SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10QSB
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
CIK NO.: 0001042053
For Quarter Ended Commission File Number
September 30, 2001 0-26559
XIN NET CORP.
---------------------
(Exact name of registrant as specified in its charter)
Florida 330-751560
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(State of incorporation) (I.R.S. Employer
Identification No.)
#830 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
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(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.
21,360,010 as of September 30, 2001
ITEM 1. FINANCIAL STATEMENTS
XIN NET CORP.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Stated in U.S. dollars)
(Unaudited)
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
( Prepared by management and without audit )
Stated in U.S. dollars September 30, 2001 December 31, 2000
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ASSETS
Current Assets
Cash and Short term deposits $ 1,682,424 $ 2,619,288
Investments 1,267 1,333
Accounts Receivables 482,422 604,971
Other Receivables 1,713 6,631
Loan to ProtectServe Pacific Ltd. 300,000 -
Inventory - 36,156
Prepaid Expenses 50,116 46,146
Deferred Costs 475,059 465,185
------------------------ -------------------------
Total Current Assets
2,993,001 3,779,710
Property and Equipment, Net (Note 2) 1,041,888 1,125,128
------------------------ -------------------------
Total Assets $ 4,034,889 $ 4,904,838
======================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 666,318 $ 511,693
Unearned Revenue 2,170,488 2,112,760
Security Deposit (Note 4) 500,000 -
Capital Lease Obligation, Current Portion (Note 3) 74,274 61,442
------------------------ -------------------------
3,411,080 2,685,895
Capital Lease Obligation, Noncurrent Portion - 62,463
Commitments and Contingencies (Notes 3,4) - -
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 (6,461,452) (4,926,669)
Accumulated Other Comprehensive Income (150,144) (152,256)
------------------------ -------------------------
Total Stockholders' Equity
623,809 2,156,480
------------------------ -------------------------
Total Liabilities and Stockholders' Equity $ 4,034,889 $ 4,904,838
======================== =========================
See accompanying notes
F-1
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Prepared by management and without audit)
Three Months Ended September 30, Nine Months Ended September 30,
Stated in U.S. dollars 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Revenue
Domain Name Registration $ 686,323 $ 107,822 $ 1,774,201 $ 607,032
E-Solutions 285,894 261,951 742,014 445,402
------------------------------------------------------------------------------
972,217 2,516,215 1,052,434
369,773
Cost of Revenue
Domain Name Registration 306,411 55,624 808,766 206,181
E-Solutions 16,852 8,216 42,121 17,673
------------------------------------------------------------------------------
323,263 850,887 223,854
63,840
Gross Profit 648,954 305,933 1,665,328 828,580
Expenses
Advertising and promotion 101,998 222,472 340,946 610,336
Amortization 65,487 11,219 159,459 98,740
General and administrative 307,122 325,688 845,966 951,632
Salaries, wages and benefits 323,766 265,697 1,136,129 501,838
Telephone and communication 143,263 154,122 325,820 265,053
------------------------------------------------------------------------------
941,636 979,198 2,808,320 2,427,599
------------------------------------------------------------------------------
Operating Loss (292,682) (673,265) (1,142,992) (1,599,019)
Other Income
Interest income 9,520 35,352 51,037 125,105
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Loss from Continuing Operations (283,162) (637,913) (1,091,955) (1,473,914)
Loss from Discontinued Operations -
Internet Access Card services (Note 4) - (381,159) (442,828) (837,617)
------------------------------------------------------------------------------
Net Loss Available to Common
Stockholders $ (283,162) $ (1,019,072) $ (1,534,783) $ (2,311,531)
==============================================================================
Basic and Diluted Loss from Continuing
Operations per Share (Note 5) $ (0.01) $ (0.03) $ (0.05) $ (0.07)
==============================================================================
Basic and Diluted Weighted Average
Common Shares Outstanding (Note 5) 21,360,010 21,360,000 21,360,010 21,360,000
==============================================================================
See accompanying notes.
F-2
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND YEAR ENDED DECEMBER 31, 2000
( Prepared by management and without audit )
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
Loss for the year ended December 31, 2000 (3,607,724) (3,607,724)
Other Comprehensive Income : Translation (45,037) (45,037)
Adjustments
------------------------------------------------------------------------------------
Balance, December 31, 2000 2,156,480
21,360,010 21,360 7,214,045 (4,926,669) (152,256)
Loss for the nine months ended September 30, 2001 (1,534,783) (1,534,783)
Other Comprehensive Income : Translation 2,112 2,112
Adjustments
-------------------------------------------------------------------------------------
Balance, September 30, 2001 21,360,010 $ 21,360 $ 7,214,045 $ (6,461,452) $ (150,144) $ 623,809
=====================================================================================
See accompanying notes.
F-3
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
( Prepared by management and without audit )
Stated in U.S. dollars 2001 2000
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (1,534,783) $ (2,311,531)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 200,574 147,396
Translation adjustments 2,112 (19,445)
Changes in assets and liabilities
Decrease (Increase) in accounts receivables 122,549 (364,668)
Decrease in other receivables 4,918 -
Increase in prepaid expenses (3,970) (347,483)
Decrease (Increase) in inventory 36,156 (54,563)
Increase in deferred costs (9,874) -
Increase in accounts payable 154,625 66,105
Increase in unearned revenue 57,728 863,272
Increase in security deposit 500,000 -
------------------------------------------
Net cash used in operating activities (469,965) (2,020,917)
------------------------------------------
Cash flows from investing activities
Purchases of property and equipment (117,334) (700,670)
Reduction in investment 66 -
Increase in organizational costs - (1,270)
Loan to ProtectServe Pacific Ltd. (300,000) -
------------------------------------------
Net cash flows used in investing activities (417,268) (701,940)
------------------------------------------
Cash flows from financing activities
Principal payments on capital lease obligations (49,631) (47,115)
Issuance of common stock - 20
------------------------------------------
Net cash flows used in financing activities (49,631) (47,095)
------------------------------------------
Decrease in cash and cash equivalents (936,864) (2,769,952)
Cash and cash equivalents - beginning of period 2,619,288 5,512,614
------------------------------------------
Cash and cash equivalents - end of period $ 1,682,424 $ 2,742,662
==========================================
See accompanying notes
F-4
XIN NET CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
( Prepared by management and without audit )
Stated in U.S. dollars 2001 2000
-------------------------------------------------------------------------------
Supplemental Information :
Cash paid for :
Interest $ 8,988 $ 14,145
Income taxes - -
See accompanying notes.
F-6
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
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, 2000 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, 2001 December 31, 2000
Office equipment 233,198 230,809
Equipment 1,189,251 1,074,464
Computer software 83,299 83,156
Furniture 28,912 28,912
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Total 1,534,660
1,417,341
Less : Accumulated depreciation (492,772) (292,213)
-------------------------------------
Net book value 1,041,888 1,125,128
=====================================
The depreciation expense charged to continuing operations and
discontinued operations for the nine-month period ended September 30,
2001 is $159,459 and $41,056 respectively.
F-7
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
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 September 30
2002 $ 76,870
Less : Amount representing interest (2,596)
----------------
Present value of minimum lease payment 74,274
Less : Current portion (74,274)
----------------
$ -
================
4 Discontinued Operations
The Board of Directors of the Company decided to discontinue the
unprofitable internet access provision ("ISP") services in the People's
Republic of China ("P.R.C."). The Company's joint venture partner, Xin
Hai Technology Development Ltd., has signed an agreement on June 22,
2001 to sell its ISP operation and related assets to a private company
in Beijing, P.R.C. for a 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. As at September 30, 2001,
$500,000 has been received as a security deposit for the transaction.
F-8
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
4 Discontinued Operations (Continued)
The estimated gain on disposal of the ISP services, together with the
related assets and liabilities to be disposed, are as follows : -
Sales proceeds $ 700,000
Less : Capital assets $ 320,771
Accounts receivable 290,016
-----------------
(610,787)
Add : Unearned revenue 316,627
------------------
Gain on disposal of ISP business $ 405,840
==================
The results of the discontinued ISP operations for the three-month and
nine-month periods ended September 30, 2001 and 2000 are as follows :-
Three months ended Nine months ended
9/30/2001 9/30/2000 9/30/2001 9/30/2000
--------- --------- --------- ---------
Revenue $ - $ 512,850 $ 832,696 $ 1,309,530
Operating costs - (894,009) (1,275,524) (2,147,147)
------------------------------- ----------------------------------
Net loss $ - $ (381,159) $ (442,828) $ (837,617)
=============================== ==================================
F-9
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
5 Acquisition of ProtectServe Pacific Ltd. ("PSP") and Spin Off of Remain
-ing Business
On October 1, 2001, the Company signed a share exchange agreement to
acquire 100% ownership of PSP, a privately-owned company based in Hong
Kong. PSP is an innovative developer and provider of state-of-the-art
web-based surveillance, monitoring and control systems.
As of September 30, 2001, the Company has made cash loans of $300,000
to PSP in order to allow it to begin implementing its expansion plan.
After obtaining the approval of the shareholders on the disposal of the
ISP business and related assets and the spin-off of remaining assets
and liabilities as discussed in the following paragraph, the Company
will issue 4.2 million restricted common shares to PSP, in exchange of
100% of ownership of PSP, and PSP will nominate 3 new members to sit on
the Company's Board of Directors. In addition, contingent upon
performance criteria, the Company will grant to PSP stock purchase
options at the nominal price of $0.001 per option. The exact amount of
such options to be granted, to a maximum amount of approximately 18
million, will be determined by the level of net income achieved by PSP
for the 12-month period ending on August 31, 2002. The Company is
presently engaged in the process of seeking alternative approaches to
close the share exchange agreement with PSP as soon as possible.
The Company also intends to transfer its remaining business assets and
liabilities, except for cash $800,000 (which will be used to manage and
expand PSP operations), to a new US-incorporated company, Xin Net
International Corp.. The Company plans to obtain shareholders' approval
to distribute, by way of a dividend, this new company's shares, on a
pro-rata basis, to the shareholders of the Company on record as of a
record date still to be determined.
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.
F-10
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
6 Basic and Diluted Earnings (Loss) Per Share (Continued)
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
quarters ended September 30, 2001 and 2000 :
Three months ended Nine months ended
9/30/2001 9/30/2000 9/30/2001 9/30/2000
--------- --------- --------- ---------
Net loss from continuing operations $(283,162) $ (1,019,072) $(1,534,783) $ (2,311,531)
Weighted-average shares outstanding 21,360,010 21,360,000 21,360,010 21,360,000
Effect of dilutive securities :
Dilutive options - - - -
Dilutive warrants - - - -
------------------------------------------------------------
Dilutive potential common shares - - - -
------------------------------------------------------------
Adjusted weighted-average shares
and assumed conversions 21,360,010 21,360,000 21,360,010 21,360,000
Basic loss from continuing operations
per share $ (0.01) $ (0.03) $ (0.05) $ (0.07)
============================================================
Diluted loss from continuing operations
per share $ (0.01) $ (0.03) $ (0.05) $ (0.07)
============================================================
Due to the loss for the three-month periods and nine-month periods
ended September 30, 2001 and 2000, the effect of outstanding options
and warrants was not included as the effect would be anti-dilutive.
F-11
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
7 Total Amount Advanced to Joint Venture
As at September 30, 2001, the total amount advanced to the joint
venture project is $3,177,763.
8 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 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 2,906,550 30,726 1,097,613 4,034,889
For three months ended September 30, 2000
Revenue from continuing
Operations $ 369,773 - - $ 369,773
Operating loss (638,160) (2,560) (32,545) (673,265)
Total assets 2,755,732 18,426 2,052,338 4,826,496
F-12
XIN NET CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and 2000
( Prepared by management and without audit )
8 Segment and Geographic Data (Continued)
China Canada Other Total
For 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 2,906,550 30,726 1,097,613 4,034,889
For nine months ended September 30, 2000
Revenue from continuing
Operations $1,052,434 - - $ 1,052,434
Operating loss (1,454,405) (9,157) (135,457) (1,599,019)
Total assets 2,755,732 18,426 2,052,338 4,826,496
9 Subsequent Events
On November 5, 2001, the Company made an additional cash loan to PSP
amounted to 60,400.
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the
Company's 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," and "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.
On June 22, 2001 the Company, through Xin Hai Technology Development
Ltd. (Xin Hai), its Chinese joint venture partner, entered into an "Assets
Transfer Agreement" under which the Company has agreed to transfer all the
assets of the ISP (Internet Access Provision) operations in China to
Beijing-based Sino Soft. The Company filed the "Assets Transfer Agreement" with
the Securities and Exchange Commission (SEC) in its July 12, 2001 8-K/A Amended
Current Report. The Company plans to seek shareholders' approval to close this
agreement.
On July 31, 2001 the Company signed a letter of intent to acquire
100% ownership of Protectserve Pacific Ltd. ("PSP"), a privately-owned company
based in Hong Kong. PSP is an innovative developer and provider of
state-of-the-art web-based surveillance, monitoring & control systems. The
Company filed the letter of intent in its August 3, 2001 8-K Current Report to
the SEC. The Company and PSP subsequently signed the formal agreement, called
the "Share Exchange Agreement", which the Company filed on October 4, 2001. The
Company also intends to transfer its current business assets and liabilities,
except for cash $800,000 (which will be used to manage and expand PSP
operations), to its new, wholly-owned subsidiary, Xin Net International Corp. It
plans to obtain shareholders' approval to distribute, by way of a dividend, Xin
Net International shares, on a pro-rata basis, to the Company shareholders on
record as of a record date still to be determined. The Company is presently
engaged in the process of seeking to close the PSP Share Exchange Agreement as
soon as possible.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash capital of $1,682,424 at September 30, 2001.
The Company has no other capital resources other than the ability to
use its common stock to achieve additional capital raising. It is engaged in
some serious negotiations to obtain new funds, but no definitive agreement has
been signed to this date. It did not raise any additional capital during third
quarter of 2001. It has equipment of $1,041,888 on the books, which is not
necessarily liquid at such value. Other than cash capital, its other assets
would be illiquid.
The Company has material commitments to expend funds to cover
operating expenses of current operations in China. The trend of operating losses
could continue due to the Company not being able to increase revenue
sufficiently and/or reduce operating costs to a level such that current
operations may break even or turn a profit.
Net cash flows used in operating activities decreased to $469,965 in
the first nine months in 2001 from $2,020,917 in the corresponding period in
2000. The three biggest contributors to this result were: the increase in
security deposit ($500,000 in the period in 2001 compared to nil in the same
period in 2000); depreciation and amortization, which increased to $200,574
compared to year-ago amount of $147,396; and the increase in accounts payable,
which increased to $154,625 compared to $66,105 in the same period in 2000. Net
cash flow used in investing decreased to $417,268 in the nine month period in
2001 as compared $701,940 in the corresponding period in 2000 mainly due to
purchases of equipment, which decreased to $117,334 in the nine month period
2001 from $700,670 in the same period in 2000, and the $300,000 loan to
Protectserve Pacific Ltd. Net cash flow used in financing activities increased
marginally to $49,631 in the period in 2001, compared to $47,095 in the
corresponding period in 2000.
Changes in Financial Condition:
At the end of the third quarter 2001, Company assets had decreased
to $4,034,889 compared to $4,904,838 at year-end 2000. Current assets totaled
$2,993,001 at the end of the third quarter 2001 compared to $3,779,710 at
year-end 2000. Total liabilities at end of third quarter 2001 were $3,411,080
compared to $2,748,358 at year-end 2000. At September 30, 2001 the Company had
$1,682,424 in cash compared to $2,619,288 at year-end 2000. Of the $1,682,424
cash capital at the end of the quarter, an amount of $1,182,424 will be
available to fund the continuing operations of domain name registration services
and e-solutions. The balance of $500,000 will be set aside to be used in the
management and expansion of Protectserve Pacific Ltd. business, in addition to
the $300,000 loan already advanced to PSP. It is to be noted that the cash on
hand includes a security deposit of $500,000 made to the Company by Sino Soft,
related to the ISP assets transfer agreement signed on June 22, 2001.
Need for Additional Financing:
The Company has sufficient capital to meet its current cash needs,
including the costs of compliance with the continuing reporting requirements of
the Securities Exchange Act of 1934. It may have to seek loans or equity
placements to cover future cash needs to continue expansion of business. There
is no assurance, however, that the available funds will ultimately prove to be
adequate to continue Company business and its needs for additional financing are
likely to persist.
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 finance its current 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. It is engaged in some serious negotiations to obtain new
funds, but no definitive agreement has been signed to this date. Besides the
acquisition of Hong Kong-based Protectserve Pacific Ltd., 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.
Market Risk:
The Company does not hold any derivatives or 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 SEPTEMBER 30, 2001 AS COMPARED TO
THE QUARTER ENDED SEPTEMBER 30, 2000.
Discontinued Operations: Internet Access Provision ("ISP") Operations
The Company phased out and eventually discontinued its ISP services
in China during second quarter 2001. The Company had no ISP operations in the
quarter ended September 30, 2001.
Continuing Operations: Domain Name Registration Services and E-Solutions
(Web Site Design & Hosting, and E-Commerce Platforms)
The Company achieved revenue of $972,217 in third quarter 2001 as
compared to revenue of $369,773 in third quarter 2000. The increase in revenue
of $602,444 (163%) is largely due to domain name registration revenues, which
increased to $686,323 in third quarter 2001 from 107,822 in third quarter 2000
as a result of continued targeted promotions and advertising. Revenues for
e-solutions increased at a much lesser rate to $285,894 in third quarter 2001
from $261,951 in the same quarter in 2000 because of the highly competitive
nature of the market and the large number of competitors. The Company had cost
of revenue of $323,263 in the period in 2001, as compared to $63,840 in the same
period in 2000. Gross profit in third quarter 2001 was $648,954 compared to
$305,933 in third quarter 2000.
Operating expenses decreased to $941,636 in third quarter 2001 from
$979,198 in third quarter 2000. This decrease in expenses, significant in the
light of the large increase in revenue, was due to the lasting effect of cost
saving measures implemented earlier in the year and continuing in the quarter.
Except for Salaries, wages and benefits, which increased to $323,766 from
$265,697 a year ago, and Depreciation, which increased to $65,487 from $11,219,
all expense items decreased in the quarter as compared to the same quarter a
year ago: Advertising and promotion to $101,998 from $222,472; General and
administrative to $307,122 from $325,688 and Telephone and communication to
$143,263 from $154,122.
Operating loss for third quarter 2001 was $292,682 in contrast to
same period 2000 operating loss of $673,265. The Company had interest income of
$9,520 in third quarter 2001 and $35,352 in third quarter 2000. The net loss
from continuing operations in third quarter 2001 was $283,162 ($0.01/share)
compared to the net loss in third quarter 2000 of $637,913 ($0.03/share).
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 AS
COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000.
Discontinued Operations: Internet Access Provision ("ISP") Operations
The Company phased out and eventually discontinued its ISP services
in China during second quarter 2001. The Company had no ISP operations in the
quarter ended September 30, 2001.
Revenue generated by ISP operations totaled $832,696 in the nine
month period in 2001 compared to $1,309,530 in the corresponding period in 2000.
ISP operating costs were $1,275,524 in first nine month period in 2001 compared
to ISP operating costs of $2,147,147 in the same period in 2000. Resulting ISP
net loss amounted to $442,828 in first nine month period in 2001 compared to ISP
net loss of $837,617 in the same period in 2000.
Continuing Operations: Domain Name Registration Services and E-Solutions (Web
Site Design & Hosting, and E-Commerce Platforms)
The Company achieved revenue of $2,516,215 in first nine months of
2001 as compared to revenue of $1,052,434 in the corresponding period in 2000.
The increase of $1,463,781 in revenue is largely due to domain name registration
revenues which increased to $1,774,201 in the nine month period in 2001 from
$607,032 in the corresponding period in 2000 as a result of the Company's
successful targeted promotions and advertising. Revenues for e-solutions also
increased significantly to $742,014 in the nine month period 2001 from $445,402
in the same period in 2000 for e-solutions. However the e-solutions provision
market is fiercely competitive and occupied by a large number of competitors.
The Company had cost of revenue of $850,887 in the period in 2001, as compared
to $223,854 in the same period in 2000. Gross profit in the nine month period in
2001 was $1,665,328 compared to $828,580 in the corresponding period in 2000.
Operating expenses increased to $2,808,320 in the period in 2001
from $2,427,599 in the corresponding period in 2000. This increase in expenses,
moderate when viewed in the light of the significant increase in revenue, was
due mainly to Salaries, wages and benefits which increased to $1,136,129 from
$501,838. Other increases were: Telephone and communication, to $325,820 from
$265,053; and Depreciation, to $159,459 from $98,740. Decreases due to the
implementation of cost saving measures were achieved in: General and
administrative, to $845,966 from $951,632; and Advertising and promotion, to
$340,946 from $610,336.
Operating loss for the nine month period in 2001 was $1,142,992 in
contrast to same period 2000 operating loss of $1,599,019. The Company had
interest income of $51,037 in the period in 2001 and $125,105 in the
corresponding period in 2000. The net loss from continuing operations in the
nine month period in 2001 was $1,091,955 ($0.05/share) compared to the net loss
in the corresponding period in 2000 of $1,473,914 ($0.07/share).
PROVISION FOR INCOME TAXES
Due to the company's loss position, no provision for income taxes
has been included in these financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141 "Business Combinations". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS No.
141 also changes the criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. This statement does not currently
affect the financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses accounting and reporting for intangible assets
acquired, except for those acquired in a business combination. SFAS No. 142
presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 also
addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. This statement is not expected to have a
material effect on the financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. This
statement does not affect the financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. This statement is not expected to
have a material effect on the financial statements.
FUTURE TRENDS
The Company will continue its endeavour to increase revenue, while
at the same time taking measures to control costs. For the nine month period
ended September 30, 2001 it managed to reduce its operating loss to $0.05/share
from $0.07/share a year ago; and for the three month period ended September 30,
2001 its operating loss decreased to $0.01/share from $0.03/share a year ago.
However, operating losses may still continue from current domain name
registration and E-solutions business. The Company cannot assure that any profit
on revenue can occur in the future.
The Company agreed to sell its ISP assets as mentioned earlier in
this discussion and analysis. Once this assets sale agreement is closed, the
Company will obtain, in addition to the $500,000 security deposit already made
by Sino Soft, a cash amount of $200,000 to help fund continuing operations and
moderate growth. The Company is also engaged in the process of negotiating for
new funds, but no agreement has been signed at this date.
Further, as mentioned earlier, the Company signed an agreement to
acquire 100% ownership of Protectserve Pacific Ltd. (PSP). Once an agreement
with PSP is closed, the Company will own a second business which has generated a
profit during its first six months of operations. Management believes the
prospects of continuing profits for PSP look very positive.
The Company also plans to transfer its current business of domain
name registration, web design & hosting and e-solutions to its wholly owned
subsidiary, Xin Net International Corp., and distribute by way of a dividend Xin
Net International Corp. shares to Company shareholders on record at a yet-to-be
determined record date. Management intends to file before the end of 2001 a
registration statement (SB-2) with the Securities and Exchange Commission for
these dividend shares in order to qualify them for trading.
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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None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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None
XIN NET CORP.
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.
/s/ Marc Hung
Date: November 9, 2001 ---------------------------------
Marc Hung, President