SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
CIK NO.: 0001042053
For Quarter Ended September 30, 2002
Commission File Number
0-26559
XIN NET CORP.
---------------------
(Exact name of registrant as specified in its charter)
Florida 330-751560
------- ----------
(State of incorporation) (I.R.S. Employer
Identification No.)
#950 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
-------------------------------------------------------------
(Address of principal executive offices) (Postal 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
--- --- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
41,360,010 as of November 11, 2002.
XIN NET CORP.
INDEX TO QUARTERLY REPORT
ON FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets F-1
Consolidated Statements of Operations F-2
Consolidated Statements of Stockholders' Equity F-3
Consolidated Statements of Cash Flows F-4
Notes to Condensed Consolidated Financial Statements F-5 - F-8
ITEM 2. Management's Discussion and Analysis 11
ITEM 3. Controls and Procedures 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
ITEM 1. FINANCIAL STATEMENTS
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
Stated in U.S. dollars 2002 2001
-----------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $683,630 $1,360,071
Investments 14,259 64,077
Accrued Interest Receivables 12 701
Loan to ProtectServe Pacific Ltd. - 360,400
Inventory 6,212 5,985
Prepaid Expenses and Other Current Assets 173,255 183,188
Net Assets of Discontinued Operations 293,445 293,341
Deferred Costs 758,722 571,678
---------------------------- --------------------------
Total Current Assets 1,929,535 2,839,441
Investment - at equity (Note 4) 629,800 -
Property and Equipment, Net (Note 2) 528,981 714,171
Goodwill - 200,000
---------------------------- --------------------------
Total Assets $ 3,088,316 $3,753,612
============================ ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 640,387 $683,828
Deferred Revenue 1,866,667 1,861,700
Security Deposit 500,000 500,000
Capital Lease Obligation (Note 3)
- 58,840
---------------------------- --------------------------
3,007,054 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 (7,004,231) (6,437,572)
Accumulated Other Comprehensive Income (149,912) (148,589)
---------------------------- --------------------------
Total Stockholders' Equity 81,262 649,244
---------------------------- --------------------------
Total Liabilities and Stockholders' Equity $ 3,088,316 $3,753,612
============================ ==========================
F-1
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
Stated in U.S. dollars 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Revenue
Domain Name Registration $ 770,061 $686,323 $2,275,438 $1,774,201
E-Solutions 358,753 285,894 973,252 742,014
----------------------------------------------------------------------------
1,128,814 972,217 3,248,690 2,516,215
Cost of Revenue
Domain Name Registration 428,024 306,411 1,202,618 808,766
E-Solutions 31,475 16,852 98,710 42,121
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459,499 323,263 1,301,328 850,887
Gross Profit 669,315 648,954 1,947,362 1,665,328
Expenses
Advertising and promotion 48,833 101,998 124,842 340,946
Depreciation and Amortization 58,337 65,487 209,808 159,459
General and administrative 131,692 214,853 435,890 518,936
Rent 109,811 92,269 296,402 327,030
Salaries, wages and benefits 342,465 323,766 1,003,137 1,136,129
Telephone and communication 58,673 143,263 213,102 325,820
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749,811 941,636 2,283,181 2,808,320
----------------------------------------------------------------------------
Operating Loss (80,496) (292,682) (335,819) (1,142,992)
Other Income and Expenses
Interest income 145 9,520 1,857 51,037
Other income - - 12,463 -
Equity loss in undistributed earnings of investee
company (Note 4) (89,708) - (170,500) -
Loss on disposal of capital assets - - (74,660) -
----------------------------------------------------------------------------
(89,563) 9,520 (230,840) 51,037
Loss from Continuing Operations (170,059) (283,162) (566,659) (1,091,955)
Loss from Discontinued Operations - - - (442,828)
----------------------------------------------------------------------------
Net Loss Available to Common Stockholders $ (170,059) $(283,162) $(566,659) $(1,534,783)
============================================================================
Loss per share attributable to common stockholders:
Loss from continuing operations ($0.01) ($0.01) ($0.03) ($0.05)
Loss from discontinued operations - - - (0.02)
----------------------------------------------------------------------------
Total basic and diluted ($0.01) ($0.01) ($0.03) ($0.07)
============================================================================
Weighted average number of common shares
outstanding:
Basic and diluted 21,360,010 21,360,010 21,360,010 21,360,010
============================================================================
F-2
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 $2.00 per share in
September 2000 10 - 20 20
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 (566,659) (566,659)
Translation Adjustments (1,323) (1,323)
-----------------------------------------------------------------------------------------
Balance, September 30, 2002 21,360,010 $21,360 $7,214,045 $ (7,004,231) $ (149,912) $ 81,262
=========================================================================================
F-3
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
( Unaudited )
Stated in U.S. dollars 2002 2001
--------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(566,659) $(1,534,783)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 209,808 200,574
Loss on disposal of capital assets 74,660 -
Translation adjustments (1,323) 2,112
Equity loss of The Link Group, Inc. 170,500 -
Changes in assets and liabilities
Increase in accrued interest receivables 689 5,706
(Increase) Decrease in prepaid expenses and other current assets 9,933 (27,001)
(Increase) Decrease in inventory (227) 36,156
Decrease in net assets of discontinued operations - 59,742
Increase in deferred costs (187,044) (9,874)
Increase (Decrease) in accounts payable (43,441) 154,625
Increase (Decrease) in deferred revenue 4,967 176,373
Increase in security deposits - 500,000
--------------------------------------------
Net cash used in operating activities (328,137) (436,370)
--------------------------------------------
Cash flows from investing activities
Purchases of property and equipment (129,337) (150,929)
Reduction in investment 49,818 66
Reduction (Increase) in loan to ProtectServe Pacific Ltd. 360,400 (300,000)
Investment in The Link Group, Inc. (600,300) -
--------------------------------------------
Net cash flows used in investing activities (319,419) (450,863)
--------------------------------------------
Cash flows from financing activities
Principal payments on capital lease obligations (28,885) (49,631)
--------------------------------------------
Net cash flows used in financing activities (28,885) (49,631)
--------------------------------------------
Decrease in cash and cash equivalents (676,441) (936,864)
Cash and cash equivalents - beginning of period 1,360,071 2,619,288
--------------------------------------------
Cash and cash equivalents - end of period $683,630 $1,682,424
============================================
Supplemental Information :
Cash paid for :
Interest $9,475 $8,988
Income taxes 7,176 -
F-4
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 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:
September 30, 2002 December 31, 2001
-------------------------------------------------------
Office equipment $ 226,022 $ 229,349
Equipment 776,272 757,625
Computer software 76,580 83,299
Furniture 27,976 27,976
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Total 1,106,850
1,098,249
Less: Accumulated depreciation (577,869) (384,078)
--------------------------------------------------------
Net book value $ 528,981 $ 714,171
========================================================
The depreciation expense charged to continuing operations for the three-month
and nine-month periods ended September 30, 2002 are $58,337 and $209,808
respectively.
3. 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-5
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 10, 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%. 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:
Original cost of 15,370,675 shares of The Link Group, Inc. $ 800,300
Equity in undistributed losses of investee company (170,500)
------------
Investment - at equity $ 629,800
============
4. 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, 2002 and 2001:
Three months ended Nine months ended
9/30/2002 9/30/2001 9/30/2002 9/30/2001
--------- --------- --------- ---------
Loss from continuing operations $ (170,059) $ (283,162) $ (566,659) $ (1,091,955)
Loss from discontinued operations - - - (442,828)
------------- ------------- ---------------- ---------------
Net loss for the period (170,059) (283,162) (566,659) (1,534,783)
Weighted-average shares outstanding 21,360,010 21,360,010 21,360,010 21,360,010
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 21,360,010 21,360,010 21,360,010
Loss per share attributable to common shareholders:
Loss from continuing operations (0.01) (0.01) (0.03) (0.05)
Loss from discontinued operations - - - (0.02)
------------- ------------- ---------------- ---------------
Total basic and diluted loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.07)
============= ============= ================ ===============
The effect of outstanding options and warrants was not included as the effect
would be anti-dilutive.
F-6
5. Total Amount Advanced to Joint Venture
As at September 30, 2002, the total amount advanced to the joint venture project
is $3,020,459.
6. 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 September 30, 2002
Revenue from continuing operations $ 1,128,814 $ - $ - $ 1,128,814
Operating loss (41,652) (3,042) (35,802) (80,496)
Total Assets 2,367,683 6,576 714,057 3,088,316
For the three months ended September 30, 2001
Revenue from continuing operations $ 972,217 $ - $ - $ 972,217
Operating Loss (194,541) (7,423) (90,718) (292,682)
Total Assets 2,589,923 30,726 1,097,613 3,718,262
For the nine months ended September 30, 2002
Revenue from continuing operations $ 3,248,690 $ - $ - $ 3,248,690
Operating Loss (193,652) (11,393) (130,774) (335,819)
Total Assets 2,367,683 6,576 714,057 3,088,316
For the nine months ended September 30, 2001
Revenue from continuing operations $ 2,516,215 $ - $ - $ 2,516,215
Operating Loss (958,856) (13,964) (170,172) (1,142,992)
Total Assets 2,589,923 30,726 1,097,613 3,718,262
F-7
7. Subsequent Events
The Company has completed a private placement of 20 million common shares at
$0.05 per share for a gross proceed of $1 million on October 30, 2002. These
private placement shares will not have any right to any future distribution of
The Link Group, Inc. shares that the Company currently owns. After the private
placement, total issued and outstanding shares of the Company's common stock are
41,360,010. The effect of the issuance of 20,000,000 shares diluted the
Company's common stock outstanding by approximately 48%. The transaction was
approved by the Board of Directors.
F-8
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 section 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
nine months ended September 30, 2002.
o Results of operations. This section provides an analysis of the
Company's results of operations for the third 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
--------------------------------
The Financial Accounting Standards Board has issued the following accounting
pronouncements, none of which are expected to have a significant effect, if any,
on the company's financial statements:
April 2002 - SFAS No. 145 - "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This statement
is effective for fiscal years beginning after May 15, 2002.
June 2002 - SFAS No. 146 - "Accounting for Costs Associated with Exit or
Disposal Activities," which applies to costs associated with an exit activity
that does not involve an entity newly acquired in a business combination or with
a disposal activity covered by FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." 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
believes this standard does not have any material effect on its financial
statements.
Effective for exit or disposal activities initiated after December 31, 2002.
October 2002 - SFAS No. 147 - "Acquisitions of Certain Financial Institutions,
an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, "
which applies to the acquisition of all or part of a financial institution,
except for a transaction between two or more mutual enterprises. Effective for
acquisitions for which the date of acquisition is on or after October 1, 2002.
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 management's
estimates and/or judgments:
Deferred revenue and deferred costs: The Company's revenue is primarily derived
from the sale of nonrefundable services: domain name registration services, web
hosting and e-solution provision 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 September 30, 2002 and deferred costs represent 39% of
the Company's total current assets at September 30, 2002, or 25% 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 as of September 30, 2002 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 asset's carrying value at September 30, 2002, was $629,800,
representing 20.4% of the Company's total assets.
Liquidity and capital resources
-------------------------------
Liquidity. The Company had net cash, receivables and investments of $697,901 at
September 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, second quarter or third quarter
of 2002. It has equipment of $528,981 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 $1,929,535 in current assets. It had current
liabilities of $3,007,054, which included deferred revenues of $1,866,667 and a
security deposit of $500,000 from the sale of its Internet Access Provision
business in June 2001. (In the third quarter, the Company continued to
experience 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 $683,630 will be used to fund
continued operations, which management believes is adequate to satisfy its cash
requirements for the next six to 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 and
marketing that precede development of additional revenue for the Company.
Cash flows. Net cash flows used in operating activities decreased to $328,137 in
the first nine months in 2002 from $436,370 in the corresponding period in 2001.
The single most important item, which contributed to this result, was the
decrease in net loss to $566,659 in the first nine months in 2002, as compared
to $1,534,783 in the first nine months in 2001. Net loss decreased primarily as
a result of an increase in gross margin of $282,034, a decrease in operating
expenses of $525,139, and a decrease in loss from discontinued operations of
$442,828. Net cash flow used in investing decreased to $319,419 in first nine
months in 2002 as compared $450,863 in first nine 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 $129,337 in first nine months 2002 from $150,929 in first
nine months 2001. Net cash flow used in financing activities decreased to
$28,885 in first nine months 2002, compared to $49,631 in the year 2001
corresponding period.
Changes in Financial Condition. At the end of the third quarter 2002, Company
assets had decreased to $3,088,316 compared to $3,753,612 at year-end 2001. The
current assets totaled $1,929,535 at the end of third quarter 2002 compared to
$2,839,441 at year-end 2001. Total liabilities at end of third quarter 2002 were
$3,007,054 compared to $3,104,368 at year-end 2001. At September 30, 2002 the
Company had $683,630 in cash compared to $1,360,071 at year-end 2001. Net cash,
investments and receivables at September 30, 2002 totaled $697,901.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2002 AS COMPARED TO
-----------------------------------------------------------------------------
THE QUARTER ENDED SEPTEMBER 30, 2001.
------------------------------------
Revenues. Revenues (excluding those generated by Internet Access Provision
services which the Company ceased providing since June 2001) in third quarter
2002 rose 16% to $1,128,814 in the form of net sales from its joint venture with
Xin Hai Technology Ltd, as compared to net sales of $972,217 in third 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 $459,499
in third quarter 2002, as compared to $323,263 in third quarter 2001. Gross
profit in third quarter 2002 was $669,315 compared to $648,954 in third quarter
2001.
Operating expenses. The Company incurred operating expenses of $749,811 in third
quarter 2002 compared to operating expenses of $941,636 in third quarter 2001, a
decrease of 20%. This result, achieved against the backdrop of an increase in
revenues of 16%, was made possible by the cost-cutting measures which the
Company implemented throughout 2001 and continued in the first nine months 2002.
Expenses that decreased significantly were: advertising and promotion to $48,833
from $101,998, general and administrative to $131,692 from $214,853, and
telephone and communication to $58,673 from $143,263.
Net loss and loss per share. Operating loss for third quarter 2002 decreased by
72% to $80,496 compared to the third quarter 2001 operating loss of $292,682.
The company had "other loss" of $89,563 in third quarter 2002 compared to" other
gain" of $9,520 in third quarter 2001. The net loss in third quarter 2002 was
$170,059 ($0.01/share) compared to the net loss in third quarter 2001 of
$283,162 ($0.01/share).
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
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THE SAME PERIOD IN 2001.
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Revenues. Revenues (excluding those generated by Internet Access Provision
services which the Company ceased providing since June 2001) in the nine months
2002 rose to $3,248,690 in the form of net sales from its joint venture with Xin
Hai Technology Ltd, as compared to net sales of $2,516,215 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
$1,301,328 in the period in 2002, as compared to $850,887 in the period in 2001.
Gross profit in the period in 2002 was $1,947,362 compared to $1,665,328 in the
period in 2001.
Operating expenses. The Company incurred operating expenses of $2,283,181 in the
period in 2002 compared to operating expenses of $2,808,320 in the period in
2001, a decrease of 19%. This result, achieved against the backdrop of an
increase in revenues of $732,475, was made possible by the cost-cutting
measures, which the Company implemented throughout 2001 and continued 2002. All
expense categories, except for depreciation and amortization, saw a decrease.
The major decreases were: advertising and promotion to $124,842 from $340,946;
telephone and communications to $213,102 from $325,820. Depreciation and
amortization increased to $209,808 from $159,459.
Net loss and loss per share. Operating loss for the period in 2002 decreased by
$807,173 (71%) to $335,819 compared to the same period in 2001 operating loss of
$1,142,992. The company had "other loss" of $230,840 in the period in 2002
compared to "other gain" of $51,037 in the period in 2001. The net loss in the
period in 2002 was $566,659 ($0.03/share) compared to the net loss in the same
period in 2001 of $1,534,783 ($0.05/share).
Nature of the Company's Present Operations and Future Trends
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New Funding. On October 30, 2002, the Company raised USD 1 million in new
funding by way of a private placement of 20 million common shares at USD 0.05
per share. The Company believes it has sufficient capital to meet its
foreseeable 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 sell 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 third quarter, the Company persevered in its efforts to obtain
this funding, but no concrete results have followed thus far. And there is no
assurance that new 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 long-term operations expenses and
expansion of its business.
Future Trends. If future revenue declines, or operations continue to be
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. 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 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.
Inflation. 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 that eliminates any potential market risk
associated with such instruments.
ITEM 3. CONTROLS AND PROCEDURES
The chief executive officer and the chief financial officer of the Registrant,
have concluded based on their evaluation as of a date within 90 days prior to
the date of the filing of this Report, that the Registrant's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Registrant in the reports filed or submitted by it under the Securities
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Registrant in such reports is accumulated and
communicated to the Registrant's management, including the president, as
appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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None
ITEM 2. CHANGES IN SECURITIES
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None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
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None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
ITEM 5. OTHER INFORMATION
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Effective November 1, 2002, Mr. Marc Hung resigned as President and Chief
Accounting Officer for personal reasons. Mr. Hung remains as a Director of the
Company.
Ms. Angela Du was appointed President and Chief Accounting Officer effective
November 1, 2002. Ms. Du, age 32, is also a Director of Infornet Investment
Limited (a Hong Kong corporation), and where our operations primarily reside.
Ms. Du was President and Director of Xin Net Corp. from 1997 to April 1999. She
received a Bachelor of Science in International Finance in 1992 from East China
Normal University. She received a Master of Science in Finance and Management
Science in 1996 from the University of Saskatchewan Canada. She has been
Business Manager of China Machinery & Equipment I/E Corp. (CMEC) from 1992 to
1994.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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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 by the
undersigned thereunto duly authorized.
XIN NET CORP.
(Registrant)
Dated: November 13, 2002
By: /s/ Angela Du
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President
/s/ Ernest Cheung
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Chief Financial Officer