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| XNYH.OB > SEC Filings for XNYH.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Results of Operations
The current global recession has reduced demand for capital goods in China. As of the first six months of 2009, this situation had a negative impact on both of our business segments. Overall, our revenue during the six months ended June 30, 2009 decreased by 40% to $4,508,640 from $ 7,522,593 achieved during the six months ended June 30, 2008. Our revenue during the three months ended June 30, 2009 decreased by 49% to $2,111,659 from $ 4,142,698 achieved during the three months ended June 30, 2008. The decrease was most dramatic in our equipment distribution business, where revenues declined by 69% to $758,670 during the six months ended June 30, 2009 from $2,457,691 during the same period of 2008, and from $1,478,359 during the second quarter of 2008 to $221,766 during the second quarter of 2009. The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived. The decline reversed a surge in equipment sales that we had experienced in 2008, and returned this business segment to a 17% contribution to our overall revenue during the first six months ended June 30, 2009, a level similar to our experience in 2007 and 2006. The future of this business segment will depend, in part, on the success of the recent economic stimulus initiated by the Government of China.
Revenue from our printing business fell by 26% to $3,749,970 during the six months ended June 30, 2009, compared to $5,064,902 during the same period of 2008. During the three months ended June 30, 2009, the revenue from our printing business decreased by 29% to $1,889,893, compared to $2,664,339 during the same period of 2008. The decline occurred, in part, due to the weakening of the Chinese banking industry, as many of our customers are conserving cash pending stabilization of the international credit markets. The decline also occurred because we moved our entire production operation to a larger facility at the end of 2008, which interfered with our printing business. Today, however, our new facility is fully operational, and we expect the traditional growth of our printing business to be renewed.
Over the longer term, the continued revenue growth in our printing services business will require further capital investment. As China's banking industry rapidly modernizes, our customers demand additional product offerings similar to those available to the banking industry in Europe and the U.S. Our ability to meet that demand will determine the long term growth of our business. Immediately, the development of these new products will require substantial capital investment. For that purpose, we are currently exploring financing possibilities, but have not yet received a commitment for the funds.
The 36% gross margin realized by our subsidiary, Harbin Golden Sea, on sales during the six and three months ended June 30, 2009 was lower than the 40% gross margin realized during the six and three months ended June 30, 2008. The reason for the fall-off was the sharp decline in profits from equipment sales during the six and three months ended June 30, 2009. The decline in demand for our cutting machinery forced us to price our sales aggressively, which reduced margins on equipment sales in the recent quarter. Our expectation for the future is that our gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business. If we obtain the funding necessary to expand our printing capacity, we expect the printing portion of its business to grow faster than the equipment sales business. If that occurs, overall gross margin should increase towards the higher margins that printing has historically produced.
During the six months ended June 30, 2009, we reduced our total expenses by 8.4% to $706,751, compared to $771,851 during the same period of 2008. This reduction was achieved despite a 48% increase in depreciation and amortization and $13,448 increase in our selling and distribution expenses during the first six months of 2009. These increases were counterbalanced by the favorable results of our continuing efforts to achieve efficiencies in our operations, leading to a decrease of $78,548 in our general and administration expenses for the first half of 2009. Likewise, our total expenses during the three months ended June 30, 2009 was reduced by 29% to $299,372, compared to $422,882 during the same period of 2008. When demand for our products returns to prior levels, we expect that the ratio of our selling expense to revenues will return to the lower levels that we consistently achieved in prior periods.
Commencing in 2008, we became subject to preferential Chinese income tax rates of 9% for 2008, 10% for 2009 and 11% for 2010, respectively. As a result of this government allowance, we were taxed at a 9% rate in the first six months of 2008, causing an expense of $303,351, and at a 10% rate in the first quarter of 2009, causing an expense of $122,675. The reduction in our tax liability was attributed to our decreased income during the six months ended June 30, 2009, compared to the same period of 2008.
The operations of our subsidiary, Harbin Golden Sea, earned a net income of $921,930 during the first six months of 2009 and $460,125 during the second quarter of 2009. However, because we own only 90% of Harbin Golden Sea, we deducted a "noncontrolling interest" of $92,193 and $46,012 respectively during the six and three months ended June 30, 2009 before recognizing net income on our Statements of Income and Comprehensive Income. After that deduction and taking into account the income and expenses incurred by the parent corporation, our net income for the first six months and second quarter of 2009 was $734,298 and $367,009, respectively, representing $0.04 and $0.02 per share.
Our business operates primarily in Chinese RMB, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our balance sheet labeled "accumulated other comprehensive income," since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the six and three months ended June 30, 2009, the effect of converting our financial results to Dollars was to reduce our comprehensive income by $16,844 and $368.
Liquidity and Capital Resources
Since our subsidiary, Harbin Golden Sea, was organized in 1998, the growth of its operations has been funded by contributions to capital by our Chairman, Mrs. Tian. With the $2.4 million that she invested, Harbin Golden Sea built its facilities and funded its operations, resulting in profitable operations for the past several years. As a result, at June 30, 2009, we had working capital totaling $8,156,865 (an increase of $858,982 since the end of 2008) and no long-term liabilities.
Our $332,070 in net cash flow from operations during the six months ended June 30, 2009 was less than half of our net income of $734,298 during the same period. The primary reason for the discrepancy was the $576,298 increase in our trade receivables during 2009. In 2008 and the first six months of 2009 our trade receivables have increased disproportionately to our sales due to the ongoing international financial crisis. Our customers are primarily Chinese banks, and the restriction of international credit lines has adversely affected their liquidity. To assist them in meeting their cash obligations, we have extended the credit terms afforded to the majority of our customers. This led to the disproportionate increase in our trade receivables. As we enter the second half of 2009, there is increased availability of credit within the international banking system, and our customers are better able to meet their payment obligations. We anticipate, therefore, that our trade receivables will decrease in future periods until swelled by increased sales.
Our cash position increased by $137,594 during the first six months of 2009, as we slowed our growth to conserve cash. Our only capital expenditure during the first six months of 2009 was the use of $193,341 to increase the equipment in our new manufacturing facility.
Harbin Golden Sea's business plan calls for significant investment in the growth of Harbin Golden Sea during 2009. We plan to purchase new equipment for our new production facility. We also plan to invest in the development of additional product lines, although the amount that we apply to that purpose will depend on our success in obtaining investment capital. To date, however, we have not received any commitment of funds.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
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