing reporting requirements of the Securities Exchange Act of 1934. But if
losses continue it may have to sale its investments, seek loans or equity
placements to cover longer term cash needs to continue operations and expansion.
The Company signed a funding agreement with the iBanc Group, Inc. in November
2001. During the course of the second quarter, the Company persevered in its
efforts to obtain this funding, but no concrete results have followed thus far.
If and when the agreement with iBanc comes to fruition, a sum of $5-6 million
will be made available to the Company. There is no assurance, however, that such
funds will become available. No commitments to provide additional funds have
been made by management or other stockholders. Accordingly, there can be no
assurance that any additional funds will be available to the Company to allow it
to cover operations expenses.
If future revenue declines, or operations are unprofitable, it will be
forced to develop another line of business, or to finance its operations through
the sale of assets it has, or enter into the sale of stock for additional
capital, none of which may be feasible when needed. The Company has no specific
management ability, nor financial resources or plans to enter any other business
as of this date.
Operating expenses. The Company incurred operating expenses of $1,533,370 in
the period in 2002 compared to operating expenses of $1,886,684 in the period in
2001, a decrease of 18%. This result, achieved against the backdrop of an
increase in revenues of$575,878, was made possible by the cost-cutting measures
which the Company implemented throughout 2001 and continued in the first six
months 2002. Expenses which increased were: amortization, to $151,471 in the
period in 2002 from $51,972 in the corresponding period in 2001; general &
administrative, to $304,198 in the period in 2002 from $304,083 in the period in
2001. All other expense categories saw a decrease: advertising and promotion to
$76,009 from $238,948; rent to $186,591 from $234,781; salaries, wages and
benefits to $660,672 from $812,363; telephone and communications to $154,429
from $182,357.
Net loss and loss per share. Operating loss for the period in 2002 decreased by
($255,323) compared to the same period in 2001 operating loss of ($850,310).
The company had "other loss" of ($141,277) in the period in 2002 compared to
"other gain" of $41,517 in the period in 2001. The net loss in the period in
2002 was ($396,600) ($0.02/share) compared to the net loss in the same period in
2001 of ($125,621) ($0.04/share).
From the aspect of whether it can continue toward the business goal of
maintaining and expanding the joint venture for internet services in China, it
may use all of its available capital without generating a profit.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
The Company will continue its cost-saving measures and ongoing efforts to
increase revenues in order to achieve profitability. However the Company cannot
assure that any profit on revenues can occur in the future. It may have to
continue, through its joint venture business, to advertise and promote its
services and develop additional value-added services. Operating losses may
continue.
The Company will continue to seek additional funding. If the Company acquires
additional capital, for example through sale of stock in private placements or
through investors exercising warrants, it may be able to advertise and promote
its services more aggressively and expand its business more rapidly.
Market Risk. The Company's investments in The Link Group, Inc. will be subject
to market volatility. It does not hold any derivatives or other investments that
are subject to market risk. The carrying values of any financial instruments,
approximate fair value as of those dates because of the relatively short-term
maturity of these instruments which eliminates any potential market risk
associated with such instruments.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in securities - None.
Item 3. Defaults upon senior securities - None.
Item 4. Submission of matters to a vote of security holders - None.
Item 5. Other information - None.
Item 6. Exhibits and reports on Form 8-K
(a) The following are filed as Exhibits to this
Quarterly Report. The numbers refer to the Exhibit Table of
Item 601 of Regulation S-K:
None.
(b) Reports on Form 8-K filed during the three months
ended June 30, 2002. (incorporated by reference)
None.
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 of the
undersigned thereunto duly authorized.
Dated: August 19, 2002
XIN NET CORP.
by: /s/ Maurice Tsakok
----------------------------
Maurice Tsakok, Director