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: March 31, 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 March 31, 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
March 31, December 31,
Stated in U.S. dollars 2002 2001
--------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 883,384 $ 1,360,071
Investments 62,785 64,077
Accrued Interest Receivables 1,033 701
Loan to ProtectServe Pacific Ltd. - 360,400
Inventory 6,030 5,985
Prepaid Expenses and Other Current Assets 184,240 183,188
Net Assets of Discontinued Operations 293,396 293,341
Deferred Costs 603,334 571,678
---------------------- ------------------------
Total Current Assets 2,839,441
2,034,202
Investment - at equity (Note 4) 824,652 -
Property and Equipment, Net (Note 2) 707,013 714,171
Goodwill - 200,000
---------------------- ------------------------
Total Assets $ 3,565,867 $ 3,753,612
====================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 661,870 $ 683,828
Deferred Revenue 1,818,888 1,861,700
Security Deposit 500,000 500,000
Capital Lease Obligation (Note 3) 43,784 58,840
---------------------- ------------------------
3,024,542 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 (6,546,103) (6,437,572)
Accumulated Other Comprehensive Income (147,977) (148,589)
---------------------- ------------------------
Total Stockholders' Equity 541,325 649,244
---------------------- ------------------------
Total Liabilities and Stockholders' Equity $ 3,565,867 $ 3,753,612
====================== ========================
F-1
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
Stated in U.S. dollars 2002 2001
------------------------------------------------------------------------------------------------------------------
Revenue
Domain Name Registration $ 723,187 $ 488,842
E-Solutions 285,403 186,989
------------------------ ------------------------
1,008,590 675,831
Cost of Revenue
Domain Name Registration 379,410 272,861
E-Solutions 16,175 10,505
------------------------ ------------------------
395,585 283,366
Gross Profit 613,005 392,465
Expenses
Advertising and promotion 30,955 134,750
Depreciation and Amortization 57,029 46,287
General and administrative 137,559 160,605
Rent 96,574 117,609
Salaries, wages and benefits 347,251 424,453
Telephone and communication 77,535 133,689
------------------------ ------------------------
746,903 1,017,393
------------------------ ------------------------
Operating Loss (133,898) (624,928)
Other Income
Interest income 1,015 28,712
Equity in undistributed earnings of investee company (Note 4) 24,352 -
------------------------ ------------------------
25,367 28,712
Loss from Continuing Operations (108,531) (596,216)
Loss from Discontinued Operations - (232,115)
------------------------ ------------------------
Net Loss Available to Common Stockholders $ (108,531) $ (828,331)
======================== ========================
Loss per share attributable to common stockholders:
$
Loss from continuing operations $ (0.01) (0.03)
Loss from discontinued operations - (0.01)
------------------------ ------------------------
Total basic and diluted $ (0.01) $ (0.04)
======================== ========================
Weighted average number of common shares outstanding:
Basic and diluted 21,360,010 21,360,010
======================== ========================
F-2
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 $2.00 10 - 20 20
per share in September 2000
Net loss (3,607,724) (3,607,724)
Translation Adjustments (45,037) (45,037)
-------------------------------------------------------------------------------------------
Balance, December 31, 2000 (4,926,669)
21,360,010 21,360 7,214,045 (152,256) 2,156,480
Net loss (1,510,903) (1,510,903)
Translation Adjustments 3,667 3,667
-------------------------------------------------------------------------------------------
Balance, December 31, 2001 (6,437,572)
21,360,010 21,360 7,214,045 (148,589) 649,244
Net loss (108,531) (108,531)
Translation Adjustments 612 612
-------------------------------------------------------------------------------------------
Balance, March 31, 2002 21,360,010 $ 21,360 $ 7,214,045 $ (6,546,103) $ (147,977) $ 541,325
===========================================================================================
F-3
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
( Unaudited )
Stated in U.S. dollars 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(108,531) $ (828,331)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 57,029 66,815
Translation adjustments 612 2,789
Equity income of The Link Group, Inc. (24,352) -
Changes in assets and liabilities
(Increase) Decrease in accrued interest receivables (332) 2,462
Increase in prepaid expenses and other current assets (1,052) (125,396)
(Increase) Decrease in inventory (45) 3,682
(Increase) Decrease in net assets of discontinued operations - 30,565
(Increase) Decrease in deferred costs (31,656) 23,162
Increase (Decrease) in accounts payable (21,958) 176,750
Increase (Decrease) in deferred revenue (42,812) 228,369
------------------- ---------------------
Net cash used in operating activities (173,097) (419,133)
------------------- ---------------------
Cash flows from investing activities
Purchases of property and equipment (49,926) (72,301)
Reduction in investment 1,292 1,333
Reduction in loan to ProtectServe Pacific Ltd. 360,400 -
Investment in The Link Group, Inc. (600,300) -
------------------- ---------------------
Net cash flows used in investing activities (288,534) (70,968)
------------------- ---------------------
Cash flows from financing activities
Principal payments on capital lease obligations (15,056) (20,365)
------------------- ---------------------
Net cash flows used in financing activities (15,056) (20,365)
------------------- ---------------------
Decrease in cash and cash equivalents (476,687) (510,466)
Cash and cash equivalents - beginning of period 1,360,071 2,619,288
------------------- ---------------------
Cash and cash equivalents - end of period $ 883,384 $ 2,108,822
=================== =====================
Supplemental Information :
Cash paid for :
$
Interest 2,971 $ 3,019
Income taxes - -
F-4
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 :
March 31, 2002 December 31, 2001
Office equipment $ 219,799 $ 229,349
Equipment 904,407 757,625
Computer software 83,299 83,299
Furniture 27,976 27,976
-------------------------------------------------
Total 1,235,481
1,098,249
Less : Accumulated depreciation (528,468) (384,078)
-------------------------------------------------
Net book value $ 707,013 $ 714,171
=================================================
The depreciation expense charged to continuing operations for the three-month
period ended March 31, 2002 is $57,029.
F-5
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
Total minimum lease payments
For the year ended March 31
2003 $ 44,457
Less : Amount representing interest (673)
-----------------------
Present value of minimum lease payment 43,784
Less : Current portion (43,784)
-----------------------
$ -
=======================
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.
F-6
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
( Unaudited )
4. Investment in The Link Group, Inc. ("Link") - Continued
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 24,352
----------
Investment - at equity $ 824,652
==========
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 periods
ended March 31, 2002 and 2001:
F-7
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
( Unaudited )
5. Basic and Diluted Loss Per Share - Continued
Three months ended
3/31/2002 3/31/2001
Net loss from continuing operations $(108,531) $ (596,216)
Weighted-average shares outstanding 21,360,010 21,360,010
Effect of dilutive securities :
Dilutive options - -
Dilutive warrants - -
---------------------------------
Dilutive potential common shares - -
---------------------------------
Adjusted weighted-average shares and assumed conversions 21,360,010 21,360,010
Basic loss from continuing operations per share $ (0.01) $ (0.03)
=================================
Diluted loss from continuing operations per share $ (0.01) $ (0.03)
=================================
Due to the loss for the three-month periods ended March 31, 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 March 31, 2002, the total amount advanced to the joint venture project is
$3,151,527.
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.
F-8
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
( Unaudited )
7. Segment and Geographic Data - Continued
China Canada Other Total
For three months ended March 31, 2002
-------------------------------------
Revenue from continuing
Operations $ 1,008,590 - - $ 1,008,590
Operating loss (70,177) (5,309) (58,412) (133,898)
Total assets 2,553,326 6,763 1,005,778 3,565,867
For three months ended March 31, 2001
-------------------------------------
Revenue from continuing
Operations $ 675,831 - - $ 675,831
Operating loss (585,249) (3,117) (36,562) (624,928)
Total assets 3,146,529 34,123 1,450,740 4,631,392
F-9
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash, receivables and investments of $947,202 at March
31, 2002.
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 first quarter of 2002. It has equipment of
$707,013 on the books, which is not necessarily liquid at such value. It has an
investment in The Link Group, Inc. valued at $824,652. Other than cash capital,
its other assets would be illiquid.
At the end of the quarter, it had $2,034,202 in current assets. It had
Current liabilities of $3,024,542, which included deferred revenues of
$1,818,888 and a security deposit of $500,000 from the sale of its Internet
Access Provision business in June 2001. (The Company is experiencing 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 $883,384 will be used to fund
continued operations, which management believes 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 & marketing which precede
development of additional revenue for the Company.
Net cash flows used in operating activities decreased to $173,097 in the
first quarter in 2002 from $419,133 in the corresponding quarter in 2001. The
single most important item which contributed to this result was the decrease in
net loss to $108,531 in the first quarter in 2002, as compared to $828,331
($596,216 due to continuing operations and $232,115 due to discontinued
operations) in first quarter 2001. Net cash flow used in investing increased to
$288,534 in first quarter 2002 as compared $70,968 in first quarter 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 $49,926 in first quarter 2002 from
$72,301 in first quarter 2001. Net cash flow used in financing activities
decreased to $15,056 in first quarter 2002, compared to $20,365 in first quarter
2001.
Changes in Financial Condition:
At the end of the first quarter 2002 Company assets had decreased to
$3,565,876 compared to $3,753,612 at year-end 2001. The current assets totaled
$2,034,202 at the end of first quarter 2002 compared to $2,839,441 at year-end
2001. Total liabilities at end of first quarter 2002 were $3,024,542 compared to
$3,104,368 at year-end 2001. At March 31,2002 the Company had $883,384 in cash
compared to $1,360,071 at year-end 2001; approximately half of the cash used in
the first quarter 2002 was due to the Company "net" investment in The Link
Group, Inc. Net cash, investments and receivables at March 31, 2002 totaled
$947,202.
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 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. If and when this agreement 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.
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.
Although the Company is unaware of any major seasonal aspect that would
have a material effect on the financial condition or results of operation, the
first quarter of each fiscal year is always a financial concern. It is not
uncommon for companies to shut down their operation or operate on a skeletal
crew during the Chinese New Year holiday. Therefore in effect, the first quarter
really has only two months for generating revenue.
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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 AS COMPARED TO THE
QUARTER ENDED MARCH 31, 2001.
Revenues in first quarter 2002 rose by 49% to $1,008,590 in the form of net
sales from its joint venture with Xin Hai Technology Ltd, as compared to net
sales of $675,831 in first quarter 2001. The Company had cost of revenues of
$395,585 in first quarter 2002, as compared to $283,366 in first quarter 2001.
Gross profit in first quarter 2002 was $613,005 compared to $392,465 in first
quarter 2001. The Company incurred operating expenses of $746,903 in first
quarter 2002 compared to operating expenses of $1,017,393 in first quarter 2001.
Operating loss for first quarter 2002 decreased substantially to $133,898 in
contrast to the first quarter 2001 operating loss of $624,928. The company had
interest and equity income of $25,367 in first quarter 2002 and $28,712 in first
quarter 2001. The net loss in first quarter 2002 was $108,531 ($0.01/share)
compared to the net loss in first quarter 2001 of $828,331 ($0.04/share).
Revenues (excluding those generated by Internet Access Provision services,
which the Company stopped providing as of June 2001) increased from $675,831 in
first quarter 2001 to $1,008,590 in first quarter 2002, up 49%, as 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.
Operating expenses decreased to $746,903 in first quarter 2002 from
$1,017,393 in first quarter 2001. This result, achieved against the backdrop of
an increase in revenues of almost 50%, was made possible by the cost-cutting
measures which the Company implemented throughout 2001. Except for amortization,
which increased to $57,029 in the first quarter of 2002 from $46,287 in the
corresponding quarter in 2001, all expense categories saw a decrease:
advertising and promotion to $30,955 from $134,750; general and administrative
to $137,599 from $160,605; rent to $96,574 from $117,609; salaries, wages and
benefits to $347,251 from $424,453, and telephone and communications to $77,535
from $133,689.
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, through its joint venture business, to advertise and promote its
services and develop additional value-added services. 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.
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 March 31, 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: May 14, 2002
XIN NET CORP.
by: /s/ Ernest Cheung
----------------------------
Ernest Cheung, Secretary/Director