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: September 30, 2003
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 require-
ments for at least the past 90 days.
YES X NO
----- -----
As of September 30, 2003, there were 41,360,010 shares of $0.001 par value
common stock outstanding.
XIN NET CORP.
INDEX TO QUARTERLY REPORT
ON FORM 10-QSB
September 30, 2003
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets........................................F-1
Consolidated Statements of Operations..............................F-2
Consolidated Statements of Cash Flows..............................F-3
Notes to Consolidated Financial Statements.........................F-4
ITEM 2. Management's Discussion and Analysis............................. 3
ITEM 3. Controls and Procedures.......................................... 6
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 6
ITEM 2. Changes in Securities and Use of Proceeds........................ 7
ITEM 3. Defaults Upon Senior Securities.................................. 7
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 7
ITEM 5. Other Information................................................ 7
ITEM 6. Exhibits and Reports on Form 8-K................................. 7
SIGNATURE..................................................................... 8
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
September 30, December 31,
Stated in U.S. dollars 2003 2002
--------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents $3,258,999 $957,133
Investments - 1,266
Prepaid Expenses and Other Current Assets 167,670 22,422
Assets of Discontinued Operations - Internet-related Services
2,435,485 2,186,337
Net Assets of Discontinued Operations - ISP 293,347 293,372
------------------- -------------------
Total Current Assets 6,155,501 3,460,530
Investment - at equity 253,524 319,600
Property and Equipment, Net 15,611 10,906
Goodwill 187,262 127,124
------------------- -------------------
Total Assets $6,611,898 $3,918,160
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $135,783 $109,044
Deferred Revenue 66,282 37,725
Liabilities of Discontinued Operations - Internet-related Services 3,200,857 2,529,996
Security deposit from Beijing Sino Soft Intel Information
Technology Ltd. 500,000 500,000
Security deposit from Sino-i.com Ltd. 2,417,000 -
------------------- -------------------
6,319,922 3,176,765
Minority Interest 43,161 -
Commitments and Contingencies - -
Stockholders' Equity
Common Stock : $0.001 Par Value
Authorized : 50,000,000
Issued and Outstanding : 41,360,010 (2002: 41,360,010) 41,360 41,360
Additional Paid In Capital 8,194,045 8,194,045
Accumulated Deficit (7,831,843) (7,345,351)
Accumulated Other Comprehensive Loss (154,747) (148,659)
------------------- -------------------
Total Stockholders' Equity 248,815 741,395
------------------- -------------------
Total Liabilities and Stockholders' Equity $6,611,898 $3,918,160
=================== ===================
F-1
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
Stated in U.S. dollars 2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------------------------
Revenue
Tuition fee $ 78,040 $- $ 221,323 $ -
Commercial press 89,718 89,718 -
------------- ----------- ------------ --------------
167,758 - 311,041 -
Cost of revenue
Commercial press 31,992 - 31,992 -
Gross profit 135,766 - 279,049 -
Expenses
Advertising and promotion 2,612 - 15,639 1,075
Consulting and professional 32,008 31,826 78,434 101,843
Depreciation 2,182 556 5,739 1,665
Foreign exchange (gain) loss (1,759) 1,306 (6,214) (820)
General and administrative 34,504 1,257 57,188 22,872
Rent 16,549 1,550 59,696 5,784
Salaries, wages and sub-contract 83,256 2,050 195,750 11,043
------------- ----------- ------------ --------------
169,352 38,545 406,232 143,462
Operating Loss (33,586) (38,545) (127,183) (143,462)
Other Income and Expenses
Interest income 3 - 11 1,162
Other income 2,497 - 8,545 12,463
Equity loss in undistributed earnings of investee company
(21,705) (89,708) (66,076) (170,500)
------------- ----------- ------------ --------------
(19,205) (89,708) (57,520) (156,875)
Loss before minority interest and discontinued operations (52,791) (128,253) (184,703) (300,337)
Minority interest 21,198 - 21,198 -
------------- ----------- ------------ --------------
(31,593) (128,253) (163,505) (300,337)
Loss from Discontinued Operations - Internet-related Services - (41,806) (322,987) (266,322)
------------- ----------- ------------ --------------
Net Loss Available to Common Stockholders $(31,593) $(170,059) $ (486,492) $ (566,659)
============= =========== ============ ==============
Loss per share attributable to common stockholders:
Loss from continuing operations $(0.00) $(0.01) $(0.00) $(0.02)
Loss from discontinued operations 0.00 (0.00) (0.01) (0.01)
------------- ----------- ------------ --------------
Total basic and diluted $(0.00) $(0.01) $(0.01) $(0.03)
============= =========== ============ ==============
Weighted average number of common shares outstanding:
Basic and diluted 41,360,010 21,360,010 41,360,010 21,360,010
============= =========== ============ ==============
F-2
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Stated in U.S. dollars 2003 2002
-------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss from continuing operations $(163,505) $(300,337)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 5,739 1,665
Non-cash income from Dawa Business Press Inc. (476) -
Translation adjustments (6,088) (1,323)
Minority interest (21,198) -
Equity loss of The Link Group, Inc. 66,076 170,500
Changes in assets and liabilities
Decrease (Increase) in prepaid expenses and other current assets (84,542) 18,632
Decrease in accounts payable (29,270) (68,783)
Increase in deferred revenue 28,557 -
Increase in security deposits 2,417,000 -
----------- ----------
Net cash provided by (used in) operating activities 2,212,293 (179,646)
----------- ----------
Cash flows from investing activities
Purchases of property and equipment (10,444) (29,981)
Reduction in investment 1,266 49,818
Reduction in loan to ProtectServe Pacific Ltd. - 360,400
Investment in The Link Group, Inc. - (600,300)
----------- ----------
Net cash flows used in investing activities (9,178) (220,063)
----------- ----------
Cash flows from financing activities
Principal payments on capital lease obligations - (28,885)
----------- ----------
Net cash flows used in financing activities - (28,885)
----------- ----------
Net cash provided by (used in) continuing operations 2,203,115 (428,594)
Net cash provided by discontinued operations 98,751 70,682
----------- ----------
Increase (Decrease) in cash and cash equivalents 2,301,866 (357,912)
Cash and cash equivalents - beginning of period 957,133 434,215
----------- ----------
Cash and cash equivalents - end of period $3,258,999 $76,303
=========== ==========
Supplemental Information :
Cash paid for :
Interest $6,573 $9,475
Income taxes 10,978 7,176
F-3
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
( Unaudited )
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
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 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, 2002 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 :
September 30, 2003 December 31, 2002
Equipment $ 30,946 $ 20,284
Library 9,546 9,146
Furniture 10,643 8,606
-----------------------------------------
Total 51,135 38,036
Less : Accumulated depreciation (35,524) (27,130)
-----------------------------------------
Net book value $ 15,611 $ 10,906
=========================================
The depreciation expense charged to continuing operations for the three-month
and nine-month periods ended September 30, 2003 was $2,182 and $5,739
respectively.
3. Investment in The Link Group, Inc. ("Link")
Pursuant to a Share Exchange Agreement dated December 20, 2001, the Company paid
$200,000 cash for 3,882,700 shares of The Link Group, Inc. ("Link").
F-4
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. On
October 14, 2002, Link cancelled 8,300,000 outstanding common shares as part of
the consideration of the disposition of its subsidiary company and thereafter
the Company's holding in Link correspondingly increases to 34.1%. On March 28,
2003, Link issued 3,000,000 common shares and cancelled 14,000,000 common shares
and thereafter the Company's holding in Link correspondingly changes to 24.8%.
On August 5, 2003, Link cancelled 22,200,000 shares pursuant to a repurchase
agreement and thereafter the Company's holding in Link correspondingly increases
to 38.6%. The Company 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 at September 30, 2003:
Original cost of 15,370,675 shares of The Link Group, Inc. $ 800,300
Equity in undistributed earnings of investee company (546,776)
-------------
Investment - at equity $ 253,524
=============
4. Discontinued Operations - Internet-related Services
On February 26, 2003, the Company entered into an agreement to sell the
internet-related services provided in China to a subsidiary company of
Sino-i.com Ltd., a company listed on the Hong Kong Stock Exchange for a total
consideration of RMB 20 million (approximately US$2,417,000). The transaction is
still subject to the approval of shareholders. As of September 30, 2003, the
Company has received RMB 20 million as a security deposit for the transaction.
The decision to sell was due to the lack of funding and high competition in the
market.
The estimated loss on disposal of the internet-related business, together with
the related assets and liabilities to be disposed, is as follows:
Sales proceeds $ 2,417,000
Less : Current assets (1,992,665)
Capital assets (442,820)
Add : Current liabilities 3,200,857
------------
3,182,372
Less: Write off of loan balance due from internet-related
business (3,084,544)
------------
Estimated gain on disposal of internet-related business $ 97,828
============
F-5
The results of the discontinued internet-related services for the three-month
and nine-month periods ended September 30, 2003 and 2002 are as follows:
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
Revenue $ - $ 1,128,814 $ 2,372,554 $ 3,248,690
Operating Costs - (1,170,620) (2,695,541) (3,515,012)
---------------- ---------------- ----------------- -----------------
Net Loss $ - $ (41,806) $ (322,987) $ (266,322)
================ ================ ================= =================
5. Discontinued Operations - ISP Services
The Board of Directors of the Company decided to discontinue the unprofitable
ISP services in the PRC. The Company's joint venture partner, Xin Hai, signed an
agreement on June 22, 2001 to sell its ISP operation and related assets to a
private company in Beijing, PRC for sales proceeds of $700,000. The agreement is
subject to payments being made by the other party at specified dates and to
Company shareholders' approval. The net assets classified as held for sale have
been grouped on the accompanying consolidated balance sheets as Net Assets of
Discontinued Operations. As of September 30, 2003, $500,000 has been received as
a security deposit for the transaction. A provision of $200,000 has been made
against the balance of the sales proceeds as the Company has determined that the
purchaser has a liquidity problem and may not be able pay the remaining balance.
The estimated gain on disposal of the ISP services, together with the related
assets and liabilities to be disposed, is as follows:
Sales proceeds $ 700,000
Less : Capital assets (320,797)
Accounts receivable (289,871)
Add : Deferred revenue 317,321
Less : Provision for doubtful debt (200,000)
--------------
$ 206,653
==============
6. 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
nine-month periods ended September 30, 2003 and 2002:
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
Loss from continuing operations $ (31,593) $ (128,253) $ (163,505) $ (300,337)
Loss from discontinued operations - (41,806) (322,987) (266,322)
------------- -------------- ------------- ---------------
Net loss for the year (31,593) (170,059) (486,492) (566,659)
Weighted-average shares outstanding 41,360,010 21,360,010 41,360,010 21,360,010
Effect of dilutive securities :
Dilutive options - $1.30 - - - -
F-6
Dilutive warrants - $0.50 - - - -
Dilutive warrants - $0.75 - - - -
------------- -------------- ------------- ---------------
Dilutive potential common shares - - - -
------------- -------------- ------------- ---------------
Adjusted weighted-average shares and assumed
conversions 41,360,010 21,360,010 41,360,010 21,360,010
Loss per share attributable to common shareholders:
Loss from continuing operations (0.00) (0.01) (0.00) (0.02)
Loss from discontinued operations (0.00) (0.00) (0.01) (0.01)
------------- -------------- ------------- ---------------
Total basic and diluted loss per share $ (0.00) $ (0.01) $ (0.01) $ (0.03)
============= ============== ============= ===============
The effect of outstanding options and warrants was not included as the effect
would be antidilutive.
7. Share Purchase Warrants
On April 1, 2003, the Company extended its outstanding 5,884,990 million Series
"A" Share Purchase Warrants as follows:
(i) the exercise price of the Series "A" Share Purchase Warrants is
adjusted to $0.50 each and their term is extended to March 31, 2005:
(ii) upon exercise of one Series "A" Share Purchase Warrants at $0.50, the
holder will receive one common share of the company and one Series "B"
Share Purchase Warrant; and
(iii) the exercise price of the Series "B" Share Purchase Warrants is
adjusted to $0.75 each and their term is extended to March 31, 2006;
(iv) upon exercise of one Series "B" Share Purchase Warrant at $0.75, the
holder will receive one common share of the Company.
8. Acquisition of Dawa Business Group Inc. ("Dawa")
On July 3, 2003, the Company acquired 51% of the outstanding and issued shares
of Dawa in exchange for 49% of the outstanding and issued shares of the
Company's subsidiary Windsor Education Academy Inc. ("Windsor").
Dawa's main business is the publication of a weekly Chinese community newspaper
and a monthly magazine featuring education and employment in Vancouver's Chinese
community. The Company acquired Windsor on December 10, 2002, a licensed school
specializing in offering English as a Secondary Language ("ESL) courses to
foreign students. The Company can promote Windsor and its affiliated educational
products through the Dawa publications.
Dawa's financial information is incorporated into the consolidation of the
Company effective June 30, 2003, as the transactions that occurred between June
30, 2003 to July 2, 2003 were immaterial. The value assigned to assets and
liabilities acquired can be summarized as follows :
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information presented here should be read in conjunction with Xin Net
Corp.'s consolidated financial statements and related notes. 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," 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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE
SAME PERIOD IN 2002.
Revenues. The Company had $78,040 in revenue in the period in 2003 from educa-
tional services, through its subsidiary, Windsor Education Academy Inc.
("Windsor"), which was acquired in late December 2002. The Company had $89,718
in revenue in the period in 2003 from commercial press, through its subsidiary,
Dawa Business Group Inc., ("Dawa"), which was acquired in early July 2003. The
Company discontinued the internet-related operations in China. Please refer to
Note 4 of the notes to the financial statements for details.
Cost of revenues. Cost of revenues was $31,992 for the three months ended
September 30, 2003, and represented costs incurred to generate Dawa revenues.
Cost of revenues consists primarily of printing costs, materials, and labor.
These costs are relatively fixed and do not fluctuate significantly.
Expenses. The Company incurred expenses in the quarter totaling $169,352 in 2003
compared to $38,545 in 2002. The largest components of expenses were consulting
and professional fees, wages, salaries, and sub-contract services, rent expense,
and corporate and administrative overhead. The increase in expenses was the
result of the expenses incurred related to the operations of Windsor, which was
acquired in late December 2002, and the commercial press operations of Dawa,
acquired in early July 2003. The Company discontinued the internet-related
operations in China and therefore all of the expenses related to these operation
are included in the caption "Loss from Discontinued Operations-Internet-related
Services" in the statement of operations.
Other income and expense. The Company had other income of $2,497 in the period
in 2003 compared to nil in 2002. The Company had a charge of ($21,705) in 2003
and a charge of ($89,708) in 2002 for equity loss in undistributed earnings of
the investee company.
Net Losses. The loss before minority interest and discontinued operations was
($52,791) in 2003 and ($128,253) in 2002. The net loss to common shareholders,
after minority interest deduction, was ($31,593) in 2003 and in 2002, after a
loss of ($44,806) from discontinued operations, the loss was ($170,059). The net
loss per share in the quarter was nominal in 2003 and ($.01) in 2002.
The Company expects the trend of losses to continue at the current rate until it
can achieve business operations in which revenues can equal or exceed expenses,
of which there can be no assurance.
3
Loss from discontinued operations. The loss from discontinued operations was nil
in the period in 2003 and $41,806 in 2002. Discontinued operations represents
net income and expenses of the Company's internet-related operations in China.
The Company entered into an agreement to sell the internet-related services
provided in China to a subsidiary company of Sino-i.com Ltd., a company listed
on the Hong Kong Stock Exchange for a total consideration of RMB 20 million
(approximately US$2,417,000). The transaction is still subject to the approval
of shareholders. As of September 30, 2003, the Company has received RMB 20
million as a security deposit for the transaction. The decision to sell was due
to the lack of funding and high competition in the market.
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003 AS
COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002.
Revenues. The Company had $221,323 in revenue in the period in 2003 from
educational services. The Company had $89,718 in revenue in the period in 2003
from commercial press, which was acquired in early July 2003. The Company dis-
continued the internet-related operations in China. Please refer to Note 4 of
the notes to the financial statements for details.
Cost of revenues. Cost of revenues was $31,992 for the nine months ended
September 30, 2003, and represented costs incurred to generate Dawa revenues.
Cost of revenues consists primarily of printing costs, materials, and labor.
These costs are relatively fixed and do not fluctuate significantly.
Expenses. The Company incurred expenses in the period totaling $406,232 in 2003
as compared to $143,462 in 2002. 2002. The largest components of expenses were
consulting and professional fees, wages, salaries, and sub-contract services,
rent expense, and corporate and administrative overhead The increase in expenses
was primarily the result of the expenses incurred related to the operations of
Windsor, which was acquired in late December 2002, and the commercial press
operations of Dawa, acquired in early July 2003. The Company discontinued the
internet-related operations in China and therefore all of the expenses related
to these operations are included in the caption "Loss from Discontinued
Operations-Internet-related Services" in the statement of operations.
Other income and expense. The Company had other income of $8,545 in the period
in 2003 compared to $12,463 in 2002. The Company had a charge of ($66,076) in
2003 and a charge of ($170,500) in 2002 for equity loss in undistributed earn-
ings of investee company.
Loss from Discontinued Operations. The loss from discontinued operations was
($322,987) in the nine-month period in 2003 and ($266,322) in the same period of
2002. Discontinued operations represents net income and expenses of the
Company's internet-related operations in China. The Company entered into an
agreement to sell the internet-related services provided in China to a
subsidiary company of Sino-i.com Ltd., a company listed on the Hong Kong Stock
Exchange for a total consideration of RMB 20 million (approximately
US$2,417,000). The transaction is still subject to the approval of shareholders.
As of September 30, 2003, the Company has received RMB 20 million as a security
deposit for the transaction. The decision to sell was due to the lack of funding
and high competition in the market.
LOSS ON OPERATIONS
The Company had an operating loss of ($127,183) in the period in 2003 compared
to $143,462) in the same period in 2002. The net loss in the period, after
minority interest adjustment, was ($163,505) in 2003 in the period, that when
combined with loss on discontinued operations of ($322,987) resulted in a
($486,492) loss for the period in 2003. The loss in the period in 2002 was
($300,337) that, when combined with the (266,322) loss on discontinued opera-
tions resulted in a loss of ($566,659) in 2002. The net loss per share was
($.01) in 2003 and ($.03) in 2002 in the nine month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash and cash equivalents of $3,258,999 at September
30, 2003, which will be used to fund continued operations. Management believes
cash is adequate to satisfy its cash requirements for at least the next twelve
months. The trend of operating losses could continue due to costs of equipment,
design of new value-added services, start up operations for new locations and
advertising and marketing, which precede development of additional revenue for
the Company.
4
The Company has no other capital resources other than the ability to use
its common stock to achieve additional capital raising. It did not raise any
additional capital during the third quarter of 2003. It has equipment of $15,611
on the books, which is not necessarily liquid at such value. It has an invest-
ment in The Link Group, Inc. valued at $253,524. Other than cash capital, its
other assets would be illiquid.
At the end of the quarter, it had $6,155,501 in current assets. It had
current liabilities of $6,319,922, which included a security deposit of $500,000
from the sale of its Internet Access Provision business in June 2001 and a
security deposit of $2,417,000 from the sale of its Internet related business in
February 2003.
Net cash flows provided by continuing operations increased to $2,203,115 in
the first nine month period in 2003 from ($428,594) in the corresponding period
in 2002, primarily as a result of $2,417,000 received as a security deposit for
the sale of its Internet related business. Net cash flow used in investing
activities decreased to ($9,178) in first nine month period 2003 from ($220,063)
in the corresponding period in 2002, primarily due to cash paid ($600,300) for
its equity investment in The Link Group, Inc. during 2002 and offset by
($360,400) representing a reduction in the loan to Protectserve Pacific Ltd. Net
cash flow used in financing activities was $0 in first nine month period of 2003
compared to $28,885 for the nine month period of 2002, representing principal
payments on capital lease obligations.
Changes in Financial Condition:
At the end of the third quarter 2003 Company assets had increased to
$6,611,898 compared to $3,918,160 at year-end 2002. Current assets increased to
$6,155,501 at the end of third quarter 2003 compared to $3,460,530 at year-end
2002 and total liabilities increased at end of third quarter 2003 to $6,319,922
compared to $3,176,765 at year-end 2002. At September 30, 2003 the Company had
$3,258,999 in cash compared to $957,133 at year-end 2002. Although working
capital decreased by $448,186, positive changes resulted from the sale of its
operations in China and the achievement of a private placement of stock for
$1,000,000 in late 2002.
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. However, if losses continue
it may have to seek loans or equity placements to cover longer term cash needs
to continue operations and expansion.
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.
The effects of inflation have not had a material impact on its operation,
nor is it expected to in the immediate future.
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.
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Future Trends:
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 to advertise and promote its business and operating losses may
continue. 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.
ITEM 3. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time period
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. As of the end of the period covered by this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
b. Changes in Internal Control over Financial Reporting:
There were no changes in the Company's internal control over financial reporting
identified in connection with the Company evaluation of these controls as of the
end of the period covered by this report that could have significantly affected
those controls subsequent to the date of the evaluation referred to in the
previous paragraph, including any correction action with regard to significant
deficiencies and material weakness.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings -
On August 7, 2003, Xin Net Corp. was named as a defendant in the
Supreme Court of British Columbia seeking C$40,313 (US$29,744) allegedly due on
the contract between Edward Kheng Yoong Lee, Sidney Pak Lai Ho, Ricky Chung Hou
NG, and Lilian Lee ("Plaintiffs") and XIN NET Corp. for the sale of Windsor
Education Academy, Inc. XIN NET Corp. intends to vigorously defend the claim.
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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:
Exhibit 31.1 - Sarbanes-Oxley Certification
Exhibit 31.2 - Sarbanes-Oxley Certification
Exhibit 32.1 - Sarbanes-Oxley Certification
Exhibit 32.1 - Sarbanes-Oxley Certification
(b) Reports on Form 8-K filed during the three months
ended September 30, 2003. (incorporated by reference)
8-K filed 7-29-03
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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 of the
undersigned thereunto duly authorized.
Dated: November 20, 2003
XIN NET CORP.
by: /s/ Ernest Cheung
----------------------------
Ernest Cheung,
Secretary/Director
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