| NOTE 14 | CONCENTRATIONS AND CREDIT RISKS |
As of June 30, 2013 and December 31, 2012, all of the Company’s assets were located in the PRC and Hong Kong and all of the Company’s revenues were derived from customers located in the PRC.
Details of the suppliers accounting for 10% or more of the Company’s purchases are as follows:
| | | Supplier A | | |
| For the three months ended | | | | |
| June 30, 2013 | | | - | | |
| June 30, 2012 | | | 91% | | |
| | | Supplier A | | |
| For the six months ended | | | | |
| June 30, 2013 | | | - | | |
| June 30, 2012 | | | 83% | | |
As of June 30, 2013 and December 31, 2012, the accounts payable for these suppliers were $0 and $0 respectively.
Details of the customers accounting for 10% or more of the Company’s sales are as follows:
| | | Customer A | | | Customer B | |
| For the three months ended | | | | | | |
| June 30, 2013 | | | 100 | % | | | - | |
| | | | | | | | | |
| June 30, 2012 | | | - | | | | 37 | % |
| | | Customer A | | | Customer B | |
| For the six months ended | | | | | | |
| June 30, 2013 | | | 82 | % | | | - | |
| | | | | | | | | |
| June 30, 2012 | | | - | | | | 26 | % |
As of June 30, 2013 and December 31, 2012, the accounts receivable from these customers were $0 and $0 respectively.
In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to June 30, 2013 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our results of operations and financial condition should be read together with our consolidated group financial statements and the notes thereto and other financial information, which are included elsewhere in our annual report on Form 10-K for fiscal year ended December 31, 2012. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In addition, our financial statements and the financial information included in this report reflect our organization transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.
This section contains forward-looking statements. These forward-looking statements are subject to various factors, risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Further, as a result of these factors, risks and uncertainties, the forward-looking events may not occur. Relevant factors, risks and uncertainties include, but are not limited to, those discussed in “Item 1. Business,” “Item 1A. Risk Factors” and elsewhere in our annual report on Form 10-K for fiscal year ended December 31, 2012. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s beliefs and opinions as of the date of this report. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise.
Overview and Strategy
In this Quarterly Report on Form 10-Q, unless the context requires or is otherwise specified, references to the “Company,” “we,” “us,” “our” and similar expressions include the following entities (as defined herein):
(i) China Xingbang Industry Group Inc., a Nevada corporation (“China Xingbang”);
(ii) Xing Bang Industry Group Limited, a British Virgin Islands company and a wholly-owned subsidiary of the Registrant (“ Xingbang BVI ”);
(iii) China Group Purchase Alliance Limited, a Hong Kong company and a wholly-owned subsidiary of Xingbang BVI (“ Xingbang HK ”);
(iv) Guangzhou Xingbang Information Consulting Co., Ltd., a wholly foreign-owned enterprise, or the “ WFOE ”, formed in the People’s Republic of China (“ PRC ”) and a wholly-owned subsidiary of Xingbang HK;
(v) Guangdong Xingbang Industry Information & Media Co. Ltd., our principal operating subsidiary, which is a Chinese variable interest entity that the WFOE controls through certain contractual arrangements (“ Guangdong Xingbang ”); and
(vi) XinyuXingbang Information Industry Co., Ltd., an entity incorporated in the PRC which the WFOE and Guangdong Xingbang each owns 50% of its equity interest, (“ XinyuXingbang ”). XinyuXingbang will continue the business of Guangdong Xingbang.
Through our wholly owned subsidiaries, Xingbang BVI and Xingbang HK, we own the WFOE, which controls Guangdong Xingbang, a variable interest entity (“VIE”), through a series of variable interest entity, or VIE contractual arrangements. Guangdong Xingbang is currently our sole source of income and operations. A summary of our business is described below.
We were formed as a Nevada corporation on April 12, 2011 to acquire operational control over Guangdong Xingbang. Since foreign investors are restricted by the laws and regulations of the PRC to operate the media and e-commerce business in China, we operate our business through ownership of the WFOE that provides management, consulting, investment and technical services to Guangdong Xingbang. We do not own any direct equity interest in Guangdong Xingbang. In May 2011, the WFOE entered into a series of contractual arrangements which effectively give the WFOE operational control over Guangdong Xingbang despite the lack of direct ownership. As a result of these contractual arrangements, we treat Guangdong Xingbang as a variable interest entity, or VIE, under U.S. generally accepted accounting principles, and we have included its historical financial results in our consolidated financial statements.
Our subsidiaries, Xingbang BVI and Xingbang HK are holding companies which do not have any operations or own any assets except for the ownership of the WFOE. The only current operation of the WFOE is to provide consulting and management services to Guangdong Xingbang. Currently, we rely on results of operations of Guangdong Xingbang and XinyuXingbang. If the PRC government declares the VIE agreements are not enforceable, we will not be able to exercise effective control over Guangdong Xingbang and consolidate the financial results of Guangdong Xingbang. In such case, our results of operations and financial position will be materially adversely affected.
Guangdong Xingbang, which was founded in 2005, derives revenue primarily from three types of business: e-commerce related revenue derived from our e-commerce platform ju51 Online Mall, advertising revenue, and revenue from consulting service provided to businesses and local governments in China.
XinyuXingbang was incorporated in the PRC in June 2012 for the purpose of continuing the business of Guangdong Xingbang in the near future as Guangdong Xingbang winds down its operations. Pursuant to the Articles of Associations of XinyuXingbang, Guangdong Xingbang and the WFOE each invested $787,030 (RMB 5,000,000) in XinyuXingbang and each owns 50% of the equity interest of XinyuXingbang. Under the XinyuXingbang Articles of Association, the WFOE is entitled to appoint the sole director and all members of the management team of XinyuXingbang and the WFOE is entitled to receive 99.99% of XinyuXingbang’s net profit. Based on the relevant PRC regulations, an Internet Content Provider license, or ICP license, issued by the Chinese Ministry of Industry and Information Technology, is required for XinyuXingbang to conduct business as currently contemplated. In order to be granted the ICP license, foreign investor’s ownership of XinyuXingbang cannot exceed 50%. XinyuXingbang obtained its ICP license in February 2013. Guangdong Xingbang will gradually wind down its operations and XinyuXingbang will carry out Guangdong Xingbang’s business except that Guangdong Xingbang will fulfill its contractual obligations under the existing customer contracts. Guangdong Xingbang will grant an exclusive license to XinyuXingbang to permit XinyuXingbang to use trademark, domain names, intellectual property rights and any know-how Guangdong Xingbang owns. Guangdong Xingbang will also assign the management right and right to receive revenue from the ju51 Mall and our newspaper publication, called Industry Economy Review, to XinyuXingbang. Guangdong Xingbang will continue its corporate existence to hold the equity interest in XinyuXingbang.
Below is our organizational structure.
Our revenue highly correlates to the Chinese real estate market and is seasonal. Chinese government’s policies restraining real estate growth will result in decrease in the demand for home furnishings, which will have a significant impact on our revenue. Generally, the first half of the year is low season for the home furnishings market, as people generally do not decorate their home during this period because of wet weather and other factors, so our revenue in advertising and consulting (except for consulting provided to local governments, and revenue generated by our ju51 Mall) is relatively low during this period.
During 2012, the Company decided to focus its efforts on its e-commerce business model. Therefore revenue from advertising and consulting dropped significantly during 2012. On February 14, 2012, the board of directors exempted distributors or the so called “channel service providers” from paying service charges from October 2011 to June 2012, considering that the distributors have recorded loss resulting from low sales volume on the ju51 Mall, and in order to maintain a good and sustainable cooperation relationship with them. The board also authorized Mr. Xiaohong Yao (“Mr. Yao”), the Chairman, CEO and President, to exempt distributors from paying service charges, direct sale stores (later rebranded as technical service stations) from paying franchise fees based on the trade volume on the ju51 Mall. In June 2012, the Company terminated all the contracts with channel service providers, because none of the channel service providers met the agreed goals. Management also determined that the e-commerce platform will not be put into use until it is fully developed. We do not expect revenue generated from service charges and commissions from the transactions on the e-commerce platform until October 2013, at the earliest.
Since February 2012, we started to develop technical service stations and recruit interior designers and decoration technicians to join a web portal called “China Decoration Technicians Network” at http://www.zgzxjg.com as part of our sales effort. The web portal is owned by XinyuZhongxing Decoration Technicians Network Company Limited, a related party that is 80% owned by Mr. Yao and 20% owned by his spouse. The technical service stations (previously called “direct sales stores”) are intended to function as our local representative offices. The interior designers and decoration technicians help us reach out to consumers and act as shopping guides using the technical service stations as their base. Consumers who place order through the introduction of decoration technicians will enjoy special “membership price”, which is less than the direct sale price listed on the ju51 Mall. Interior designers and decoration technicians earn commissions from the flagship stores.
Since June 2013, Xingyu Xingbang started to enter into franchise agreements with companies who are interested in setting up an online retail store on the e-commerce website, www.ju51.com and a physical showroom in the “Home Furnishing Procurement Headquarter”, which is located in Xingyu City, China. The purpose of the agreement is to promote the business transactions volume on the e-commerce platform. At this stage, the agreements do not include franchise fee or service charge related to the services provided by Xingyu Xingbang, only a security deposit of $3,259 (RMB 20,000) for each agreement is required to be paid by the counterparty and will be returned within two months after termination or expiration of the agreement. As of June 30, 2013, Xingyu Xingbang had signed agreements with thirty-three companies, ten of them had set up their flagship store and paid the security deposit.
We are experiencing delay in our plan to start generating revenue from the e-commerce business. We did not generate any revenue as of June 30, 2013 due to the restructuring of our marketing team and the marketing strategy. We did not generate revenue from technical service stations because of the inability to identify qualified personnel to be in charge of the process. We were not able to hire the key personnel as previously planned due to the rigorous selection process. With an experienced director and a special team in place in July 2013, we expect to sign up with more technical service stations in the second half of 2013. In the early stage of development, we may waive the franchise fees from the technical service stations for promotional purposes. We experienced delay with the development of online flagship stores and physical showroom for similar reasons. The personnel in charge of the process did not perform according to our expectation and thus we underwent a restructuring of the team. We hired seasoned professionals in the second quarter and expect to be back on track with our plans. Moreover, we did not receive welcoming responses for our previous terms in our franchise agreements, which require the franchisee to pay franchise fees for setting up online retail stores and physical showrooms and also to set up an entity in Xinyu City, China, if the franchisee is not based in Xinyu. In order to attract more franchisees, we are loosening some of these requirements, which includes waiving the franchise fee in the first year of the agreement.
Critical Accounting Policies and Estimates
In preparing our condensed consolidated group financial statements in conformity with accounting principles generally accepted in the United States, we make estimates and assumptions that affect the accounting, recognition and disclosure of our assets, liabilities, stockholders’ equity, revenues and expenses. We make these estimates and assumptions because certain information that we use is dependent upon future events, which cannot be calculated with a high degree of precision from data available or cannot be readily calculated based upon generally accepted methodologies. In some cases, these estimates are particularly difficult and therefore require a significant amount of judgment. Actual results could differ from the estimates and assumptions that we use in the preparation of our condensed consolidated group financial statements.
During the six months ended June 30, 2013, there were no significant changes to our critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2012.
Results of Operations — Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012.
The following table presents, for the three months indicated, our consolidated statements of operations information.
| | | Three months ended June 30, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| REVENUE | | | | | | |
| Advertising | | $ | 3,270 | | | $ | 231,108 | |
| Consulting service | | | 4,875 | | | | 201,145 | |
| E-commerce | | | - | | | | - | |
| Total revenue | | | 8,145 | | | | 432,253 | |
| | | | | | | | | |
| COST OF REVENUE | | | | | | | | |
| Advertising | | | 10,087 | | | | 36,125 | |
| Consulting service | | | 20,034 | | | | 16,614 | |
| E-commerce | | | 111,293 | | | | 145,495 | |
| Total cost of revenue | | | 141,414 | | | | 198,234 | |
| | | | | | | | | |
| GROSS (LOSS) PROFIT | | | (133,269 | ) | | | 234,019 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Selling expenses | | | 87,825 | | | | 459,202 | |
| General and administrative expenses | | | 388,521 | | | | 202,706 | |
| Impairment of website development cost | | | 406,963 | | | | - | |
| Depreciation – property and equipment | | | 26,319 | | | | 24,869 | |
| Total Operating Expenses, net | | | 909,628 | | | | 686,777 | |
| | | | | | | | | |
| NET LOSS FROM OPERATIONS | | | (1,042,897 | ) | | | (452,758 | ) |
| | | | | | | | | |
| OTHER (EXPENSES) INCOME, NET | | | | | | | | |
| Interest income | | | 378 | | | | 1,758 | |
| Other income | | | - | | | | 132 | |
| Other expenses | | | (646 | ) | | | (758 | ) |
| Loss on disposal of property and equipment | | | - | | | | (4 | ) |
| Total Other (Expenses) Income, net | | | (268 | ) | | | 1,128 | |
| | | | | | | | | |
| NET LOSS BEFORE TAXES | | | (1,043,165 | ) | | | (451,630 | ) |
| | | | | | | | | |
| Income tax benefit | | | - | | | | 71,015 | |
| | | | | | | | | |
| NET LOSS | | | (1,043,165 | ) | | | (380,615 | ) |
| | | | | | | | | |
| OTHER COMPREHENSIVE LOSS | | | | | | | | |
| Foreign currency translation loss | | | (21,339 | ) | | | (8,379 | ) |
| | | | | | | | | |
| TOTAL COMPREHENSIVE LOSS | | $ | (1,064,504 | ) | | $ | (388,994 | ) |
| | | | | | | | | |
| Net loss per share | | | | | | | | |
| - basic and diluted | | $ | (0.01 | ) | | $ | (0.00 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding during the period | | | | | | | | |
| - basic and diluted | | | 81,244,000 | | | | 81,244,000 | |
Revenue
During the three months ended June 30, 2013, we had total revenue of $8,145, a decrease of 98.12% compared to the same period in 2012. Of this, $3,270 was attributable to revenue generated from advertising and $4,875 was attributable to consulting service rendered. During the three months ended June 30, 2012, total revenue was $432,253. Of this, $231,108 was attributable to revenue generated from advertising and $201,145 was attributable to consulting service rendered. The decrease of $424,108 was mainly due to decrease in advertising and consulting revenue as a result of the change of our business model to focus on revamping our e-commerce business. The Company waived the fee for the use of the e-commerce platform from October, 2011 to June 2012 by the channel service providers so as to compensate for loss incurred by the channel service providers due to low sales volume in the Ju51 mall. In June 2012, the Company terminated all the contracts with channel service providers, because none of the channel service providers had met the agreed goals. Management also determined that the e-commerce platform will not be put into use until it is fully developed, which is expected to be in the second half of year ending December 31, 2013. We spent the year ended December 31, 2012 and the first and second quarters of 2013 repositioning the Company to shift our core business from advertising and consulting to e-commerce. During this time, management does not think it is appropriate to start generating revenue from our e-commerce platform until our e-commerce revenue models are finalized and driver supports are ready. Therefore revenue from e-commerce was $0 for the three months ended June 30, 2013 and 2012.
Cost of revenue
Cost of revenue is comprised of printing cost, editorial fee, agent fee, salaries of consulting service providers, amortization of website development costs, salaries of website administrators and business tax relating to advertising and consulting service rendered.
Cost of revenue for the three months ended June 30, 2013 was $141,414, compared to $198,234 for the three months ended June 30, 2012, a decrease of $56,820, or approximately 28.66%. The decrease was due to the approximate 72.08% decrease in the cost of advertising revenue, which was $26,038, and the approximately 23.51% decrease in the cost of e-commerce, which was $34,202, which was offset by the approximately 20.59% increase in the cost of consulting revenue, which was $3,420. The reason for the decrease was the decrease in agent fee, printing cost, business tax relating to advertising, amortization of website development costs and salary of website administrators.
Gross (loss) profit
Gross loss was $133,269 for the three months ended June 30, 2013, a decrease of $367,288, or approximately 156.95%, compared to a gross profit of $234,019 of the same period in 2012. The decrease was mainly due to the decrease in advertising and consulting revenue.
Operating expenses
Operating expenses consist of selling, general and administrative expenses, impairment of website development cost and depreciation.
Operating expenses for the three months ended June 30, 2013 were $909,628, composed of $87,825 in selling expenses, $388,521 in general and administrative expense, $406,963 in impairment of website development cost, and $26,319 in depreciation. Operating expenses for the three months ended June 30, 2012 were $686,777, composed of $459,202 in selling expenses, $202,706 in general and administrative expense, and $24,869 in depreciation. The increase in operating expenses from the quarter ended June 30, 2012 to the quarter ended June 30, 2013 was $222,851, or approximately 32.45%, and it was mainly due to the impairment of website development cost of $406,963.
Other (expenses) income, net
Other (expenses) income, net, consists mainly of net of interest income, other income, other expenses, and loss on disposal of property and equipment.
Other expenses, net, for the three months ended June 30, 2013 was $268 compared to other income, net of $1,128 for the three months ended June 30, 2012, a decrease of $1,396, or approximately 123.76%. The decrease in other (expenses) income, net, was mainly due to the decrease in interest income.
Income tax benefit
Income tax benefit was $0 for the three months ended June 30, 2013, as compared to income tax benefit of $71,015 for the three months ended June 30, 2012. The Company did not recognize the deferred tax asset arising from the net loss for the three months ended June 30, 2013, due to the fact that the Company sustained continuous losses over the years. Our effective income tax rate was 0% and approximately 16% for the three months ended June 30, 2013 and 2012 respectively. Under PRC law, being qualified as a “New or High Technology Enterprise” is subject to review every year.
Net Loss
Net loss was $1,043,165 and $380,615 for the three months ended June 30, 2013 and 2012 respectively. The increase was mainly the result of a decrease in advertising and consulting revenue, and the revamp of the e-commerce business model and also the Company waiver of the fees paid to it for the use of the platform. Another reason for the increase was due to the increase in rental expenses in general and administrative expenses. Moreover, the unamortized website development cost was fully impaired during the quarter ended June 30, 2013.
Other comprehensive loss
Other comprehensive loss was $21,339 and $8,379 for the three months ended June 30, 2013 and 2012 respectively. The change of foreign currency translation loss was primarily caused by the fluctuation in the RMB to U.S. dollar exchange rate in 2013 compared to 2012.
Results of Operations — Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012.
The following table presents, for the six months indicated, our consolidated statements of operations information.
| | | Six months ended June 30, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| REVENUE | | | | | | |
| Advertising | | $ | 10,027 | | | $ | 348,125 | |
| Consulting service | | | 9,696 | | | | 250,734 | |
| E-commerce | | | - | | | | - | |
| Total revenue | | | 19,723 | | | | 598,859 | |
| | | | | | | | | |
| COST OF REVENUE | | | | | | | | |
| Advertising | | | 19,837 | | | | 161,508 | |
| Consulting service | | | 39,522 | | | | 35,156 | |
| E-commerce | | | 235,987 | | | | 220,974 | |
| Total cost of revenue | | | 295,346 | | | | 417,638 | |
| | | | | | | | | |
| GROSS (LOSS) PROFIT | | | (275,623 | ) | | | 181,221 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Selling expenses | | | 278,205 | | | | 617,923 | |
| General and administrative expenses | | | 725,207 | | | | 364,371 | |
| Impairment of website development cost | | | 406,963 | | | | 10,460 | |
| Depreciation – property and equipment | | | 51,926 | | | | 51,162 | |
| Total Operating Expenses, net | | | 1,462,301 | | | | 1,043,916 | |
| | | | | | | | | |
| NET LOSS FROM OPERATIONS | | | (1,737,924 | ) | | | (862,695 | ) |
| | | | | | | | | |
| OTHER (EXPENSES) INCOME, NET | | | | | | | | |
| Interest income | | | 916 | | | | 2,136 | |
| Other income | | | - | | | | 169 | |
| Other expenses | | | (1,491 | ) | | | (1,666 | ) |
| Gain on disposal of property and equipment | | | - | | | | 2,296 | |
| Total Other (Expenses) Income, net | | | (575 | ) | | | 2,935 | |
| | | | | | | | | |
| NET LOSS BEFORE TAXES | | | (1,738,499 | ) | | | (859,760 | ) |
| | | | | | | | | |
| Income tax benefit | | | - | | | | 124,529 | |
| | | | | | | | | |
| NET LOSS | | | (1,738,499 | ) | | | (735,231 | ) |
| | | | | | | | | |
| OTHER COMPREHENSIVE LOSS | | | | | | | | |
| Foreign currency translation loss | | | (24,960 | ) | | | (10,023 | ) |
| | | | | | | | | |
| TOTAL COMPREHENSIVE LOSS | | $ | (1,763,459 | ) | | $ | (745,254 | ) |
| | | | | | | | | |
| Net loss per share | | | | | | | | |
| - basic and diluted | | $ | (0.02 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding during the period | | | | | | | | |
| - basic and diluted | | | 81,244,000 | | | | 81,244,000 | |
Revenue
During the six months ended June 30, 2013, we had total revenue of $19,723, a decrease of 96.71% compared to the same period in 2012. Of this, $10,027 was attributable to revenue generated from advertising and $9,696 was attributable to consulting service rendered. During the six months ended June 30, 2012, total revenue was $598,859. Of this, $348,125 was attributable to revenue generated from advertising and $250,734 was attributable to consulting service rendered. The decrease of $579,136 was mainly due to decrease in advertising revenue as a result of the change of our business model to focus on revamping our e-commerce business. The Company waived the fee for the use of the e-commerce platform from October, 2011 to June 2012 by the channel service providers so as to compensate for loss incurred by the channel service providers due to low sales volume in the Ju51 mall. In June 2012, the Company terminated all the contracts with channel service providers, because none of the channel service providers had met the agreed goals. Management also determined that the e-commerce platform will not be put into use until it is fully developed, which is expected to be in the second half of year ending December 31, 2013. We spent the year ended December 31, 2012 and the first and second quarters of 2013 repositioning the Company to shift our core business from advertising and consulting to e-commerce. During this time, management does not think it is appropriate to start generating revenue from our e-commerce platform until our e-commerce revenue models are finalized and driver supports are ready. Therefore revenue from e-commerce was $0 for the six months ended June 30, 2013 and 2012.
Cost of revenue
Cost of revenue is comprised of printing cost, editorial fee, agent fee, salaries of consulting service providers, amortization of website development costs, salaries of website administrators and business tax relating to advertising and consulting service rendered.
Cost of revenue for the six months ended June 30, 2013 was $295,346, compared to $417,638 for the six months ended June 30, 2012, a decrease of $122,292, or approximately 29.28%. The decrease was due to the approximate 87.72% decrease in the cost of advertising revenue, which was $141,671 offset by the approximately 12.42% increase in the cost of consulting revenue, which was $4,366 and the 6.79% increase in the cost of e-commerce, which was $15,013. The reason for the decrease was the decrease in agent fee, printing cost and business tax relating to advertising service.
Gross (loss) profit
Gross (loss) was $275,623 for the six months ended June 30, 2013, a decrease of $456,844, or approximately 252.09%, compared to a gross profit of $181,221 of the same period in 2012. The decrease was mainly due to the decrease in advertising and consulting revenue.
Operating expenses
Operating expenses consist of selling, general and administrative expenses, impairment of website development cost and depreciation.
Operating expenses for the six months ended June 30, 2013 were $1,462,301, composed of $278,205 in selling expenses, $725,207 in general and administrative expense, $406,963 in impairment of website development cost, and $51,926 in depreciation. Operating expenses for the six months ended June 30, 2012 were $1,043,916, composed of $617,923 in selling expenses, $364,371 in general and administrative expense, $10,460 in impairment of website development cost and $51,162 in depreciation. The increase in operating expenses from the quarter ended June 30, 2012 to the quarter ended June 30, 2013 was $418,385, or approximately 40.08%, and it was mainly due to the impairment of website development of $406,963.
Other (expenses) income, net
Other (expenses) income, net, consists mainly of net of interest income, other income, other expenses, and gain on disposal of property and equipment.
Other expenses, net, for the six months ended June 30, 2013 was $575 compared to other income, net of $2,935 for the six months ended June 30, 2012, a decrease of $3,510, or approximately 119.59%. The decrease in other (expenses) income, net, was primarily due to the decrease in interest income of $1,220 and no gain on disposal of property and equipment for the quarter ended June 30, 2013, compared to a gain of $2,296 the same period in 2012.
Income tax benefit
Income tax benefit was $0 for the six months ended June 30, 2013, as compared to income tax benefit of $124,529 for the six months ended June 30, 2012. The Company did not recognize the deferred tax asset arising from the net loss for the six months ended June 30, 2013, due to the fact that the Company sustained continuous losses over the years. Our effective income tax rate was 0% and approximately 14% for the six months ended June 30, 2013 and 2012 respectively. Under PRC law, being qualified as a “New or High Technology Enterprise” is subject to review every year.
Net Loss
Net loss was $1,738,499 and $735,231 for the six months ended June 30, 2013 and 2012 respectively. The increase was mainly the result of a decrease in advertising and consulting revenue, and the revamp of the e-commerce business model and also the Company waiver of the fees paid to it for the use of the platform. Another reason for the increase was due to the increase in rental expenses in general and administrative expenses. Moreover, the unamortized website development cost was fully impaired during the quarter ended June 30, 2013.
Other comprehensive loss
Other comprehensive loss was $24,960 and $10,023 for the six months ended June 30, 2013 and 2012 respectively. The change of foreign currency translation loss was primarily caused by the fluctuation in the RMB to U.S. dollar exchange rate in 2013 compared to 2012.
Liquidity and Capital Resources
Cash and cash equivalents
Cash and cash equivalents consist primarily of cash on hand and demand deposits at banks. We had $320,256 and $197,530 of cash and cash equivalents on hand as of June 30, 2013 and December 31, 2012 respectively, an increase of $122,726.
The increase in our cash and cash equivalents from December 31, 2012 to June 30, 2013 was largely attributable to an increase in net cash provided by financing activities, which was $1,424,963 on a period-to-period basis. The increase in cash provided by financing activities was largely caused by the advances of $1,334,787 from a related company, XinyuXingbang Industry Co., Ltd. of which Mr. Yao and his spouse own 90% and 10% respectively of the registered capital of XinyuXingbang Industry Co., Ltd. The rest of the increase is due to the advances of $90,176 received from Mr. Yao and his spouse.
We require cash for working capital, capital expenditures, repayment of debt, salaries, commissions and related benefits and other operating expenses and income taxes. We expect that our working capital needs will increase for the foreseeable future, as we continue to develop and grow our business. See “Business — General” in our 10-K filed with the SEC on April 1, 2013.
The following table summarizes our cash flows for the six months ended June 30, 2013 and 2012:
| | | Six months ended June 30, | |
| | | 2013 | | | 2012 | |
| Net cash (used in) operating activities | | $ | (1,161,545 | ) | | $ | (918,162 | ) |
| Net cash (used in) investing activities | | $ | (143,938 | ) | | $ | (140,538 | ) |
| Net cash provided by financing activities | | $ | 1,424,963 | | | $ | 1,577,193 | |
Net Cash Used in Operating Activities. Net cash used in operating activities was $1,161,545 and $918,162 for the six months ended June 30, 2013 and 2012 respectively. The most significant items affecting the comparison of our operating cash flow for the six months ended June 30, 2013 and 2012 are summarized below:
| ● | Increase in cash loss from operations - Our net loss from operations, excluding depreciation, amortization, impairment of website development cost and gain on disposal of property and equipment, increased by $556,820 on a period-to-period basis, from cash loss of $613,367 for the six months ended June 30, 2012 to cash loss of $1,170,187 for the six months ended June 30, 2013, which negatively impacted our cash flows from operations. The increase in cash loss from operations was mainly due to the decrease in revenue and increase in rental expenses in general and administrative expenses in the first and second quarters in 2013 from the same period last year. |
| ● | Decrease in accounts receivable – Accounts receivable decreased by $0 during the six month ended June 30, 2013, while it decreased by $1,399,061 for the same period in 2012. The reason was that we did not collect any accounts receivables in the first and second quarters of 2013 as we decided to render services after a retainer was paid by our customers. Revenue decreased from $598,859 during the six months ended June 30, 2012 to $19,723 during the six months ended June 30, 2013. No collection of accounts receivable and no increase of deferred revenue received from the customers during the first and second quarters of 2013 lead to an increase in cash used in operating activities. |
| ● | Decrease in other payables and accrued expenses - Other payables and accrued expenses decreased by $37,430 in the first and second quarters in 2013, decreased by $21,118 for the same period in 2012. Other payables and accrued expenses consisted of other tax payables, accrued professional fees, accrued expenses, deposits received from customers, other payable, accrued website development cost, accrued wages and accrued welfare. The decrease in other payables and accrued expenses was the net effect of the decrease of the accrued professional fee, accrued payables, and increase in accrued wages and other payables, which was mainly arising from the payments for construction in progress. |
Net Cash Used in Investing Activities. Our investing activities for the six months ended June 30, 2013 and 2012 used cash of $143,938 and $140,538 respectively. The net cash used in investing activities are comparable between two periods.
Net Cash Provided by Financing Activities. Our financing activities for the six months ended June 30, 2013 and 2012 provided cash of $1,424,963 and $1,577,193 respectively. Although there were advances of $1,334,787 from a related company, XinyuXingbang Industry Co., Ltd., the amount received from Mr. Yao and his spouse was decreased from $1,582,204 in the prior period compared to $90,176 during the six months ended June 30, 2013. The net result leads to a decrease in cash provided by financing activities.
Capital Resources
We had negative working capital of $3,578,992 as of June 30, 2013 and $2,219,805 as of December 31, 2012 respectively. The reason for the decrease from December 31, 2012 to June 30, 2013 was primarily due to the increase in amount due to related companies.
Under the VIE Agreements, Guangdong Xingbang pays the WFOE a consulting service fee, payable in RMB each quarter, equivalent to all of its net income for such quarter based on its quarterly financial statements, prepared in accordance with generally accepted accounting principles of the PRC. The WFOE then may transfer the cash payment to the offshore holding companies (Xingbang HK, Xingbang BVI and China Xingbang) via dividend payment, after deduction of relevant taxes. If we obtain funds through financing in the US, Xingbang HK may invest in the WFOE. It is generally prohibited for PRC resident enterprises, including foreign owned entities, to make inter-company loans. However, management believes it is in compliance with the current PRC law for the WFOE to deposit the funds into a PRC bank account and request the PRC bank to lend the funds to Guangdong Xingbang.
We are a holding company with no significant revenue-generating operations of our own, and thus any cash flows from operations are and will be generated by Guangdong Xingbang through our WFOE’s existing consulting service management arrangement with Guangdong Xingbang. Our ability to service our debt and fund our ongoing operations is dependent on the results of these operations and their ability to provide us with cash. The WFOE’s ability to make loans or pay dividends are restricted under PRC law and may be restricted under the terms of future indebtedness, its governing documents or other agreements. With the cash on hand and the anticipated cash to be received from our operations, we may not be able to generate enough cash to support the expansion of the business operations. However, the Guangdong Xingbang’s Shareholders are fully committed to provide cash as needed to support the Company’s ongoing operations and continued growth. Therefore, we believe that our sources of liquidity will be sufficient to enable us to meet our cash needs for at least the next 12 months.
Nonetheless, our liquidity and capital position could be adversely affected by:
● | loss of revenue from advertising and consulting service; |
| ● | continued failure to generate revenue in the e-Commerce business; |
| ● | any change of policy on accounts receivable; |
| ● | the enactment of new laws and regulations; |
| ● | our inability to grow our business as we anticipate by expanding our revamped e-commerce business; |
| ● | any other changes in the cost structure of our underlying business model; and |
| ● | any of the other risks and uncertainties described in our annual report on Form 10-K for the fiscal year ended December 31, 2012. |
Debt Obligations
The following is a summary of amounts outstanding under our debt obligations as of June 30, 2013 and December 31, 2012.
| | | As of June 30, 2013 | | | As of December 31, 2012 | |
| Due to related companies | | $ | 1,483,864 | | | $ | 136,039 | |
| Due to shareholders | | | 1,720,272 | | | | 1,605,110 | |
| Accounts payable | | | - | | | | 2,183 | |
| Total debt | | $ | 3,204,136 | | | $ | 1,743,332 | |
Due to related companies
As of June 30, 2013 and December 31, 2012, Guangdong Xingbang owed $0 and $5,457 respectively to ZhongshanXingbang Purchase & Exhibition Service Co., Ltd (“ZhongshanXingbang”) which is interest free, unsecured and repayable on demand. Mr. Yao is the director of ZhongshanXingbang.
As of June 30, 2013 and December 31, 2012, XinyuXingbang owed $408,165 and $130,582 respectively to XinyuXingbang Industry Co., Ltd for rental expense of showrooms. The amount due is unsecured, interest free and repayable on demand.
As of June 30, 2013 and December 31, 2012, XinyuXingbang owed $16,619 and $0 respectively to XinyuXingbang Industry Co., Ltd for rental expense of office used by XinyuXingbang. The amount due is unsecured, interest free and repayable on demand.
On May 30, 2013, Guangdong Xingbang entered into a loan agreement with XinyuXingbang Industry Co.,Ltd, with an amount of $81,468. The loan is interest free and unsecured with a loan period started on June 6, 2013 and is due for repayment on June 5, 2014. The use of this loan is only for the operation of Guangdong Xingbang.
On January 10, 2013, XinyuXingbang entered into a loan agreement with XinyuXingbang Industry Co., Ltd, with an amount of $814,677. The loan is interest free and unsecured with a loan period started on January 15, 2013 and is due for repayment on January 14, 2014. The use of this loan is only for the operation of XinyuXingbang.
On January 3, 2013, Guangdong Xingbang entered into a loan agreement with XinyuXingbang Industry Co., Ltd, with an amount of $162,935. The loan is interest free and unsecured with a loan period started on January 5, 2013 and is due for repayment on January 4, 2014. The use of this loan is solely for the operations of Guangdong Xingbang.
Due to shareholders
As of June 30, 2013 and December 31, 2012, WFOE owed $814,677 and $802,555 respectively to Mr. Yao. The loan is interest free and unsecured. The loan was entered into on May 31, 2012, and the loan period started on June 11, 2012 and was due for repayment on June 10, 2013. On May 31, 2013, the loan was renewed, and the loan period started on June 12, 2013 and is due for repayment on June 11, 2014.
As of June 30, 2013 and December 31, 2012, Guangdong owed $814,677 and $802,555 respectively to Mr. Yao. The loan is interest free and unsecured. The loan was entered into on May 31, 2012, and the loan period started on June 19, 2012 and was due for repayment on June 18, 2013. On June 10, 2013, the loan was renewed, and the loan period started on June 19, 2013 and is due for repayment on June 18, 2014.
As of June 30, 2013 and December 31, 2012, Guangdong Xingbang owed $90,918 and $0 respectively to Mr. Yao and his spouse for lease of office premises. The amounts due are unsecured, interest free and repayable on demand.
Off-Balance Sheet Arrangements
On February 14, 2012, the board of directors resolved to exempt distributors from paying service charges from October 2011 to June 2012 and to authorize Mr. Yao to exempt distributors from paying service charges, and brick-and-mortar stores or decoration companies from paying franchise fees. As of June 30, 2013 and December 31, 2012, we did not have any off-balance sheet obligations involving unconsolidated subsidiaries that provide financing or potentially expose us to unrecorded financial obligations. All of our obligations with respect to Guangdong Xingbang have been presented on our consolidated balance sheets as of each such date.
Recently Issued Accounting Pronouncements
There have been no new accounting pronouncements during the six months ended June 30, 2013 that are of significance, or potentially significant, to us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
The Company’s management, including our Chief Executive Officer and interim Chief Financial Officer, reassessed the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2013 and has subsequently determined that our disclosure controls and procedures were not effective as of June 30, 2013 due to certain material weaknesses including (i) lack of sufficient accounting personnel with appropriate understanding of U.S. GAAP and SEC reporting requirements; and (ii) lack of standard charter of accounts and written accounting manual and closing procedures to facilitate preparation of financial statements under U.S. GAAP for financial reporting processes. As a result of such material weaknesses, our disclosure controls and procedures were not effective. Our management has worked, and will continue to work to remedy the above material weaknesses in our disclosure controls and procedures.
Limitations on the Effectiveness of Disclosure Controls.
Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of 2013 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, except as disclosed above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We may be involved in litigation and other legal proceedings from time to time in the ordinary course of our business. Except as otherwise set forth in this quarterly report, we believe the ultimate resolution of these matters will not have a material effect on our financial position, results of operations or cash flows.
There have not been any material changes to the risk factors that were included in our From 10-K for fiscal year ended December 31, 2012, filed with the SEC on April 1, 2013.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
There were no issuances of our equity securities during the quarter ended June 30, 2013.
Limitations on Our Payment of Dividends
We have not paid any cash dividends to date and we do not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of our business.
In the future, we may be a party to agreements that limit or restrict our ability to pay dividends.
In addition, Nevada corporate law prohibits us from making any distribution (including a dividend) on our capital stock at a time when
| | ● | we would not be able to pay our debts as they become due in the usual course of business; or |
| | ● | our total assets would be less than the sum of (i) our total liabilities plus (ii) the amount that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution (although we presently do not have any shareholders with such preferential rights). |
WFOE is a wholly-foreign owned enterprise under the laws of the PRC. The principal regulations governing dividend distributions by wholly foreign owned enterprises and Sino-foreign equity joint ventures include:
| | ● | The Wholly Foreign Owned Enterprise Law (1986), as amended; |
| | ● | The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended; |
| | ● | The Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and |
| | ● | The Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended. |
Under these regulations, wholly foreign owned enterprises and sino-foreign equity joint ventures in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, before paying dividends to their shareholders, these foreign invested enterprises are required to set aside at least 10% of their profits each year, if any, to fund certain reserve funds until the amount of the cumulative total reserve funds reaches 50% of the relevant company’s registered capital. Accordingly, the WFOE is allowed to distribute dividends only after having set aside the required amount of its profits into the reserve funds as required under applicable PRC laws and regulations.
| Item 3. | Defaults Upon Senior Securities. |
Not applicable.
| Item 4. | Mine Safety Disclosures. |
Not applicable.
| Item 5. | Other Information. |
Not applicable.
| Exhibit No. | | Description |
| 31.1* | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
| 31.2* | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
| 32.1* | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2* | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS** | | XBRL Instance Document |
| 101.SCH** | | XBRL Taxonomy Extension Schema Document |
| 101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document |
* filed herein.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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.
| | China Xingbang Industry Group Inc. |
| | | |
| Date: August 14, 2013 | By: | /s/ Xiaohong Yao |
| | | Xiaohong Yao, Chairman, President and Chief Executive Officer |
| | | (principal executive officer) |
| | | |
| | By: | /s/ Haigang Song |
| | | Haigang Song, Chief Financial Officer (principal financial and accounting officer) |
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