10-K 1 xnyh10k20091231.htm XINYINHAI TECHNOLOGY, LTD. FORM -K DECEMBER , 2009 xnyh10k20091231.htm



UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

     (Mark one)

|X|           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2009

                or

|   |           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from ______________ to _____________


Commission file number: 0-51012

XINYINHAI TECHNOLOGY, LTD.
(Exact name of Registrant as specified in its charter)


                     Utah                    
                      87-0427336                     
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
   
                        No. 4 Yantai Road, Centralized Park, Haping Road, Harbin Development Zone, China 150060                   
                        (Address of principal executive offices)
                     (Zip Code)

Issuer's telephone number: 86-451-868-11118

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes __ No √ 

 
 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes __ No √ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 such filing requirements for the past 90 days. Yes  √     No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes___ No ____
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. √ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large accelerated filer     Accelerated filer     Non-accelerated filer     Small reporting company    X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No √ 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2009 (the last day of the Registrant’s second fiscal quarter) was $3,204,647.

The number of shares outstanding of the issuer’s common stock, as of March 31, 2009 was 19,484,029.

DOCUMENTS INCORPORATED BY REFERENCE:  None

 
 

 
 
PART I

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains certain forward-looking statements regarding Xinyinhai Technology, Ltd. (“Xinyinhai Technology”), its business and its financial prospects.  These statements represent Management’s present intentions and its present belief regarding the Company’s future.
 
Nevertheless, there are numerous risks and uncertainties that could cause our actual results to differ from the results suggested in this Report.  A number of those risks are set forth in section 1A of this report, titled “Risk Factors.”

Because these and other risks may cause Xinyinhai Technology’s actual results to differ from those anticipated by Management, the reader should not place undue reliance on any forward-looking statements that appear in this Report.  Readers should also take note that Xinyinhai Technology will not necessarily make any public announcement of changes affecting these forward-looking statements, which should be considered accurate on this date only.

ITEM 1.                BUSINESS

Xinyinhai Technology, Ltd. is a holding company that has two subsidiaries.  Xinyinhai Technology owns 100% of the registered capital of Winner Sea Group Limited (“Winner Sea”), which owns 90% of the registered capital of Harbin Golden Sea Technology Printing Co., Ltd. (“Harbin Golden Sea”).
 
Winner Sea Group Limited
 
Winner Sea is a business company organized under the laws of the British Virgin Islands in 2006.  It has conducted no business.  It is a holding company whose only asset is shares in Harbin Golden Sea that represent 90% of the registered capital of that company.  The remaining 10% of Harbin Golden Sea is owned by Xie Guihong.  Ms. Xie is a member of the Board of Directors of Xinyinhai Technology.
 
Harbin Golden Sea Technology Printing Co., Ltd.
 
Harbin Golden Sea Technology Printing Co., Ltd.  is a private company located in Harbin, China. Founded in 1998, Harbin Golden Sea has developed into a leading participant in China’s financial notes printing industry.  Harbin Golden Sea is a company to which the Chinese government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in China.

Harbin Golden Sea has in recent years developed a prestigious clientele, and its share of the market for financial notes printing in China is growing.  The three primary factors responsible for Harbin Golden Sea’s growth have been:

 
Ø
Harbin Golden Sea provides printing services whose quality equals the highest standards worldwide. Harbin Golden Sea imports state-of-the-art printing equipment from Germany, and installs on its advanced software systems, such as anti-falsification software. Harbin Golden Sea’s investment in technology means that few competitors can offer China’s financial industry the level of service that Harbin Golden Sea offers.

 
Ø
Harbin Golden Sea’s focus on providing high quality service has distinguished it from its competition.  In 2000 Harbin Golden Sea received Certification of Compliance with the ISO 9000 International Standard.  In 2003, Harbin Golden Sea’s quality management system was accredited under ISO 9001-2000, recognition that Harbin Golden Sea’s business practices meet the world’s highest standards. In 2006 Harbin Golden Sea achieved GB/T28001 Certification of Occupational Health and Security Management System as well as ISO14001 Environment Management System certification.  Harbin Golden Sea has been awarded “Best Performance” and named “Most Creditworthy and Reliable” enterprise by the Chinese government every year since 2001.
 
 
Ø
Harbin Golden Sea’s marketing acumen has brought it into exclusive relationships with many of China’s largest financial institutions and government agencies, including Bank of China, Agricultural Bank of China, and the Postal Savings Bank of China.
 
 
2

 
 
Harbin Golden Sea also earns a portion of its revenue (approximately 13% in 2009; 32% in 2008) from its position as a distributor of plasma arc cutting machinery and consumable parts manufactured by Hypertherm, Inc. of New Hampshire, U.S.A.  Hypertherm’s plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.

Production

The documents printed by Harbin Golden Sea include bank deposit books, deposit receipts, computer bills and other financial notes, as well as standard forms for banks and insurance companies, single purpose invoices, and other certificates. Harbin Golden Sea performs most services in-house.  However, it uses outsourced vendors for certain specialty services, such as large scale binding, binding in leather, and the like.

Harbin Golden Sea has, since its founding, focused its business plan on the high-end segment of the printing market.  To attract market share, Harbin Golden Sea stresses the quality of its production and uses only the most advanced printing technology available in the world. Harbin Golden Sea’s automated production lines are imported from Germany’s Kuechler Company, which produces the world’s most sophisticated printers.  Auxiliary equipment is mainly produced in China by foreign-invested joint ventures and domestic equipment manufacturers. As the market for Harbin Golden Sea’s services has expanded in the past ten years, Harbin Golden Sea has kept pace by maintaining an ongoing program of upgrading Harbin Golden Sea’s equipment and production capabilities every year. This trend will continue for the foreseeable future. Advanced equipment and world-class technology is the key to Harbin Golden Sea’s plan for continual development and success.
 
In recent years, the growth of Harbin Golden Sea’s business put a strain on its production capacity.  To alleviate that strain, at the end of 2008 Harbin Golden Sea relocated its production equipment from a 6,000 m2 facility to a nearby facility with 20,696.5 m2 of floor space.  In addition, during 2008 and 2009 Harbin Golden Sea invested approximately $1,700,000 in improvements to its new facility, including renovations to the building and installation of a gold stamping machine, slitting machine, four color rotary presses and a die cutting machine.  The additional production space has substantially increased Harbin Golden Sea’s production capacity, and should alleviate its capacity issues for the immediate future.
 
3

 
 
Research and Development
 
Harbin Golden Sea employs a staff of five research analyst professionals.  It is the responsibility of these individuals to insure that Harbin Golden Sea’s production staff utilizes state-of-the-art machinery in a cost-effective yet top quality manner.  In particular, Harbin Golden Sea’s research staff is responsible for integrating advanced software systems, such as the anti-falsification system, into Harbin Golden Sea’s production system.  The value added by these technological advantages is a key to Harbin Golden Sea’s competitive strength.

Harbin Golden Sea’s expense for research and development was $33,383 during 2007.  In 2008, however, Harbin Golden Sea suspended its research and development activities pending relocation to its new facility, and so it incurred no expense for research and development in either 2008 or 2009.

Marketing of Printing Services

Because China has only in the past twenty years assumed an important position in world financial markets, China’s financial services industry has generally lagged behind the international industry.  Recently, however, China’s government is moving to modernize the industry and force it to become more accountable. In 2005 China’s Commerce Ministry announced plans to increase the use of invoices and similar evidentiary documents, in part spurred by the need for greater tax compliance.  The government is pushing banks, telecommunications companies, insurance companies, and the national postal service to assimilate international norms.  One of the primary reforms that the government is encouraging is the use of variable data printing technology with anti-falsification encryption – technology currently provided by Harbin Golden Sea.
 
Harbin Golden Sea believes that this government emphasis on modernization of document use by China’s financial community will provide Harbin Golden Sea a unique opportunity for growth.  The movement toward higher quality documentation with advanced technological aspects, such as anti-falsification technology, should have the effect of (a) creating an increased demand for the level of services that Harbin Golden Sea has traditionally offered, (b) forcing more institutions to outsource their printing to providers such as Harbin Golden Sea, and (c) driving many smaller commercial printing companies out of the market due to their inability to finance the purchase of advanced equipment.  Management expects Harbin Golden Sea to take advantage of these phenomena, both through an expansion of its customer base and through a selective program of acquiring smaller printing companies that offer quality services but lack the capital necessary to compete technologically.

Harbin Golden Sea’s position as a member of the Chinese Anti-Falsification Technology Association and as a member of the Chinese Printing Committee has given Harbin Golden Sea exposure to the leaders of China’s financial community.  The reputation for state-of-the-art specialty printing that Harbin Golden Sea has developed, combined with the skills of Harbin Golden Sea’s marketing personnel, have enabled Harbin Golden Sea to develop strong customer relationships with many leaders in that financial community.  Among Harbin Golden Sea’s current customers are:

 
4

 
 
 
Ø
Bank of China.  The leader in China’s banking industry, and the only Chinese bank with a presence on five continents, Bank of China offers financial services through 560 offices worldwide. Harbin Golden Sea has an exclusive contract to provide printing services for the offices of the Bank of China in six of China’s provinces.
 
 
Ø
Agricultural Bank of China.  One of the four state-owned banks in China, the Agricultural Bank of China has $372 billion in assets and branches throughout China. Harbin Golden Sea has the exclusive contract to provide specialty printing services for the branches located in four provinces of China.

 
Ø
China Construction Bank.  Headquartered in Beijing, China Construction Bank has 14,250 branch offices. Harbin Golden Sea provides the specialty printing services for the Heilongjiang Province.

 
Ø
Postal Savings Bank of China. Ranked as the fifth largest state-owned bank in China, Postal Savings Bank of China offers financial services throughout China. Harbin Golden Sea has an exclusive contract to provide deposit books for the offices of Postal Savings Bank of China in six of China’s provinces.

 
Ø
China Life.  The largest life insurance company in China, China Life was listed on the New York Stock Exchange in 2003.

 
Ø
Sunlight Property Insurance.  Established by a group of state-owned conglomerates in 2004, Sunlight Insurance now holds assets in excess of $100 billion. Harbin Golden Sea provides a portion of Sunlight’s specialty printing requirements on an exclusive basis. 

During 2009 there were two customers that were each the source of more than ten percent of Harbin Golden Sea’s revenues:  Jilin Province Rural Credit Union (11%) and Heilongjiang Province Postal Savings Bank (10%).  During 2008 there was only one customer that was the source of more than ten percent of Harbin Golden Sea’s revenues.

With China’s accession into the WTO, opportunities for international expansion of Harbin Golden Sea’s market should develop.  In 2006 the last quotas on exports by China’s printing industry were lifted. Harbin Golden Sea plans for the future include the development of an international market for Harbin Golden Sea’s specialty printing services.
 
Distribution of Plasma Arc Cutting Systems

Hypertherm, Inc. has been manufacturing high-tech cutting machinery since 1968.  Today it manufactures a range of cutting products, but is known in particular for its plasma arc cutting systems.

Hypertherm has appointed Harbin Golden Sea as its exclusive distributor for the Heilongjiang region of China of Hypertherm’s plasma arc systems.  Harbin Golden Sea is also authorized to resell to other distributors throughout China, and currently sells to distributors in several of China’s provinces.  The relationship between Hypertherm and Harbin Golden Sea is on an at-will basis.

 
5

 

Harbin Golden Sea purchases the systems from Hypertherm Singapore Inc. and resells them at prices determined by Harbin Golden Sea. Harbin Golden Sea also resells the consumables that customers must employ with the systems.  In 2008 Harbin Golden Sea realized a gross profit margin of 18% on the resale of the Hypertherm equipment.  In 2009 its gross margin on the distribution business increased to 21%, although revenue from the equipment distribution business fell from $4,397,281 in 2008 to $1,147,696 in 2009.

Insurance

Harbin Golden Sea currently maintains insurance protecting it against liability to its employees for work-related injuries and reimbursing Harbin Golden Sea for the cost of worker’s retirement plans, lay-offs and pregnancy leaves. Harbin Golden Sea has also purchased employee health insurance.

Employees

Harbin Golden Sea has 161 employees, all of whom are full-time employees.  21 employees are involved in administration; 12 in marketing and business development, 5 are research analysts, and the remainder are technical and factory workers.  None of Harbin Golden Sea’s employees belong to a labor union.

ITEM 1A.            RISK FACTORS

You should carefully consider the risks described below before buying our common stock.  If any of the risks described below actually occurs, that event could cause the trading price of our common stock to decline, and you could lose all or part of your investment.

I.  Risks attendant to our business

We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.
 
We are continuously designing and developing new technology. We rely on a combination of copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Unauthorized use of our technology could damage our ability to compete effectively.  In China, monitoring unauthorized use of our products is difficult and costly.  In addition, intellectual property law in China is less developed than in the United States and historically China has not protected intellectual property to the same extent as it is protected in other jurisdictions, such as the United States. Any resort to litigation to enforce our intellectual property rights could result in substantial costs and diversion of our resources, and might be unsuccessful.

Currency fluctuations may adversely affect our business.
 
We generate revenues and (with one exception) incur expenses and liabilities in Chinese RMB. However we report our financial results in the United States in U.S. Dollars.  As a result, we are subject to the effects of exchange rate fluctuations between these currencies.  If the RMB exchange rate is adjusted or is allowed to float freely against the U.S. dollar, our revenues, which are denominated in RMB, may fluctuate significantly in U.S. dollar terms. We have not entered into agreements or purchased instruments to hedge our exchange rate risks.

 
6

 

Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.
 
Our future success depends on our ability to attract and retain highly skilled engineers, draftsmen, and technicians, as well as sales personnel experienced in international sales.  Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.

We may have difficulty establishing adequate management and financial controls in China.
 
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
 
Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States. 
 
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.
 
Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
 
China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management bodies as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
 
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the New EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operation reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial properties, accounting books, corporate board and shareholder minutes are kept in China; and (iv) directors with voting rights or senior management are resident in China. Such resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
 
However, as our case substantially meets the foregoing criteria, there is a likelihood that we are deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2009 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
 
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
 
We have limited business insurance coverage.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

Our bank deposits are not insured.
 
There is no insurance program in the PRC that protects bank deposits, in the way that bank deposits in the U.S. are given limited protection by the FDIC.  If the bank in which we maintain our cash assets were to fail, it is likely that we would lose most or all of our deposits.

 
7

 
 
II.  Risks attendant to our management

The absence of independent directors on our board of directors may limit the quality of management decision making.
 
Each of the three members of our Board of Directors is also an employee of Harbin Golden Sea.  There is no audit committee of the board and no compensation committee.  This situation means that the Board will determine the direction of our company without the benefit of an objective perspective and without the contribution of insights from outside observers.  This may limit the quality of the decisions that are made.  In addition, the absence of independent directors in the determination of compensation may result in the payment of inappropriate levels of compensation.

Our business development would be hindered if we lost the services of our Chairman.
 
Tian Ling is the Chief Executive Officer of Xinyinhai Technology, Ltd. and of its operating subsidiary, Harbin Golden Sea Technology Printing Co., Ltd.  Mrs. Tian is responsible for strategizing not only our business plan but also the means of financing it.  If Mrs. Tian were to leave Xinyinhai or become unable to fulfill her responsibilities, our business would be imperiled.  At the very least, there would be a delay in the development of Xinyinhai until a suitable replacement for Mrs. Tian could be retained.

Xinyinhai is not likely to hold annual shareholder meetings in the next few years.
 
Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved.  The current members of the Board of Directors were appointed to that position by the previous directors.  If other directors are added to the Board in the future, it is likely that the current directors will appoint them.  As a result, the shareholders of Xinyinhai will have no effective means of exercising control over the operations of Xinyinhai.
 
Your ability to bring an action against us or against our directors, or to enforce a judgment against us or them, will be limited because we conduct all of our operations in China and because our management resides outside of the United States.
 
We conduct all of our operations in China through our wholly-owned subsidiary. All of our directors and officers reside in China and all of the assets of those Chinese residents are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the United States and of China may render you unable to enforce a judgment against our assets or the assets of our directors.

ITEM 1B.            UNRESOLVED STAFF COMMENTS

Not Applicable.

 
8

 

ITEM 2.                DESCRIPTION OF PROPERTY

Harbin Golden Sea’s executive offices and production facility are located in facilities owned by Harbin Golden Sea at No. 4 Yantai Street, Haping Road Centralized Park in the Harbin Development Zone.  The land area is 20,696.5 m2.  The building area is 10,284.33 m2.

Harbin Golden Sea also owns a 6,000 m2 office and manufacturing facility located at No. 16 Dalian Road, Haping Road Centralized Park in the Harbin Development Zone in Harbin China, which was its primary manufacturing facility until December 2008.  Harbin Golden Sea is currently using the facility as a warehouse, while management considers its ultimate disposition.

ITEM 3.                LEGAL PROCEEDINGS

None.

ITEM 4.                (RESERVED)

PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a)  Market Information.

Our common stock is listed for quotation on the OTC Bulletin Board under the trading symbol “XNYH.”  The following table sets forth the bid prices quoted for our common stock during each quarter of the past two fiscal years, as reported by the OTC Bulletin Board.  Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
 
9


 
Bid
Period:
High
Low
     
Jan. 1, 2008 – Mar. 31, 2008
$  1.09
$   .35
Apr. 1, 2008 – June 30, 2008
$    .65
$   .38
July 1, 2008 – Sep. 30, 2008
$    .55
$   .35
Oct. 1, 2008 – Dec. 31, 2008
$    .40
$   .17
     
Jan. 1, 2009 – Mar. 31, 2009
$   .43
$   .15
Apr. 1, 2009 – June 30, 2009
$   .43
$   .16
July 1, 2009 – Sep. 30, 2009
$   .31
$   .16
Oct. 1, 2009 – Dec. 31, 2009
$   .45
$   .17

(b)  Holders. Our shareholders list contains the names of 109 registered stockholders of record of the Company’s Common Stock.  Based upon information from nominee holders, the Company believes the number of owners of its Common Stock exceeds 300.

(c)  Dividend Policy.  Harbin Golden Sea declared a $1,376,594 dividend to its shareholders early in 2006, before it became a subsidiary of Xinyinhai Technology.  Xinyinhai Technology itself, however, has  not declared or paid cash  dividends or made distributions  in the  past,  and we do not  anticipate  that we will  pay  cash dividends or make  distributions in the foreseeable  future. We currently intend to retain and reinvest future earnings, if any, to finance our operations.

(d)  Securities Authorized for Issuance Under Equity Compensation Plans

The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of December 31, 2009.

 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
 
Weighted average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders.
0
 
--
 
0
Equity compensation plans not approved by security holders
0
 
--
 
0
Total
0
 
--
 
0
 
(e)  Recent Sales of Unregistered Securities.

None.

 (f)  Repurchase of Equity Securities.  The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of 2009.

 
10

 
 
ITEM 6.               SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations
 
The current global recession has reduced demand for capital goods in China.  During 2009, this situation had a negative impact on both of our business segments.  Overall, our revenue during 2009 decreased by 37% to $8,627,306 from $13,686,332 achieved during 2008.  The decrease was most dramatic in our equipment distribution business, where revenues declined by 74% to $1,147,696 during 2009 from $4,397,281 during 2008.  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 13% contribution to our overall revenue during 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 economic stimulus initiated by the Government of China.
 
Revenue from our printing business fell by 19% to $7,479,610 during 2009, compared to $9,289,051 during 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 secured a $2.9 million collateralized loan during the third quarter of 2009, and applied $748,379 to improvements in our plant and equipment during the second half of the year.  At March 24, 2010 we had $2,213,667 in backlog of firm orders, all of which is for delivery during 2010.  At March 17, 2009 we had $1,147,761 in backlog.
 
The 32% gross margin realized by our subsidiary, Harbin Golden Sea, on sales in 2009 was lower than the 37% gross margin realized in 2008.  Although, as has always occurred, the gross margin on our printing operations in 2009 (33%) was significantly better than the gross margin on our  equipment distribution operations (21%), the primary reason for the overall decline in gross profitability was a reduction in the profitability of our printing operations.  Our business plan contemplates that gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business.  During 2009, however, three factors caused margins from printing operations to fall below that standard:

 
11

 
 
 
·
the disruption in the Chinese banking industry forced us to price our products more aggressively;
 
 
·
our move at the end of 2008 to a larger manufacturing facility with upgraded equipment increased our annual depreciation expense by 52%; and
 
 
·
the reduction in our sales volume led to inefficient use of the new larger facility.
 
As the Chinese banking industry is moving towards stabilization, our expectation is that we will be able to revive our sales growth and return our printing operations to the levels of profitability that they sustained prior to the international credit crisis.
 
During 2009, we reduced our operating expenses by 18% to $1,360,708, compared to $1,660,532 during 2008. This reduction was achieved despite a 52% increase in depreciation to $441,100.  That increase was counterbalanced by the favorable results of our continuing efforts to achieve efficiencies in our operations, leading to a decrease of $121,971 in our selling and distribution expenses and $177,853 in our general and administrative expenses for 2009 compared to 2008. When demand for our products returns to prior levels, we will endeavor to maintain the efficiencies that we implemented during the current slow period.
 
Our increased efficiency was not sufficient to offset the significant reduction in our revenues.  Income from operations, therefore, fell by 59%, from $3,358,065 to $1,388,175.  In each year, however, there was a significant non-operating situation:
 
 
·
During the third quarter of 2009 we obtained a one-year bank loan in the amount of $2.9 million, secured by a portion of our real property.  This caused us to incur $93,816 in finance costs in the second half of 2009, compared to only $7,051 in 2008.  We will continue to incur finance costs related to the loan until it matures in the third quarter of 2010, and thereafter if we decide to refinance the loan.
 
 
·
Prior to 2008 we issued shares of common stock to acquire the consulting services from certain leaders in the printing industry.  The value of the shares was amortized over the lives of the consulting contracts.  The greater portion of those consulting contracts expired in 2007.  However, as to the remainder of the contracts, the Company and the consultants reached agreement at the end of 2007 to cancel future services.   That cancellation, and the corresponding cancellation of a portion of the shares issued in 2006, allowed us to recognize “other income” of $376,250, which contributed to an aggregate “other income” of $376,258 during 2008.
 
Our income before income taxes and noncontrolling interests for 2009, therefore, was $1,368,328, compared to $3,727,282 in 2008.  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 2008, causing an expense of $353,450 and at a 10% rate in 2009, causing an expense of $181,930. The reduction in our tax liability was attributable to our decreased income during 2009.
 
The operations of our subsidiary, Harbin Golden Sea, produced $1,360,050 in income during 2009.  However, because we own only 90% of Harbin Golden Sea, we deducted a “noncontrolling interest” of $136,005 before recognizing net income on our Consolidated 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 2009 was $1,050,393, representing $.054 per share, a 65% reduction from the net income we achieved in 2008.

 
12

 
 
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.  In 2009, the effect of converting our financial results to Dollars was to add $695 to our comprehensive income. In 2008, when exchange rates were more volatile, the effect of converting our financial results to Dollars was to add $1,098,248 to our comprehensive income.

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 December 31, 2009, we had working capital totaling $8,014,533 (an increase of $716,650 since the end of 2008) and no long-term liabilities.
 
However, Harbin Golden Sea’s business plan calls for significant investment in the growth of Harbin Golden Sea during the next twelve months.  We are purchasing new equipment for our new production facility.  We also plan to invest in the development of additional product lines.  To accomplish those goals, during the third quarter of 2009, we obtained a $2.9 million bank loan collateralized by our real property.  The loan bears interest at 5.31% per annum and is due in the third quarter of 2010.  We are utilizing the borrowed funds to implement the capital improvements necessary for our growth.  Because the loan amount is substantially less than the value of our real property and because we are operating profitably, we expect to be able to refinance the loan when it matures.
 
Until our sales return to pre-recession levels, a rapid expansion of our facilities would only increase depreciation expense and operational inefficiency.  For that reason, the largest portion of our working capital is now invested in developing strategic relationships that will, we hope, benefit us in the future.  Within the Chinese business community, the extension of interest-free loans is a normal method of securing good relations and future opportunities.  For that reason, at December 31, 2009, we had extended a total of $4,879,468 in short-term, interest-free loans to parties that have no other affiliation with Harbin Golden Sea or its management.  The largest loan, $4,547,700, was made to Heilongjiang Jindi Real Estate Development Co., Ltd., in anticipation of future benefits to our real estate assets.  We also had relatively small loans outstanding to a trading company and a company in the pharmaceutical industry.  All of the loans are due in the first six months of 2010.

 
13

 

Our operations during 2009 produced $5,014,495 in net cash.  The disparity between our net income and net cash from operations was primarily attributable to the fact that during the year we reduced our outstanding “other receivables, deposits and prepayments” by $3,326,150.  In addition, we reduced our trade receivables during 2009 by $730,848.  In 2008 and the first six months of 2009 our trade receivables 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 adversely affected their liquidity.  To assist them in meeting their cash obligations, we extended the credit terms afforded to the majority of our customers.  This led to the disproportionate increase in our trade receivables.  In the second half of 2009, there has increased availability of credit within the international banking system, and our customers have been better able to meet their payment obligations.  We anticipate, therefore, that our trade receivables will increase or decrease in future periods in proportion to the increases or decreases in our sale revenue.
 
With the proceeds of our new bank loan and the satisfaction of our receivables, we held $2.6 million in cash and equivalents at December 31, 2009.  We will have no debt payment obligations until the bank line comes due in the third quarter.  And, in accordance with customary banking practice in China, we expect that the bank loan will be extended when it reaches maturity, provided that our financial results are satisfactory to the bank.  For that reason, we expect our liquidity will be sufficient in the next year to fund our ongoing operations as well as our near-term growth.
 
Off-Balance Sheet Arrangements

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.
 
Critical Accounting Policies and Estimates

In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the financial statements for 2009, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.  These estimates were:

 
·
Our decision, explained in Note 5 to the Consolidated Financial Statements, to record a 100% valuation allowance against the deferred asset arising from our net operating loss carryforward for U.S income taxes.  The decision is based on our lack of assurance that the Company will realize income taxable in the U.S. in future periods.
 
·
Our decision to record a $11,048 provision for doubtful accounts, against total trade receivables of $2,174,695.  This decision was based on our knowledge of the customers and their history of full payment.
 
·
Our decision, described in Note 8 to the Consolidated Financial Statements, to record no provision for obsolete inventories.  This decision was based on fact that we have orders in house for all of our finished inventory and work in progress, while the raw materials are currently usable.
 
We have made no material changes to our critical accounting policies in connection with the preparation of financial statements for 2009.
 
14

 

ITEM 7A.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial Statements

   
PAGES
     
Report of Independent Registered Public Accounting Firm
 
16
     
Consolidated Balance Sheets
 
17
     
Consolidated Statements of Income and Comprehensive Income
 
18
     
Consolidated Statements of Stockholders’ Equity
 
19
     
Consolidated Statements of Cash Flows
 
20
     
Notes to Consolidated Financial Statements
 
21 - 41
 

 
15

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Xinyinhai Technology, Ltd.
 
 
We have audited the accompanying consolidated balance sheets of Xinyinhai Technology, Ltd. (the “Company”) and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.


 

PKF
Certified Public Accountants
Hong Kong, China
March 31, 2010

 
16

 

XINYINHAI TECHNOLOGY, LTD.
CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)


   
As of December 31,
 
   
2009
   
2008
 
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 2,624,780     $ 495,060  
Trade receivables (Note 7)
    2,163,647       2,901,909  
Inventories (Note 8)
    1,707,931       1,950,544  
Value added tax recoverable
    19,198       -  
Other receivables, deposits and prepayments (Note 9(a))
    352,449       3,680,640  
Loans to third parties (Note 9(b))
    4,879,468       -  
Prepaid expenses (Note 10)
    -       87,693  
                 
Total current assets
    11,747,473       9,115,846  
                 
Property, plant and equipment, net (Note 11(a))
    5,601,405       5,103,480  
Land-use-right (Note 11(b))
    1,042,064       1,069,546  
                 
TOTAL ASSETS
  $ 18,390,942     $ 15,288,872  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities
               
Collateralized bank loan (Note 12)
  $ 2,934,000     $ -  
Trade payables
    561,804       899,141  
Customer deposits
    1,300       117,221  
Other payables and accrued liabilities (Note 13)
    208,676       652,170  
Value added tax payable
    -       111,718  
Income tax payable
    27,160       37,713  
                 
TOTAL LIABILITIES
    3,732,940       1,817,963  
                 
COMMITMENTS AND CONTINGENCIES (NOTE 14)
               
                 
STOCKHOLDERS’ EQUITY
               
Common stock (Note 15(a))
    19,484       19,484  
Additional paid-in capital
    3,294,543       3,294,543  
Statutory reserves (Note 16)
    1,437,061       1,276,013  
Accumulated other comprehensive income
    1,330,394       1,329,779  
Retained earnings
    7,074,258       6,184,913  
                 
TOTAL XINYINHAI TECHNOLOGY, LTD. STOCKHOLDERS’ EQUITY
    13,155,740       12,104,732  
                 
NONCONTROLLING INTERESTS (NOTE 3)
    1,502,262       1,366,177  
                 
TOTAL EQUITY
    14,658,002       13,470,909  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 18,390,942     $ 15,288,872  


See the accompanying notes to consolidated financial statements

 
17

 

XINYINHAI TECHNOLOGY, LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Stated in US Dollars)


   
Year ended December 31,
 
   
2009
   
2008
 
             
Revenues (Note 3)
  $ 8,627,306     $ 13,686,332  
Cost of sales
    (5,878,423 )     (8,667,735 )
                 
Gross profit
    2,748,883       5,018,597  
                 
Operating expenses
               
Selling and distribution expenses
    331,740       453,711  
General and administrative expenses
    1,028,968       1,206,821  
                 
Total expenses
    1,360,708       1,660,532  
                 
Income from operation
    1,388,175       3,358,065  
                 
Interest income
    7,524       10  
Government grants (Note 3)
    50,031       -  
Other income
    16,414       376,258  
Finance costs (Note 4)
    (93,816 )     (7,051 )
                 
Income before income taxes and noncontrolling interests
    1,368,328       3,727,282  
Income taxes (Note 5)
    (181,930 )     (353,450 )
                 
Net income before noncontrolling interests
    1,186,398       3,373,832  
Net income attributable to noncontrolling interests
    (136,005 )     (335,885 )
                 
Net income attributable to Xinyinhai Technology, Ltd. common stockholders
  $ 1,050,393     $ 3,037,947  
                 
Net income before noncontrolling interests
    1,186,398       3,373,832  
                 
Other comprehensive income
               
Foreign currency translation adjustments
    695       1,098,248  
                 
Comprehensive income
    1,187,093       4,472,080  
                 
Comprehensive income attributable to noncontrolling interests
    (136,085 )     (446,537 )
                 
Comprehensive income attributable to Xinyinhai Technology, Ltd. common stockholders
    1,051,008       4,025,543  
                 
Earnings per share attributable to Xinyinhai Technology, Ltd. stockholders - basic and diluted (Note 6)
  $ 0.054     $ 0.150  
                 
Weighted average number of common stock outstanding
    19,484,029       20,213,644  


See the accompanying notes to consolidated financial statements

 
18

 

XINYINHAI TECHNOLOGY, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Stated in US Dollars)
 
 
   
Xinyinhai Technology, Ltd. stockholders
             
                           
Accumulated
                   
               
Additional
         
other
                   
   
Common stock
   
paid-in
   
Statutory
   
comprehensive
   
Retained
   
Noncontrolling
       
   
No. of shares
   
Amount
   
capital
   
reserves
   
income
   
earnings
   
interests
   
Total
 
                                                 
Balance, January 1, 2008
    24,417,899     $ 24,417     $ 3,799,610     $ 918,636     $ 342,183     $ 3,504,343     $ 919,640     $ 9,508,829  
                                                                 
Issuance of common stock for services
    300,000       300       119,700       -       -       -       -       120,000  
Warrant issued to a consultant
    -       -       70,000       -       -       -       -       70,000  
Cancellation of common stocks for
                                                               
  services (Note 10(a))
    (3,233,870 )     (3,233 )     3,233       -       -       -       -       -  
Cancellation of consulting agreements
                                                               
  (Note 10(b))
    (2,000,000 )     (2,000 )     (698,000 )     -       -       -       -       (700,000 )
Net income
    -       -       -       -       -       3,037,947       335,885       3,373,832  
Foreign currency translation adjustments
    -       -       -       -       987,596       -       110,652       1,098,248  
Appropriation to reserves
    -       -       -       357,377       -       (357,377 )     -       -  
                                                                 
Balance, December 31, 2008
    19,484,029       19,484       3,294,543       1,276,013       1,329,779       6,184,913       1,366,177       13,470,909  
                                                                 
Net income
    -       -       -       -       -       1,050,393       136,005       1,186,398  
Foreign currency translation adjustments
    -       -       -       -       615       -       80       695  
Appropriation to reserves
    -       -       -       161,048       -       (161,048 )     -       -  
                                                                 
Balance, December 31, 2009
    19,484,029     $ 19,484     $ 3,294,543     $ 1,437,061     $ 1,330,394     $ 7,074,258     $ 1,502,262     $ 14,658,002  
 

See the accompanying notes to consolidated financial statements

 
19

 

XINYINHAI TECHNOLOGY, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in US Dollars)

   
Year ended December 31,
 
   
2009
   
2008
 
Cash flows from operating activities
           
Net income before noncontrolling interests
  $ 1,186,398     $ 3,373,832  
Adjustments to reconcile net income to net cash provided by
               
  operating activities :-
               
Other income
    -       (376,250 )
Depreciation on property, plant and equipment
    444,100       291,231  
Amortization of prepaid expenses
    87,693       121,294  
Value of common stock and warrant issued to a consultant
    -       70,000  
Loss on disposal of property, plant and equipment
    -       7,627  
Amortization of land-use-right
    27,466       2,055  
Allowance of doubtful accounts and bad debts
    6,961       12,424  
Changes in operating assets and liabilities:-
               
Restricted cash
    -       402,179  
Trade receivables
    730,848       (1,396,031 )
Inventories
    242,464       (658,723 )
Other receivable, deposits and prepayments
    3,326,150       1,578,528  
Trade payable
    (337,131 )     32,179  
Bills payable
    -       (397,854 )
Customer deposits
    (115,848 )     (198,877 )
Other payables and accrued liabilities
    (443,225 )     (361,281 )
Income taxes payable
    (10,545 )     37,057  
Value added tax payable
    (130,836 )     (40,540 )
                 
Net cash flows provided by operating activities
    5,014,495       2,498,850  
                 
Cash flows from investing activities
               
Loans to third parties
    (4,992,883 )     -  
Loans repaid by third parties
    116,408       -  
Payments to acquire property, plant and equipment and land-use-right
    (941,720 )     (4,247,572 )
Proceeds from disposal of property, plant and equipment and land-use-right
    -       806,311  
                 
Net cash flows used in investing activities
    (5,818,195 )     (3,441,261 )
                 
Cash flows from financing activity
               
Proceeds from bank loan
    2,932,200       -  
                 
Net cash flows provided by financing activity
    2,932,200       -  
                 
Effect of foreign currency translation on cash and cash equivalents
    1,220       128,594  
                 
Net increase (decrease) in cash and cash equivalents
    2,129,720       (813,817 )
                 
Cash and cash equivalents, beginning of year
    495,060       1,308,877  
                 
Cash and cash equivalents, end of year
  $ 2,624,780     $ 495,060  
                 
 
Supplemental disclosure for cash flow information
           
Interest paid
  $ 91,382     $ -  
Income taxes paid
  $ 192,475     $ 73,939  
 
             
Non-cash investing activity :-
           
             
Other receivable of sale proceed from disposal of property, plant
           
  and equipment
  $ -     $ 3,007,350  


See the accompanying notes to consolidated financial statements

 
20

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


1.            Corporation information

 
(a)
Xinyinhai Technology, Ltd. (“Xinyinhai” or the “Company”) was incorporated in Utah on October 18, 1985.  It currently has two subsidiaries, Winner Sea Group Limited (“Winner Sea”) and Harbin Golden Sea Technology Printing Co., Ltd. (“Harbin Golden Sea”).

Winner Sea is a business company organized under the laws of the British Virgin Islands on January 12, 2006.  It has conducted no business and is a holding company whose only asset is 90% equity interest in Harbin Golden Sea.  Ms. Xie Guihong, a director of the Company, owns the remaining 10% equity interest in Harbin Golden Sea.

Harbin Golden Sea is a company located in Harbin City, Heilongjiang Province, the People’s Republic of China (“PRC”).  Founded in 1998, Harbin Golden Sea has developed into a leading participant in the PRC’s financial note printing industry.  It is one of the companies to which the PRC government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in the PRC.

The Company ended its development stage after the share exchange transaction as detailed in note 1(b) to the financial statements.

 
(b)
On June 29, 2006, the Company executed a share exchange agreement (the “Share Exchange”) with the stockholders of Winner Sea whereby the stockholders of Winner Sea exchanged all their Winner Sea shares for 18,000,000 shares of the Company’s common stock, representing 98.3% of the then outstanding stock of the Company.

The purchase method under reverse takeover accounting has been applied for the Share Exchange.  These consolidated financial statements issued under the name of the legal parent, Xinyinhai, are a continuation of the financial statements of Winner Sea, which include Winner Sea’s majority owned subsidiary Harbin Golden Sea.


2.           Description of business

The Company, through Harbin Golden Sea, is a leading participant in the PRC’s financial notes printing industry.  It provides printing services whose quality equals the highest standards worldwide and imports state-of-the-art printing equipment from overseas that is installed on its advanced software systems, such as anti-falsification software.

The Company also earned approximately 13% of its revenue for the current reporting period from its position as a distributor of plasma arc cutting machinery and consumable parts.  The plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.
 
 
21

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.  These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories and the estimation on useful lives of property, plant and equipment.  Actual results could differ from those estimates.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade receivable.  As of December 31, 2009, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.  With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral.  The Company maintains an allowance for doubtful accounts of trade receivables.

During the year ended December 31, 2009, there were two customers, which contributed 10% or more to the Company’s consolidated revenues : Jilin finance Rural Credit Union and Heilongjiang Province Postal Savings Bank, which contributed respectively 11% and 10%.

During the year ended December 31, 2008 there was one customer which contributed 10% or more to the Company’s consolidated revenues.

Cash and cash equivalents

Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less.  As of December 31, 2009 the cash and cash equivalents were denominated in Renminbi (“RMB”) and are not freely convertible into foreign currencies.

 
22

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Trade receivables

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is established and recorded based on management’s assessment of the credit history with the customers and current relationships with them.  Additional specific provision will be made against trade receivables to the extent that they are considered to be doubtful.

Bad debts are written off when identified.  The Company does not accrue interest on trade receivables.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.  In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels.

During the reporting years, the management establishes the general provisioning policy for inventories based on past experience of the inventories’ movement.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.

Depreciation is provided to write off the cost of the assets to the estimated residual value on a straight-line basis over their estimated useful lives :-

 
Depreciable life
   
Buildings
20 years
Plant and machinery
10 years
Furniture, fixtures and equipment
5 years
Motor vehicles
10 years

Maintenance or repairs are charged to expense as incurred.  Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.

 
23

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Land-use-right

Land-use-right is stated at cost less accumulated amortization.  Amortization is provided using the straight-line method over the terms of the lease of 39 years.

Noncontrolling interests

Noncontrolling interests result from the consolidation of 90% owned subsidiary, Harbin Golden Sea, where the Company has control over its operations.

Government grants

Government grants are received for compensation expenses already incurred or from the local government for the subsidy of informational communication paid to Harbin Golden Sea.

Government grants are received as compensation for expenses already incurred and for the subsidy of informational communication is recognized as income in the period the grant document was approved.

During the year ended December 31, 2009, the Company recorded government grants income of US$50,031.  US$6,048 of the grant received from the relevant government authorities to reimbursement the payment made to the defined contribution plan and US$43,983 received for the subsidy of informational communication.

Stock-based compensation

The Company adopted ASC 718 "Share-Based Payment" (previously SFAS No. 123R), using the modified prospective method. Under ASC 718, equity instruments issued to service providers for their services are measured at the grant-date fair value and recognized in the statement of income and comprehensive income over the vesting period.

Revenue recognition

The Company derives revenues from the sales of printed products and trading of equipment.  The Company recognizes its revenues net of related business taxes and value added taxes and when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

 
(a)
The Company recognizes revenue from the sale of printed forms upon delivery to the customers and the transfer of title and risk of loss.  Because the majority of products are customized to meet customer specifications, product returns are not significant.

 
(b)
Trading of equipment, plasma arc cutting machines, does not require significant modification or customization.  Revenue from sale of the equipment and associated spare parts is recognized at the time of delivery of products to customers and when the title and ownership are passed to the customers.

 
24

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Advertising, transportation and research and development expenses

Advertising, transportation, research and development, and other product-related costs are charged to expense as incurred.

Advertising expenses amounting to $10,397 and $9,041 for the years ended December 31, 2009 and 2008 respectively are included in selling and distribution costs.

Transportation expenses amounting to $124,871 and $161,694 for the years ended December 31, 2009 and 2008 respectively are included in selling and distribution costs.

No research and development expenses for the years ended December 31, 2009 and 2008 are included in general and administrative expenses.

Income taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740 “Income Taxes” (previously SFAS No. 109).  Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Off-balance sheet arrangements

The Company does not have any off-balance sheet arrangements.

Comprehensive income

The Company has adopted ASC 220 “Comprehensive Income” (previously SFAS No. 130), which establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Components of comprehensive income include net income and foreign currency translation adjustments.

Foreign currency translation

The functional currency of the Company and Winner Sea is United States dollars (“US$”) while that of Harbin Golden Sea is RMB.  The Company maintains its financial statements in the functional currency.  Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date.  Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction.  Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

 
25

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Foreign currency translation (Cont’d)

For financial reporting purposes, the financial statements of Harbin Golden Sea, which are prepared using the functional currency, have been translated into US$.  Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates.  Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.  Both of the exchange rates in effect at December 31, 2009 and 2008 were RMB1 for US$0.1467.  There is no significant fluctuation in exchange rate for the conversion of RMB to US$ after the balance sheet date.

Fair value of financial instruments

The carrying values of the Company’s financial instruments, including cash and cash equivalents, trade and other receivables, customer deposits, collateralized bank loan, and trade and other payables approximate their fair values due to the short-term maturity of such instruments.

It is the management’s opinion that the Company is not exposed to significant foreign currency, interest, price or credit risks arising from these financial instruments.

Basic and diluted earnings per share

The Company reports basic earnings per share in accordance with ASC 260, “Earnings Per Share” (previously SFAS No. 128).  Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented.  The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.

Recently issued accounting pronouncements

FASB Accounting Standards Codification (Accounting Standards Update “ASU” 2009-1). In June 2009, the Financial Accounting Standard Board (“FASB”) approved its Accounting Standards Codification (“Codification”) as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification is effective for interim or annual financial periods ending after September 15, 2009 and impacts our financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of our financial statements or disclosures as a result of implementing the Codification.

As a result of our implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current financial statements, we will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.
 
 
26

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (Cont'd)

Noncontrolling Interests (Included in amended Topic ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements”, an amendment of ARB No. 51). The amended topic establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. We adopted the amended topic on January 1, 2009. As a result, we have reclassified financial statement line items within our Consolidated Balance Sheets and Statements of Income (Loss) and Comprehensive Income (Loss) for the prior period to conform to this amended topic.

Business Combinations (Included in amended Topic ASC 805 “Business Combinations”, previously SFAS No. 141(R)). This ASC guidance addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a business combination. The adoption of this amended topic has no material impact on the Company’s financial statements.

Intangibles-Goodwill and Other (Included in amended Topic ASC 350”, previously FASB staff position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets).  The amended topic amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The amended topic is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The adoption of this amended topic has no material effect on the Company's financial statements.

Business Combinations (Included in amended Topic ASC 805, previously FSP No. 141R-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”).  Amended topic ASC 805 amends the requirements for the provisions in FASB Statement 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The amended topic eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria and instead carries forward most of the provisions for acquired contingencies. The amended topic is effective for contingent assets and contingent liabilities acquired in evaluating the impact. The adoption of this amended topic has no material impact on the Company’s financial statements.

Fair Value Measurements and Disclosures (Included in amended Topic ASC 820, previously FSP No. 157-4, “Determining Whether a Market is Not Active and a Transaction Is Not Distressed”).  The amended topic clarifies when markets are illiquid or that market pricing may not actually reflect the “real” value of an asset. If a market is determined to be inactive and market price is reflective of a distressed price then an alternative method of pricing can be used, such as a present value technique to estimate fair value. The amended topic identifies factors to be considered when determining whether or not a market is inactive. The amended topic would be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 and shall be applied prospectively. The adoption of this amended topic has no material effect on the Company's financial statements.

 
27

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (Cont'd)

Investments - Debt and Equity Securities - Overall - Transition and Open Effective Date Information (Included in amended Topic ASC 320, previously FASB Staff Position No. 115-2 and Statement of Financial Accounting Standards No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”).  The amended topic amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold.  In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and securities with unrealized losses.  The adoption of this amended topic has no material impact on the Company’s financial statements.

Interim Disclosures about Fair Value of Financial Instruments (Included in amended Topic ASC 825 “Financial Instruments”, previously FSP SFAS No. 107-1).  This guidance requires that the fair value disclosures required for all financial instruments be included in interim financial statements.  This guidance also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to highlight any changes from prior periods. The amended topic was effective for interim periods ending after September 15, 2009.  The adoption of this amended topic has no material impact on the Company’s financial statements.

Subsequent Events (Included in amended Topic ASC 855 “Subsequent Events”, previously SFAS No. 165).  The amended topic establishes accounting and disclosure requirements for subsequent events.  The amended topic details the period after the balance sheet date during which we should evaluate events or transactions that occur for potential recognition or disclosure in the financial statements, the circumstances under which we should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. We adopted this amended topic effective June 1, 2009.

Accounting for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers and Servicing”, previously SFAS No. 166, “Accounting for Transfers of Financial Assets - an Amendment of FASB Statement No. 140.”).  The amended topic addresses information a reporting entity provides in its financial statements about the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets.  Also, the amended topic removes the concept of a qualifying special purpose entity, limits the circumstances in which a transferor derecognizes a portion or component of a financial asset, defines participating interest and enhances the information provided to financial statement users to provide greater transparency.  The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for us as of January 1, 2010.  The management is in the process of evaluating the impact of adopting this amended topic on the Company’s financial statements.
 
 
28

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


3.             Summary of significant accounting policies (Cont’d)

Recently issued accounting pronouncements (Cont'd)

Consolidation of Variable Interest Entities – Amended (Included in amended Topic ASC 810 “Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No. 46(R)”).  The amended topic requires an enterprise to perform an analysis to determine the primary beneficiary of a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity.  The amended topic also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for us as of January 1, 2010.  The management is in the process of evaluating the impact of adopting this amended topic on the Company’s financial statements

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05 (“ASU Update 2009-05”), an update to ASC 820, Fair Value Measurements and Disclosures.  This update provides amendments to reduce potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASU Update 2009-05.  ASU Update 2009-05 will become effective for the Company’s annual financial statements for the year ended December 31, 2009.  The adoption of this ASU update has no material impact on the Company’s financial statements.

The FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force.”  This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting.  This update establishes a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available.  The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted.  The management is in the process of evaluating the impact of adopting this ASU update on the Company’s financial statements.

The FASB issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date through which an entity has evaluated subsequent events. This change alleviates potential conflicts with current SEC guidance.  An SEC filer is still required to evaluate subsequent events through the date financial statements are issued, but disclosure of that date is no longer required.  The amendments in ASU 2010-09 became effective upon issuance of the guidance.
 
 
29

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


4.             Finance costs
   
Year ended December 31,
 
   
2009
   
2008
 
             
Bank interests
  $ 91,382     $ -  
Bank charges
    2,434       7,051  
                 
    $ 93,816     $ 7,051  


5.           Income taxes

The Company is subject to the United States of America tax law at a tax rate of 34%.  It had no taxable income for income tax purposes in the year ended December 31, 2009.  The Company has not provided deferred taxes on undistributed earnings of its non-U.S. subsidiaries as of December 31, 2009, as it is the Company’s current policy to reinvest these earnings in non-U.S. operations.

Harbin Golden Sea is subject to PRC enterprise income tax that is computed according to the relevant laws and regulations in the PRC.  It is registered as a new and high technology enterprise in the Harbin region of the PRC and is entitled to a 50% preferential reduction of the income tax rate.  On May 1, 2006, Harbin Golden Sea became a wholly-owned foreign enterprise under a reorganization plan and the Taxation Bureau of Harbin City approved its income tax exemption.  The new arrangement of exemption began in the first two years after Harbin Golden Sea became profitable, being 2006 and 2007, and a 50% income tax reduction for the following three years, being 2008 through 2010.

On March 16, 2007, the PRC’s legislative body, the National People’s Congress, adopted the unified enterprise income tax ("EIT") Law.  This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008.  Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises.  However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities.  Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the EIT Law.  Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires.  Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law.  Accordingly, as approved by the Taxation Bureau of Harbin City, Harbin Golden Sea was still entitled to two years’ exemption from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“tax holiday”).  The tax holiday of Harbin Golden Sea commenced in the fiscal financial year of 2006.  Accordingly, Harbin Golden Sea was subject to preferential tax rate of 9% for 2008, 10% for 2009 and 11% for 2010 respectively.

 
30

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


5.             Income taxes (Cont’d)

   
Year ended December 31,
 
   
2009
   
2008
 
             
Provision for income taxes at 34%
  $ 465,232     $ 1,267,276  
Non-deductible items for tax
    27,731       -  
Tax concessions
    (231,234 )     (574,600 )
Tax rate differential
    (138,778 )     (334,109 )
Valuation allowance
    58,979       (5,117 )
                 
    $ 181,930     $ 353,450  

During the two years ended December 31, 2009 and 2008, the aggregate amounts of benefit from tax holiday were $231,234 and $574,600 and the respective effect on earnings per share effect was $0.01 and $0.03 respectively.

In July 2006, the FASB issued ASC 740 (previously Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”).  This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.  The management evaluated the Company’s and its subsidiaries’ tax positions and considered that no additional provision for uncertainty in income taxes is necessary as of December 31, 2009.

Deferred tax asset as of the balance sheet dates is composed of the following:-

   
As of December 31,
 
   
2009
   
2008
 
United States
           
Tax losses
  $ 120,151     $ 61,172  
Valuation allowances
    (120,151 )     (61,172 )
                 
    $ -     $ -  

The Company has net operating loss carry forwards for income taxes amounting to approximately $353,415 and $180,000 as of December 31, 2009 and 2008 respectively.  These losses are available to reduce future years’ taxable income and will expire, if not utilized, through 2028.  Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history.  Accordingly, a full deferred tax asset valuation allowance has been provided against the deferred tax asset.


6.           Earnings per share - basic and diluted

The basic and diluted earnings per share is calculated using the net income attributable to Xinyinhai Technology, Ltd. common stockholders and the weighted average number of common stock outstanding during the years.

The basic and diluted earnings per share are the same as the warrants granted to external financial advisors were anti-dilutive.  The Company had nil and 200,000 outstanding warrants as of December 31, 2009 and 2008 respectively.

 
31

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


7.             Trade receivables

   
As of December 31,
 
   
2009
   
2008
 
             
Trade receivables
  $ 2,174,695     $ 2,907,933  
Allowance for doubtful accounts
    (11,048 )     (6,024 )
                 
    $ 2,163,647     $ 2,901,909  

An analysis of the allowance for doubtful accounts for the years ended December 31, 2009 and 2008 are as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
             
Balance at beginning of year
  $ 6,024     $ 6,682  
Addition of bad debt expense
    6,961       12,424  
Trade receivables written off
    (1,958 )     (13,800 )
Translation adjustments
    21       718  
                 
Balance at end of year
  $ 11,048     $ 6,024  


8.           Inventories

   
As of December 31,
 
   
2009
   
2008
 
             
Raw materials
  $ 1,033,203     $ 1,303,481  
Work in progress
    209,966       228,524  
Finished goods
    464,762       418,539  
                 
    $ 1,707,931     $ 1,950,544  

The Company recorded no allowance of obsolete inventories during the years ended December 31, 2009 and 2008.

 
32

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)

 
9.           Other receivables, deposits and prepayments and loans to third parties

 
(a)
Other receivables, deposits and prepayments

   
As of December 31,
 
   
2009
   
2008
 
             
Deposits
  $ 189,126     $ 439,702  
Retention money
    14,670       46,793  
Advances to staff
    110,832       150,630  
Receivable for disposal of building
    -       3,007,350  
Prepayments
    1,662       -  
Other receivables
    36,159       36,165  
                 
    $ 352,449     $ 3,680,640  

 
(b)
Loans to third parties

On July 1, 2009, Harbin KeHai Trade Co., Ltd. (“Harbin KeHai”) and Harbin Golden Sea had entered into a loan agreement.  Pursuant to the loan agreement, the amount is unsecured, interest-free and repayable within 6 months after the drawdown date.  During the months of September, October and December 2009, Harbin KeHai had drawn down a total amount of RMB2,455,540 (equivalent to $360,007) and repaid the amount of RMB794,000 (equivalent to $116,408), resulting to the outstanding loan balance of RMB1,661,540 (equivalent to $243,748) as of December 31, 2009.

 
On October 15, 2009, Heilongjiang Jindi Real Estate Development Co., Ltd. (“Heilongjiang Jindi”) and Harbin Golden Sea had entered into a loan agreement.  Mr. Xia Songlin, the accountant of Harbin Golden Sea, is one of the shareholders of Heilongjiang Jindi.  Pursuant to the loan agreement, the amount is unsecured, interest-free and repayable within 6 months after the drawdown date.  During the months of October, November and December 2009, Heilongjiang Jindi had drawn down a total amount of RMB31,000,000 (equivalent to $4,547,700) as of December 31, 2009.

 
On November 15, 2009, Heilongjiang BaoSen Century Pharmaceutical Co., Ltd (“Heilongjiang BaoSen”) and Harbin Golden Sea had entered into a loan agreement.  Pursuant to the loan agreement, the amount is unsecured, interest-free and repayable within 6 months after the drawdown date.  During the month of November 2009, Heilongjiang BaoSen had drawn down a total amount of RMB600,000 (equivalent to $88,020) as of December 31, 2009.

 
 
In the opinion of the management of the Company, the purpose of the short-term, interest-free loans to third parties is to develop strategic business relationships within the Chinese business community.  As of December 31, 2009, a total of loan amounts of $4,879,468 were made to Harbin KeHai, Heilongjiang Jindi and Heilongjiang BaoSen in anticipation of future benefits to trading, real estate and pharmaceutical industries respectively.
           
 
33

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


10.           Prepaid expenses

   
As of December 31,
 
   
2009
   
2008
 
             
Prepaid consultancy fees
  $ -     $ 673,000  
Amortization
    -       (261,557 )
                 
      -       411,443  
Termination of consulting agreements (Note 10(b))
    -       (323,750 )
                 
Amount to be amortized within one year
  $ -     $ 87,693  

 
(a)
During the year ended December 31, 2007, the Company and certain consultants agreed to terminate the consulting agreements whereby the consultants returned an aggregate of 3,233,870 shares of the Company’s common stock previously granted to them to the Company.  These shares of common stock had been returned to the Company for cancellation in February 2008.

 
(b)
The Company and certain consultants agreed to cancel the consulting agreements whereby the consultants returned an aggregate of 2,000,000 shares of the Company’s common stock previously granted to them to the Company.  These shares of common stock had been returned to the Company for cancellation in April 2008.  Since the services related to certain of these common stocks were performed and recognized as expenses in previous periods, the Company recognized an income of $376,250 upon return of these shares of common stock from the consultants for the year ended December 31, 2008.

 
(c)
Amortization for the years ended December 31, 2009 and 2008 was $87,693 and $121,294 respectively.
 
 
34

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


11.           Property, plant and equipment, net and land-use-right

(a)           Property, plant and equipment

   
As of December 31,
 
   
2009
   
2008
 
             
Buildings
  $ 4,158,278     $ 3,499,037  
Plant and machinery
    2,930,257       2,693,877  
Motor vehicles
    432,914       389,602  
Furniture, fixtures and equipment
    92,613       89,248  
                 
      7,614,062       6,671,764  
Accumulated depreciation
    (2,012,657 )     (1,568,284 )
                 
    $ 5,601,405     $ 5,103,480  

Depreciation expenses for the year ended December 31, 2009 and 2008 were $444,100 and $291,231 respectively and are included in:-

   
As of December 31,
 
   
2009
   
2008
 
             
Cost of sales
  $ 301,935     $ 213,172  
General and administrative expenses
    142,165       78,059  
                 
    $ 444,100     $ 291,231  

Included in buildings is the office building of RMB18,001,677 (equivalent to $2,640,846) acquired by Harbin Golden Sea, the subsidiary of the Company, during the year ended December 31, 2008.  The new plant is located at No. 4 Yantai Road, Centralized Park, Haping Road, Harbin Development Zone, Harbin, China.

The office building acquired in 2007 that was planned to be used as a tourist destination was disposed of at a consideration of RMB26,450,000 (equivalent to $3,812,768) to an independent third party for the year ended December 31, 2008.

During the year ended December 31, 2008, property, plant and equipment with carrying amounts of RMB59,115 (equivalent to $8,520) were disposed of at a consideration of $893 resulting in a loss of $7,627.

The building of carrying amount of $3,121,701 was pledged to a bank loan granted to Harbin Golden Sea (Note 12).

 
35

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


11.           Property, plant and equipment, net and land-use-right (Cont’d)

(b)           Land-use-right

   
As of December 31,
 
   
2009
   
2008
 
             
Land-use-right
  $ 1,071,601     $ 1,071,601  
Accumulated amortization
    (29,537 )     (2,055 )
                 
    $ 1,042,064     $ 1,069,546  

The land-use-right relates to the plot of land on which the office building mentioned in note 11(a) to the financial statements is situated.  Harbin Golden Sea obtained the right from the relevant PRC land authority for a period of 39 years to use the land on which the office premises, production facilities and warehouse of Harbin Golden Sea is situated.

The land-use-right of carrying amount of $1,042,064 was pledged to a bank loan granted to Harbin Golden Sea (Note 12).

On August 18, 2008, the land-use-right purchased in 2007 with the carrying amounts of $70,710 was disposed at $70,710, no gain or loss is resulted.

Amortization for the years ended December 31, 2009 and 2008 was $27,466 and $2,055 respectively.

The estimated aggregate amortization expenses for land-use-right for the five succeeding years is as follows :-

Year
     
       
2010
  $ 27,466  
2011
    27,466  
2012
    27,466  
2013
    27,466  
2014
    27,466  
         
    $ 137,330  
 
 
36

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


12.           Collateralized bank loan

   
As of December 31,
 
   
2009
   
2008
 
             
Bank loan repayable within 1 year
  $ 2,934,000     $ -  

The above bank loan is denominated in RMB and carry an average interest rate at 5.31% per annum.  The bank loan as of December 31, 2009 was collateralized by land-use-right and buildings with carrying value of $1,042,064 and $3,121,701 respectively (Note 11).

 
13.           Other payables and accrued liabilities

   
As of December 31,
 
   
2009
   
2008
 
             
Other payables
  $ 132,534     $ 553,899  
Accrued statutory staff welfare and salaries
    28,982       47,111  
Accrued liabilities
    47,160       51,160  
                 
    $ 208,676     $ 652,170  

 
14.          Commitments and contingencies

The Company had no commitments or contingencies liabilities as of December 31, 2009 and 2008.
 
 
15.           Stockholders’ equity

(a)           Common stock

   
No. of shares
   
Amount
 
Authorized:-
           
             
Common stock at USD0.001 par value
    40,000,000     $ 40,000  
                 
Issued and outstanding:-
               
                 
As of January 1, 2008
    24,417,899     $ 24,417  
Common stock issued to consultants
    300,000       300  
Cancellation of common stocks for services
    (5,233,870 )     (5,233 )
                 
As of December 31, 2008 and 2009
    19,484,029     $ 19,484  

 
37

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


15.           Stockholders’ equity (cont’d)

 
(b)
In 2008, the Company entered into a consultancy agreement with a consultant whereby the Company agreed to issue to the consultant 300,000 shares of common stock and five-year warrants to purchase 200,000 shares of the Company's common stock in exchange for services on introducing potential source of capital by the consultant.

The common stock and warrants were issued to the consultant on July 22, 2008.  The Company cancel the issued warrants to the consultant on July 27, 2009.

The value of common stocks issued to the consultant was measured with reference to the trading prices of the Company’s common stocks as quoted on the OTCBB on the date of grant.  The weighted-average grant-date fair value per share is $0.4.

The Company used the Black-Scholes option pricing method (Assumptions : volatility 149.52%, risk free rate 2.5%, five years expected life and zero dividend yield) to calculate the value of the warrant issued to the consultant.  Using these assumptions a value of approximately $70,000 was assigned to the warrant and was fully charged to the statement of operations in 2008.


16.           Statutory reserves

 
(a)
In accordance with the relevant laws and regulations of the PRC, the subsidiary is required to appropriate 10% of its net income reported under the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory reserve.  When the balance of such reserve reaches 50% of the subsidiary’s registered capital, any further appropriation is optional.

 
(b)
During the years ended December 31, 2009 and 2008, the Company appropriated in aggregate $161,048 and $357,377 respectively to the statutory reserve based on its net income reported under the PRC statutory accounts.


17.           Defined contribution plan

The Company has a defined contribution plan for all its qualified employees in the PRC.  The Company and its employees are each required to make contributions to the plan at the rates specified in the plan.  The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan.  No forfeited contribution is available to reduce the contribution payable in future years.  The defined contribution plan contributions were charged to the statement of operations.  The Company contributed $63,101 and $37,261 for the years ended December 31, 2009 and 2008 respectively.

 
38

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


18.           Supplemental cash flow information

During the year ended December 31, 2008, the Company issued a total of 300,000 (Note 15(b)) of its common stock for services provided by a consultant.
 

19.           Equity incentive plan

The Company’s equity incentive plan became effective on October 6, 2006.  The equity incentive plan aims to promote the success and enhance the value of the Company by linking the personal interests of participants to those of the Company's stockholders, and by providing participants with an incentive for outstanding performance.

The plan is administered by one or more committees of the Board.  The Board, at any time and from time to time, may grant shares of stock or options to eligible persons in such amounts and upon such terms and conditions as the Board shall determine.  No award may be made under the plan after December 31, 2014.

The maximum number of shares available for grant under the plan is 6,000,000 shares of the Company’s common stock, which may be either authorized but unissued or reacquired shares.

During the year ended December 31, 2006, the Company issued 6,000,000 shares of common stock to several consultants for the provision of consultancy services to the Company.  The compensation cost was measured with reference to the trading prices of the Company’s common stocks as quoted on the OTCBB on the date of grant.

The compensation cost has been capitalized as an asset which is classified as prepaid expenses in the consolidated balance sheet and the amortization over the service period.  The weighted-average grant-date fair value per share is $0.37.  The prepaid expenses are expected to be recognized over a weighted- average period of 1 year.

The Company received a total of 5,233,870 shares of the Company’s common stock which were cancelled by certain consultants during the year ended December 31, 2008, as disclosed in Note 10.

Other than the above transactions and the plan as disclosed in Note 15(b), no other options or awards have been made, exercised or lapsed during the years ended December 31, 2009 and 2008 under the equity incentive plan.
 
39


XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 

20.           Segment information

The Company currently operates in two reportable segments, Sales of printed products and trading of equipment.  The accounting policies of the segments are the same as described in the summary of significant accounting policies.  The Company evaluates segment performance based on income from operations.  As a result, the components of operating income for one segment may not be comparable to another segment.  The following is a summary of the Company’s segment information for the years ended December 31, 2009 and 2008 :

   
Printing Products
   
Equipment Trading
   
Total
 
   
Year ended December 31,
   
Year ended December 31,
   
Year ended December 31,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                     
Revenues
  $ 7,479,610     $ 9,289,051     $ 1,147,696     $ 4,397,281     $ 8,627,306     $ 13,686,332  
Gross profit
    2,504,367       4,224,628       244,516       793,969       2,748,883       5,018,597  
Interest income
    6,772       9       752       1       7,524       10  
Depreciation on property, plant and
                                               
  equipment and amortization
    406,772       275,289       15,833       15,942       422,605       291,231  
Segment profit
    1,463,169       3,500,992       108,855       629,347       1,572,024       4,130,339  
Total assets
    11,658,140       10,895,494       767,542       558,250       12,425,682       11,453,744  
Expenditure for segment assets
    777,010       600,118       4,665       2,010       781,675       602,128  
 
 
40

 

XINYINHAI TECHNOLOGY, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)


20.           Segment information (Cont’d)

A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.

   
As of December 31,
 
   
2009
   
2008
 
             
Total consolidated revenue
  $ 8,627,306     $ 13,686,332  
                 
Total income for reportable segments
  $ 1,572,024     $ 4,128,284  
Other income
    4,000       -  
Unallocated amounts relating to operations :-
               
Amortization of prepaid expenses
    (87,693 )     (121,294 )
Value of common stock and warrants issued to a consultant
    -       (70,000 )
Depreciation and amortization
    (48,961 )     -  
General and administrative expenses
    (71,042 )     (209,708 )
                 
Income before income taxes and noncontrolling interests
  $ 1,368,328     $ 3,727,282  

Assets
           
             
Total assets for reportable segments
  $ 12,425,682     $ 11,453,744  
Unallocated amounts relating to operations :-
               
Prepaid expenses
    -       87,693  
Building and land-use-right
    1,046,590       3,708,052  
Other receivables
    36,160       36,160  
Loans to third parties
    4,879,468       -  
Cash and cash equivalents
    3,042       3,223  
                 
Total
  $ 18,390,942     $ 15,288,872  

All of the Company’s long-lived assets and customers are located in the PRC.  Accordingly, no geographic information is presented.


21.           Related party transactions

The Company had no material transactions with its related parties during the years.


22.           Subsequent events

The Company has evaluated all subsequent events and determined that there was no subsequent events or transactions that required recognition or disclosure in the consolidated financial statements.

 
41

 

ITEM 9.                  CHANGES IN AND DISAGREEMENTS WITH   ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A.               CONTROLS AND PROCEDURES.

 (a)           Evaluation of disclosure controls and procedures.
 
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer has concluded that, as of the Evaluation Date, such controls and procedures were effective.

(b)           Changes in internal controls.
 
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

(c)           Management’s Report on Internal Control over Financial Reporting.
 
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  We have assessed the effectiveness of those internal controls as of December 31, 2009, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework as a basis for our assessment.
 
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
 
42

 
 
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified no material weaknesses in our internal control over financial reporting.  Accordingly, management’s assessment is that the Company’s internal controls over financial reporting were effective as of December 31, 2009.
 
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 

ITEM 9B.               OTHER INFORMATION.

None.
 
PART III

ITEM 10.               DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following individuals are the members of Xinyinhai Technology’s Board of Directors and its executive officers.
 
 
Name
Age
Position
 
Tian Ling
46
Chairman, Chief Executive Officer
 
Xie Guihong
47
Vice President, Director
 
Du Song
63
Chief Financial Officer, Director

Tian Ling founded the predecessor to Harbin Golden Sea in 1998, and has served as Chairman and Chief Executive Officer of that company since its founding.  Mrs. Tian earned an MBA from Honolulu University with a concentration in Finance and Economics.

Xie Guihong has been employed as the Vice President of Harbin Golden Sea and its predecessors since 1998.  From 1995 to 1998 Ms. Xie was employed as Director of Accountants by the Harbin Children’s Pharmaceutical Factory.  Ms. Xie holds a B.S. degree in Accounting from the Harbin Workers College.

Du Song has been employed as Financial Controller of Harbin Golden Sea and its predecessors since 1998, with responsibility for implementing the financial management systems, budget management systems and internal accounting control systems.  Ms. Du is accredited as a certified public accountant in China.  She holds a B.S. degree in Accounting from China Nong Keng (Heilongjiang August First Land Reclamation) University.

 
43

 

Nominating, Compensation and Audit Committees
 
The Board of Directors does not have an audit committee, a compensation committee or a nominating committee, due to the small size of the Board.  Decisions regarding nominations to the Board will be made by all currently-serving members of the Board.  The Board will also not have an “audit committee financial expert” within the definition given by the Regulations of the Securities and Exchange Commission.  The members of the Board expect to recruit an audit committee financial expert to join the Board during 2010.

Code of Ethics
 
Harbin Golden Sea adopted a Code of Ethics that applies to its executive officers.  Xinyinhai Technology will apply the same Code of Ethics while the officers of Xinyinhai Technology are also officers of Harbin Golden Sea.  A copy of the Code of Ethics has been filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 5, 2006.

Section 16(a) Beneficial Ownership Reporting Compliance
 
None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2009.

ITEM 11.                EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or paid by Xinyinhai Technology, Ltd. and its subsidiaries to Tian Ling, its Chief Executive Officer.  There were no other executive officers whose total salary and bonus for the fiscal year ended December 31, 2008 exceeded $100,000.
 
 
Year
 
Salary
   
Bonus
   
Stock
Awards
   
Option
Awards
   
Other
Compensation
 
Tian Ling
2009
  $ 52,182       0       0       0       0  
 
2008
  $ 45,407       0       0       0       0  
 
2007
  $ 16,321       0       0       0       0  

Equity Awards

The following tables set forth certain information regarding the stock options acquired by the executive officer named in the table above during the year ended December 31, 2009 and those options held by her on December 31, 2009.
 
Option Grants in the Last Fiscal Year
 
 
Number of
securities
underlying
option
Percent
of total
options
granted to
employees
in fiscal
Exercise
Price
Expiration 
Potential realizable
value at assumed
annual rates of
appreciation
for option term
 
  granted year ($/share) Date 5% 10%  
Tian Ling
-- -- -- -- -- --  
 
44

 
The following tables set forth certain information regarding the stock grants received by the executive officer named in the table above during the year ended December 31, 2009 and held by her unvested at December 31, 2009.
 
Unvested Stock Awards in the Last Fiscal Year

 
Number of
Shares That
Have Not
Vested
Market Value
of Shares That
Have Not
Vested
Tian Ling
0
--

Employment Agreements

Each of our executive officers is employed on an at-will basis.

Remuneration of Directors
 
None of the members of the Board of Directors receives remuneration for service on the Board.

ITEM 12.                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT

The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:
 
 
·
each shareholder known by us to own beneficially more than 5% of our common stock;
 
 
·
Tian Ling, our Chief Executive Officer
 
 
·
each of our directors; and
 
 
·
all directors and executive officers as a group.
 
Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares,  subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.

Name and Address of
Beneficial Owner
Amount and Nature of
Beneficial Ownership
 
Percentage of Class
Tian Ling
6,465,441
33.2%
Du Song
20,000
0.1%
Xie Guihong
180,000
0.9%
     
All officers and directors (3 persons)
6,665,441
34.2%
 
 
45

 

ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain Relationships
 
None.

Director Independence

None of the members of the Board of Directors is independent, as “independent” is defined in the rules of the NASDAQ Stock Market.

ITEM 14.                PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

PKF Certified Public Accountants, Hong Kong, China, a member firm of the PKF International Limited network of legally independent firms ("PKF Hong Kong"), as our independent registered public accounting firm, billed $45,000 to the Company for professional services rendered for the audit of our fiscal 2009 financial statements.  PKF  Hong Kong billed $45,000 to the Company for professional services rendered for the audit of our fiscal 2008 financial statements.

Audit-Related Fees

PKF Hong Kong billed $12,000 to the Company during fiscal 2009 for assurance and related services that are reasonably related to the performance of the 2009 review of the quarterly financial statements.  PKF Hong Kong billed $12,000 to the Company during fiscal 2008 for assurance and related services that are reasonably related to the performance of the 2008 review of the quarterly financial statements.

Tax Fees

PKF Hong Kong did not perform professional services rendered for tax compliance, tax advice and tax planning during fiscal 2009 or fiscal 2008.

All Other Fees

PKF Hong Kong did not perform any services for the Company in fiscal 2009 or fiscal 2008 that are not described above.

 It is the policy of the Company’s Board of Directors that all services, other than audit, review or attest services, must be pre-approved by the Board of Directors, acting in lieu of an audit committee.  All of the services described above were approved by the Board of Directors.

 
46

 

Subcontracted Services
 
The hours expended on PKF Hong Kong’s engagement to audit the Company’s financial statements for 2009 that were attributed to work performed by persons other than full-time permanent employees of PKF Hong Kong was not greater than 50% of the total hours expended.

 
ITEM 15.                EXHIBITS

3-a
Articles of Incorporation - filed as an exhibit to the Company’s Registration Statement on Form 10-SB, filed on November 5, 2004, and incorporated herein by reference.
   
3-a(1)
Certificate of Amendment of Certificate of Incorporation filed on September 27, 2006 – filed as an exhibit to the Company’s Current Report on Form 8-K filed on October 12, 2006, and incorporated herein by reference.
   
3-b
By-laws – filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, and incorporated herein by reference.
   
14
Code of Ethics - filed as an exhibit to the Company’s Current Report on Form 8-K, filed on July 5, 2006, and incorporated herein by reference.
   
31.1
Rule 13a-14(a) Certification – CEO
31.2
Rule 13a-14(a) Certification – CFO
   
32
Rule 13a-14(b) Certification

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
XINYINHAI TECHNOLOGY, LTD.
 
By: /s/ Tian Ling
 
      Tian Ling, Chief Executive Officer

In accordance with the Exchange Act, this Report has been signed below on March 31, 2010 by the following persons, on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Tian Ling
Tian Ling, Director
Chief Executive Officer

/s/ Du Song
Du Song, Director
Chief Financial Officer
 
/s/ Xie Guihong
Xie Guihong, Director
 
 
47