UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-QSB
__________________________
(Mark One)
| ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedMarch 31, 2005
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from __________ to ___________
Commission file number:333-100046
CINTEL CORP.
(Exact name of Registrant as specified in its charter)
____________________
Nevada (State or other Jurisdiction of Incorporation or organization) | 52-2360156 (IRS Employer I.D. No.) |
___________________________
1001 W. Cheltenham Ave.
Melrose Park, PA 19027
(215) 782-8201
(Address, including zip code, and telephone and facsimile numbers, including area code, of
registrant’s executive offices)
___________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 31, 2005, 30,324,680 shares of common stock, $.001 par value per share.
CINTEL CORP.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements Periods Ended March 31, 2005 and 2004 (unaudited)
Consolidated Balance Sheets3
Consolidated Statements of Operations4-5
Consolidated Statements of Stockholders’ Deficit6
Consolidated Statements of Cash Flows9
Notes to Consolidated Financial Statements10-17
Item 2. Management’s Discussion and Analysis or Plan of Operation18
Item 3. Controls and Procedures20
PART II OTHER INFORMATION
Item 1. Legal Proceedings21
Item 2. Changes in Securities and Use of Proceeds21
Item 3. Defaults Upon Senior Securities21
Item 4. Submission of Matters to a Vote of Security Holders21
Item 5. Other Information21
Item 6. Exhibits and Reports on Form 8-K21
SIGNATURE PAGE 22
CINTEL CORP.
Consolidated Balance Sheets
March 31, 2005 and 2004
2005 | 2004 | ||||||
ASSETS | |||||||
Current | |||||||
| Cash and cash equivalents (note 3) | $ | 141,789 | $ | 345,759 | |||
| Accounts receivable (net of allowance for doubtful accounts of $972,014; 2004 - $425,791) | 326,192 | 1,082,307 | |||||
| Inventory (note 4) | 290,032 | 226,594 | |||||
| Prepaid and sundry assets | 257,842 | 156,464 | |||||
| Deferred taxes | 213,470 | 121,050 | |||||
1,229,325 | 1,932,174 | ||||||
Deferred financing fees | 60,000 | - | |||||
Deferred taxes | 799,875 | 478,614 | |||||
Equipment (note 5) | 513,218 | 651,760 | |||||
Investments | 49,094 | 43,570 | |||||
$ | 2,651,512 | $ | 3,106,118 | ||||
LIABILITIES | |||||||
Current | |||||||
| Accounts payable | $ | 873,359 | $ | 652,571 | |||
| Shareholder loan (note 6) | 114,079 | - | |||||
| Loans payable - current (note 7) | 1,630,679 | 1,321,239 | |||||
| Convertible debenture (note 8) | 320,000 | - | |||||
2,938,117 | 1,973,810 | ||||||
Accrued Severance | 125,315 | - | |||||
Loans Payable (note 7) | 30,538 | 50,896 | |||||
3,093,970 | 2,024,706 | ||||||
STOCKHOLDERS' DEFICIT | |||||||
Capital Stock (note 9) | |||||||
| Authorized 300,000,000 common shares, par value $0.001 per share | |||||||
| Issued 30,324,680 common shares (20,314,300 in 2004) | 30,324 | 20,314 | |||||
Paid-in Capital | 4,941,120 | 4,427,330 | |||||
Treasury Stock | (105,185 | ) | - | ||||
Accumulated Other Comprehensive Loss | 26,830 | 9,949 | |||||
Accumulated Deficit | (5,335,547 | ) | (3,376,181 | ) | |||
(442,458 | ) | 1,081,412 | |||||
$ | 2,651,512 | $ | 3,106,118 | ||||
APPROVED ON BEHALF OF THE BOARD | |||||||
"SANG DON KIM" | "KYO JIN KANG" | ||||||
| Director | Director | ||||||
CINTEL CORP.
Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004
2005 | 2004 | ||||||
Revenue | |||||||
Finished goods | - | 83,037 | |||||
| Merchandise | 112,004 | 216,117 | |||||
| Services | 14,514 | 7,642 | |||||
$126,518 | 306,796 | ||||||
Cost of Sales | |||||||
Finished goods | $ | - | $ | 90,917 | |||
| Merchandise | 111,678 | 208,041 | |||||
111,678 | 298,958 | ||||||
Gross Profit | 14,840 | 7,838 | |||||
Expenses | |||||||
| Salaries and employee benefits | 148,252 | 120,663 | |||||
| Professional fees | 124,351 | 51,219 | |||||
| Amortization of deferred financing fees | 60,000 | - | |||||
| Depreciation | 55,750 | 50,908 | |||||
| Travel | 45,394 | 14,525 | |||||
| Taxes and dues | 32,782 | 5,236 | |||||
| Research and development | - | 133,395 | |||||
| Office and general | 98,650 | 40,496 | |||||
565,179 | 416,442 | ||||||
Operating Loss | (550,339 | ) | (408,604 | ) | |||
Other | |||||||
| Interest and other income | 1,459 | 7,002 | |||||
| Foreign exchange | - | (813 | ) | ||||
| Interest expense | (74,849 | ) | (23,890 | ) | |||
(73,390 | ) | (17,701 | ) | ||||
Loss Before Income Taxes | (623,729 | ) | (426,305 | ) | |||
| Deferred income taxes recoverable | 77,314 | 68,000 | |||||
Net Loss | $ | (546,415 | ) | $ | (358,305 | ) | |
Basic Loss per Share | $ | (0.02 | ) | $ | (0.02 | ) | |
Fully Diluted Loss per Share | $ | (0.02 | ) | $ | (0.02 | ) | |
Weighted Average Number of Shares(note 9) | 27,692,499 | 20,314,300 | |||||
CINTEL CORP.
Consolidated Statements of Stockholders' Deficit
Three Months Ended March 31, 2005 and 2004
Paid in | Accumulated | |||||||||||||||||||||||
Capital in | Other | Total | ||||||||||||||||||||||
Number of | Capital | Excess of | Treasury | Comprehensive | Accumulated | Stockholders' | ||||||||||||||||||
Shares | Stock | Par value | Stock | Loss | Deficit | Equity | ||||||||||||||||||
| Balance, January 1, 2004 | 20,314,300 | $ | 20,314 | $ | 4,427,330 | $ | - | (38,627 | ) | $ | (3,017,876 | ) | $ | 1,391,141 | ||||||||||
| Foreign exchange on translation | - | - | - | - | 48,576 | - | 48,576 | |||||||||||||||||
| Net loss | - | - | - | - | - | (358,305 | ) | (358,305 | ) | |||||||||||||||
| Balance, March 31, 2004 | 20,314,300 | $ | 20,314 | $ | 4,427,330 | $ | - | 9,949 | $ | (3,376,181 | ) | $ | 1,081,412 | |||||||||||
| Balance, January 1, 2005 | 23,409,800 | $ | 23,409 | $ | 4,573,535 | $ | - | 23,826 | $ | (4,789,132 | ) | $ | (168,362 | ) | ||||||||||
| Common shares issued for consulting services | 640,000 | 640 | 63,860 | - | - | - | 64,500 | |||||||||||||||||
| Conversion of convertible debentures into common stock (note 8 a) | 4,369,744 | 4,370 | 165,630 | - | - | - | 170,000 | |||||||||||||||||
| Conversion of convertible debentures into common stock (note 8 b) | 1,905,136 | 1,905 | 138,095 | - | - | - | 140,000 | |||||||||||||||||
| Repurchase of employees' stocks | - | - | - | (105,185 | ) | - | - | (105,185 | ) | |||||||||||||||
| Foreign exchange on translation | - | - | - | - | 3,004 | - | 3,004 | |||||||||||||||||
| Net loss | - | - | - | - | - | (546,415 | ) | (546,415 | ) | |||||||||||||||
| Balance, March 31, 2005 | 30,324,680 | $ | 30,324 | $ | 4,941,120 | $ | (105,185 | ) | 26,830 | $ | (5,335,547 | ) | $ | (442,458 | ) | |||||||||
CINTEL CORP.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004
2005 | 2004 | |||||||||
Cash Flows from Operating Activities | ||||||||||
| Net loss | $ | (546,415 | ) | $ | (358,305 | ) | ||||
| Adjustments required to reconcile net loss to net cash used in operating activities: | ||||||||||
| Depreciation | 55,750 | 50,908 | ||||||||
| Amortization of financing fees | 75,380 | - | ||||||||
| Common shares issued for consulting services | 64,500 | - | ||||||||
| Net Changes in Assets & Liabilities | ||||||||||
| Accounts receivable | 272,019 | 1,316,111 | ||||||||
| Inventory | 7,337 | (72,912 | ) | |||||||
| Prepaid and sundry assets | 12,605 | 80 | ||||||||
| Deferred taxes | (77,314 | ) | (68,000 | ) | ||||||
| Accounts payable | 45,000 | (1,047,019 | ) | |||||||
| Accrued severance | 2,345 | - | ||||||||
(88,793 | ) | (179,137 | ) | |||||||
Cash Flows from Investing Activities | ||||||||||
| Acquisition of equipment | (356 | ) | 5,670 | |||||||
Cash Flows from Financing Activities | ||||||||||
| Payments of deferred financing fees | (240,000 | ) | - | |||||||
| Repayment of loans payable | (77,342 | ) | (32,612 | ) | ||||||
| Advances from convertible debenture - net | (20,000 | ) | - | |||||||
| Advances from shareholder loan | 81,144 | - | ||||||||
| Proceeds from common shares issued for repayment of convertible debentures | 310,000 | - | ||||||||
| Repurchase of employees' stocks | (105,185 | ) | - | |||||||
(51,383 | ) | (32,612 | ) | |||||||
Foreign Exchange on Cash and Cash Equivalents | 934 | 17,271 | ||||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (139,598 | ) | (188,808 | ) | ||||||
Cash and Cash Equivalents - beginning of period | 281,387 | 534,567 | ||||||||
Cash and Cash Equivalents - end of period | $ | 141,789 | $ | 345,759 | ||||||
Interest and Income Taxes Paid: | ||||||||||
| Interest paid | $ | 51,469 | $ | 23,890 | ||||||
| Income taxes paid | $ | - | $ | - | ||||||
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
1. Operations and Business
Cintel Corp., formerly Link2 Technologies, Inc. ("the Company"), was incorporated in the State of Nevada on August 16, 1996 and on April 24, 2001 changed its name from "Great Energy Corporation International" to Link2 Technologies, Inc. On September 30, 2003 the Company changed its name to Cintel Corp.
On September 30, 2003, the Company entered into a definitive Share Exchange Agreement (the "Agreement") with Cintel Co., Ltd., ("Cintel Korea") a Korean corporation and its shareholders. The Agreement provided for the acquisition by the Company from the shareholders of 100% of the issued and outstanding capital stock of Cintel Korea. In exchange, the shareholders of Cintel Korea received 16,683,300 shares of the Company. As a result, the shareholders of Cintel Korea controlled 82% of the Company. While the Company is the legal parent, as a result of the reverse-takeover, Cintel Korea became the parent company for accounting purposes.
Upon completion of the share exchange, the business operations of Cintel Korea constituted virtually all of the business operations of the Company. Cintel Korea develops network solutions to address technical limitations to the Internet. Cintel Korea has developed what it believes is the first Korean server load balancing technology. Cintel Korea is now focused on the development of advanced solutions for Internet traffic management. The business operations of Cintel Korea are located in Seoul, Korea.
2. | Summary of Significant Accounting Policies |
The accounting policies of the Company are in accordance with generally accepted accounting principles of the United States of America, and their basis of application is consistent. Outlined below are those policies considered particularly significant:
| a) | Basis of Financial Statement Presentation |
These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
| b) | Basis of Consolidation |
The merger of the Company and Cintel Korea has been recorded as the recapitalization of the Company, with the net assets of the Company brought forward at their historical basis. The intention of the management of Cintel Korea was to acquire the Company as a shell company listed on NASDAQ. Management does not intend to pursue the business of the Company. As such, accounting for the merger as the recapitalization of the Company is deemed appropriate.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
2. | Summary of Significant Accounting Policies(cont'd) |
| c) | Unit of Measurement |
The US Dollar has been used as the unit of measurement in these financial statements.
| d) | Use of Estimates |
Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates, although management does not believe such changes will materially affect the financial statements in any individual year.
| e) | Revenue Recognition |
The Company recognizes revenues upon delivery of merchandise sold, and when services are rendered for maintenance contracts.
| f) | Cash and Cash Equivalents |
Cash and highly liquid investment with an initial maturity period of 90 days or less are considered cash equivalents and recorded at cost.
| g) | Investments |
Investments in available-for-sale securities are being recorded in accordance with FAS-115 "Accounting for Certain Investments in Debt and Equity Securities". Equity securities that are not held principally for the purpose of selling in the near term are reported at fair market value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity.
| h) | Inventories |
Inventories are stated at the lower of cost or net realizable value. Net realizable value is determined by deducting selling expenses from selling price.
The cost of inventories is determined on the first-in first-out method, except for materials-in-transit for which the specific identification method is used.
| i) | Equipment |
Equipment is stated at cost. Major renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over a period of 5 years.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
2. | Summary of Significant Accounting Policies(cont'd) |
| j) | Government Grants |
Government grants are recognized as income over the periods necessary to match them with the related costs that they are intended to compensate.
| k) | Currency Translation |
| The Company's functional currency is Korean won. Adjustments to translate those statements into U.S. dollars at the balance sheet date are recorded in other comprehensive income. |
| Foreign currency transactions of the Korean operation have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses have been charged to income in the year. |
| l) | Financial Instruments |
Fair values of cash equivalents, short-term and long-term investments and short-term debt approximate cost. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined using market information and valuation methodologies, primarily discounted cash flow analysis. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods could significantly affect the fair value estimates.
| m) | Income Tax |
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
2. | Summary of Significant Accounting Policies(cont'd) |
| n) | Earnings or Loss per Share |
The Company adopted FAS No.128, "Earnings per Share" which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year.
| o) | Concentration of Credit Risk |
SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk", requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration. The Company maintains cash and cash equivalents with major Korean financial institutions.
The Company's provides credit to its clients in the normal course of its operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent credit losses which, once they materialize, are consistent with management's forecasts.
For other debts, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value.
Concentration of credit risk arises when a group of clients having a similar characteristic such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions. The Company does not have any significant risk with respect to a single client.
| p) | Recent Accounting Pronouncements |
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" (Statement 151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). As currently worded in ARB 43, Chapter 4, the term "so abnormal" was not defined and its application could lead to unnecessary noncomparability of financial reporting. This Statement eliminates that term and requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The adoption of Statement 151 will not have a material impact on the Company's consolidated financial statements.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
2. | Summary of Significant Accounting Policies(cont'd) |
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" (Statement 153). This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of FAS 153 will not have a material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based Payment" (Statement 123R). This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide service in exchange for the award requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met; those conditions are much the same as the related conditions in Statement 123. This Statement is effective for public entities that do not file as a small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. This Statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date and is not expected to have a material impact on the Company's consolidated financial statements.
3. | Cash and cash equivalents |
Included in cash and cash equivalents is cash restricted for use by the Company of $136,738 (2004 - $117,208). The fund is being held as security for one of the bank loans as described in note 7. The loan will mature on May 12, 2005. As at March 31, 2005, the amount outstanding was $615,321 (2004 - $586,040).
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
4. | Inventory |
Inventory includes $18,752 (2004 - $17,065) of merchandise and $271,280 (2004 - $209,529) of raw materials.
5. | Equipment |
Equipment is comprised as follows:
2005 | 2004 | ||||||||||||
Accumulated | Accumulated | ||||||||||||
Cost | Depreciation | Cost | Depreciation | ||||||||||
| Furniture and fixtures | $ | 38,484 | $ | 25,494 | $ | 23,752 | $ | 17,445 | |||||
| Equipment | 640,866 | 522,833 | 559,419 | 377,052 | |||||||||
| Vehicles | 15,117 | 15,115 | 13,416 | 11,404 | |||||||||
| Software | 674,467 | 292,274 | 616,444 | 155,370 | |||||||||
$ | 1,368,934 | $ | 855,716 | $ | 1,213,031 | $ | 561,271 | ||||||
| Net carrying amount | $ | 513,218 | $ | 651,760 | |||||||||
6. | Shareholder Loan |
The loan from the chief executive officer, who is also a 15% shareholder of the company, is non-interest bearing, unsecured, and due on demand.
7. | Loans Payable |
2005
2005 | 2004 | ||||||||||||
Current | Long-term | Total | Total | ||||||||||
| Bank loans | $ | 1,220,875 | $ | - | $ | 1,220,875 | $ | 1,256,860 | |||||
| Promissory Note | 39,000 | - | 39,000 | 39,000 | |||||||||
| Government loans (1, 2, & 3) | 62,366 | 38,525 | 100,891 | 89,538 | |||||||||
| Discount of interest-free government loans | (1,352 | ) | (7,987 | ) | (9,339 | ) | (13,263 | ) | |||||
| Notes payable (1, 2, & 3) | 309,790 | - | 309,790 | - | |||||||||
| $ | 1,630,679 | $ | 30,538 | $ | 1,661,217 | $ | 1,372,135 | ||||||
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
7. | Loans Payable(cont'd) |
Bank Loans
The bank loans bear interest at 7.5% to 11.15% and mature between May and December 2005. The loans are repayable upon maturity.
Promissory Note
The promissory note is non-interest bearing, unsecured, and due on demand.
Government Loan #1
The loan is non-interest bearing, unsecured, repayable in annual payments of $18,024 and matures July 2005. The Company is in arrears on the 2004 annual payment. Total amount outstanding at March 31, 2005 was $36,237.
Government Loan #2
The loan is non-interest bearing, unsecured, repayable in annual payments of $13,109 and matures July 2005. The Company is in arrears on the 2004 annual payment. Total amount outstanding at March 31, 2005 was $26,129.
Government Loan #3
The loan is non-interest bearing, unsecured, repayable in annual payments of $8,678 starting 2006 and matures October 2009.
Note Payable #1
The note payable of $39,068 bears interest at 5% per month, payable monthly interest only, and is due on demand.
Note Payable #2
The note payable of $214,874 bears interest at 4% per month, is personally guaranteed by the chief executive officer of the Company, and is due on demand.
Notes Payable #3
The notes payable of $55,848 is non-interest bearing and due on demand.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
8. Convertible Debentures
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" the Company accounts for the convertible debentures as a liability at face value and no formal accounting recognition is assigned to the value inherent in the conversion feature.
| a) | Convertible debenture #1 |
The convertible debenture has a face value of $400,000 with an annual coupon rate of 12%. Commencing November 15, 2004, the convertible debenture and interest is repayable in one installment of $29,266 followed by 39 installments of $10,000 every seven calendar days. The loan will be repaid in August 2005.
As security, 25,000,000 shares have been held in escrow by the lawyer who shall provide the shares for repayment of the debt. The conversion price of said shares issued will be equal to 98% of the lowest closing bid price of the common stock on the listed market for the five days immediately following the notice date for the advance.
Under the agreement, the debenture holder has committed to provide financing of up to $5,000,000 over a two year period. The maximum amount of financing per month is $400,000.
The debenture has been repaid as follows:
Balance - - January 1, 2004 -
Issued - November 2004 400,000
Converted - - 2004 (60,000)
Additional advance in March 2005 50,000
Converted - - quarter ended March 2005 (170,000)
Balance - - March 31, 2005 $220,000
| b) | Convertible debenture #2 |
The convertible debenture has a face value of $240,000 with an annual coupon rate of 5%, and both principal and interest are to be repaid either in cash or common shares by August 4, 2007.
The debenture has been repaid as follows:
Issued - February 2005 240,000
Converted - - quarter ended March 2005 (140,000)
Balance - - March 31, 2005 $100,000
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
9. Capital Stock
Authorized
300,000,000 common shares, par value $0.001 per share (2004 - 50,000,000)
2005 2004
Issued
30,324,680 common shares (2004 - 20,314,300) $30,324 $20,314
| On September 30, 2003, the Company cancelled 4,800,000 shares of common stock for no consideration. As well, the Company granted a 2 to 5 reverse stock split. The reverse split has retroactively been taken into consideration in the consolidated financial statements an the calculation of earnings per share. Subsequently, the Company issued 16,683,300 common shares in exchange for 100% of the outstanding shares of Cintel Co., Ltd. |
| In June 2004, 300,000 common shares were issued for consulting services at the value of $33,000. |
| In July 2004, 160,000 common shares were issued for consulting services at the value of $12,800. |
| In August 2004, 50,000 common shares were issued for consulting services at the value of $4,500. |
| In September 2004, 120,000 common shares were issued for consulting services at the value of $9,600. |
| In September 2004, the Company increased its authorized capital from 50,000,000 common shares to 300,000,000 common shares. |
| In October 2004, 120,000 common shares were issued for consulting services at the value of $14,400. |
| In November 2004, 170,000 common shares were issued for consulting services at the value of $15,000. |
| In November 2004, 25,000,000 common shares were held in escrow for future conversion to repay the convertible debt as described in note 8 a). As at March 31, 2005, 6,545,244 common shares have been issued on conversion as described below. The balance of shares held in escrow at March 31, 2005 was 18,454,756. |
| In November 2004, the Company issued 412,286 common shares upon the conversion of $20,000 of the convertible debentures as described in note 8 a). |
| In December 2004, the Company issued 1,763,214 common shares upon the conversion of $40,000 of the convertible debentures as described in note 8 a). |
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
9. Capital Stock(cont'd)
| In January 2005, the Company issued 240,000 common shares for consulting service at the value of $20,500. |
| In January 2005, the Company issued 2,262,424 common shares upon the conversion of $40,000 of the convertible debentures as described in note 8 a). |
| In February 2005, the Company issued 622,200 common shares upon the conversion of $50,000 of the convertible debentures as described in note 8 a). |
| In February 2005, 400,000 common shares were issued for consulting services at the value of $44,000. |
| In March 2005, the Company issued 1,485,120 common shares upon the conversion of $80,000 of the convertible debentures as described in note 8 a). |
| In March 2005, the Company repurchased 93,830 common shares for $105,185 |
| In March 2005, 1,905,136 common shares were issued upon the conversion of $140,000 of convertible debenture as described in note 8 b). |
| Stock Warrants and Options |
The Company has accounted for its stock options and warrants in accordance with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148 "Accounting for Stock - Based compensation - Transition and Disclosure." Value of options granted has been estimated by the Black Scholes option pricing model. The assumptions are evaluated annually and revised as necessary to reflect market conditions and additional experience. The following assumptions were used:
2005 2004
Interest rate 6.5% 6.5%
Expected volatility 7 % 70%
Expected life in years 6 6
In 1999 the Board of Directors of Cintel Korea adopted an option plan to allow employees to purchase ordinary shares of the Cintel Korea.
In August 1999, the share option plan granted 96,000 stock options for the common stock of Cintel Korea having a $0.425 nominal par value each and an exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In 2003, an additional 30,000 stock options were cancelled.
In March 2000, 225,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.68. In 2002, 135,000 and in 2003, an additional 47,000 of these stock options were cancelled.
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
9. Capital Stock(cont'd)
In February 2001, 30,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.72. In 2003, all of these stock options were cancelled.
In March 2003, 65,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.71. In the same year, 15,000 of these stock options were cancelled.
The options vest gradually over a period of 3 years from the date of grant. The term of each option shall not be more than 8 years from the date of grant. No options have vested in the three months ended March 31, 2005 and 2004.
The stock options have not been included in the calculation of the diluted earnings per share as their inclusion would be antidilutive.
The following table summarizes the stock option activity during 2004 and 2003:
20052004
Outstanding, beginning of year 106,000 163,000
Granted - 65,000
Exercised - -
Cancelled - (122,000)
Outstanding, end of year 106,000 106,000
Weighted average fair value of options granted during the year $- $ 54,097
Weighted average exercise price of common stock options, beginning of year $0.62 $ 0.62
Weighted average exercise price of common stock options granted in the year $- $ 0.72
Weighted average exercise price of common stock options, end of year $0.67 $ 0.67
Weighted average remaining contractual life of common stock options 3 years 4 years
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
10. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". This Standard prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The effects of future changes in tax laws or rates are not anticipated. Corporate income tax rates applicable to the Company in 2005 and 2004 are 16.5 percent of the first 100 million Korean Won ($84,000) of taxable income and 29.7 percent on the excess.
Under SFAS No. 109 income taxes are recognized for the following: a) amount of tax payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. The Company has deferred income tax assets arising from research and development expenses. For accounting purposes, these amounts are expenses when incurred. Under Korean tax laws, these amounts are deferred and amortized on a straight-line basis over 5 years.
The Company has deferred income tax assets as follows:
20052004
Deferred income tax assets
Research and development expenses amortized over 5 years for tax purposes$231,788235,827
Other timing differences 155,522 63,594
Net operating loss carryforwards 626,035 300,243
$1,013,345 599,664
11. | Contingent Liabilities and Commitments |
| a) | The Company has entered into a contract with iMimic Networking, Inc. for the use of the iMimic solution within Korea starting November 17, 2000. For the use of this solution, the Company paid $70,000 as an upfront payment and pays a $640 royalty for each product sold that uses the iMimic solution. The Company is also required to pay an annual royalty fee of $10,000. The contract has no fixed termination date. |
| b) | On September 14, 2004, the Company entered into a Standby Equity Distribution Agreement with US-based investment fund Cornell Capital Partners LP. Under the terms of the agreement, Cornell has committed to provide up to $5 million of funding to the Company over a 24 month period, to be drawn down at the Company's discretion through the sale of the Company's common stock to Cornell. As at December 31, 2004, $400,000 has been advanced in the form of convertible debenture as described in note 8 a). In addition, a one-time commitment fee of $240,000 is to be paid to Cornell Capital Partners LP through convertible debenture as described in note 8 b). |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
Results of Operations for three months ended March 31, 2005 compared to three months ended March 31, 2004
3/31/2005 | 3/31/.2004 | |
| Revenue | 126,518 | 306,796 |
| Cost of sales | 111,678 | 298,958 |
| Gross Profit | 14,840 | 7,838 |
| Expenses | 565,179 | 416,442 |
| Operating (Loss) | (550339) | (408,604) |
| Loss Before Income Taxes | (623,729) | (426,305) |
Our decrease in revenue for the first quarter of 2005 as compared to the previous year was primarily attributed to the cancellation of a large e-government project and a downsizing of projects from major customers such as KT and Samsung Electronics. The decrease in cost of sales for the first quarter of 2005 compared to the previously year was primarily attributable to the relative decrease in revenue. However our gross margins increased, due to our ability to maintain our pricing policy more effectively on the deals that we did close. Despite our decrease in revenues, our operating expenses increased. The lack of a relative decrease in expenses as compared to revenues was primarily attributable to the unforeseen cancellation of a Korean e-government project, and management was unable to reduce overhead to compensate for that significant revenue shortfall.
Although management believes the ITM market continues to expand globally, the company's financial performance is down largely due to a lack of diversification in its products and markets, concentrating execution risk unnecessarily on only a handful of large customers. In accordance with the directive of the board of directors, management will use the balance of fiscal year 2005 to expand its products and markets that it participates in going forward. In its core market, Korea, CinTel must better leverage its solid distribution channels and expand the solution portfolio from the single ITM solutions to include more enterprise IT solutions, such as Enterprise Content Management (ECM), Business Intelligence, broadband access solutions and enterprise wireless technologies. We believe these areas will continue to experience growth in the current IT environment. Geographically CinTel will enter the US market with its iCache and PacketCruz product lines, and begin business development of broadband access solutions. Additionally, CinTel will research other markets to enter where we can leverage our distribution channels and product strengths.
Operations for the next twelve months
Our financial plan for the next twelve months depends on important assumptions, most of which are shown in the following table. The key underlying assumptions are:
| § | We assume a slow-growth economy without major recession. |
| § | We assume there are no unexpected discoveries in technology to make our products immediately obsolete. |
| § | We expect the global IT spending environment to remain flat to slightly above this year's levels. |
| § | Nature and Limitation of Projections -This financial projection is based on sales volume at the levels described in the revenue section and presents, to the best of management's knowledge and belief, the company's expected assets, liabilities, capital, revenues, and expenses. The projections reflect management's judgment of the expected conditions and its expected course of action, given the assumptions. |
| § | Revenues - The Company's revenues are derived primarily from the sale of IT solutions to enterprise customers. Revenue projections are based on the 2005 sales in the comparable market nationwide, based on industry average. The exact numbers can be found in the Sales Forecast table and chart section. |
| § | Expenses - The Company's expenses are primarily those of salaries, sales commissions, development costs, operating costs, and administrative costs. Other expenses are based on management's estimates and industry averages. |
| § |
Trends
The ITM market is currently in a rapid transformation from a pure caching appliance environment to a convergence of more enterprise network traffic and application management features such as SSL VPN, Application Acceleration (Web-enabled), WAN optimization, Firewall and Content Security. CinTel must incorporate these functionalities into its current product line to better compete in the marketplace.
Broadband access penetration is rapidly increasing in North America as wireless and Broadband over Powerline (BPL) technologies are being deployed. As these standards are agreed upon, and as the new business models begin to surface broadband access penetration will become ubiquitous and will open up new business opportunities for companies like CinTel and others in this space.
Income/loss elements not a part of regular business operations
Although in the normal course of business there will always be a percentage of receivables that will go uncollected, a significant amount was written off the books this fiscal year. This was due to the downturn in Korea's IT climate that began a few years ago, and these companies were never able to recover from that, and management has conceded and recognized the fact. This is not a symptom of poor vendor qualification.
Liquidity
Although results of this fiscal quarter did not yield a profit, we believe this was due to our concentration of risk on a small number of customers for the majority of our revenues, and not due to any specific weakness in our business opportunity overall in a broader marketplace. Therefore we do not believe reducing expenses to achieve profitability in one single year will help to grow the business in the long run for our shareholders. We anticipate increasing our expenditure to capture market share in the areas we have outlined above will result in a solid base for future growth and profitability.
To execute our current plan for fiscal year2005, we anticipate a cash shortfall of $1.17 million for the year. We intend to execute draw downs to meet this cash requirement on the SEDA with Cornell Capital, LLC. signed on November 13th, 2004. In addition we will continue to seek favorable financing or equity placement as the need arises for mergers and acquisitions and/or ongoing operating costs.
Forward-Looking Statements
Many statements made in this report are forward-looking statements that are not based on historical facts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made.
ITEM 3 - CONTROLS AND PROCEDURES
We have evaluated, with the participation of our Chief Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of March 31, 2005. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our quarterly reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending legal proceedings other than in the normal course of business nor is any of its property subject to pending legal proceedings material to the fiscal well-being of the Company.
Item 2. Changes in Securities and Use of Proceeds.
During the first quarter of 2005, Registrant has not sold securities without registration under the Securities Act of 1933, except as described below.
Securities issued in each of such transaction were offered and sold in reliance upon the exemption from registration under Section 4(2) of the Securities Act, relating to sales by an issuer not involving a public offering. The recipients of the securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and restrictive legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about Registrant or had access, through relationships with Registrant, to information about Registrant.
In January 2005, the Company issued 2,262,424 common shares upon the conversion of $40,000 of convertible debentures.
In February 2005, the Company issued 622,200 common shares upon the conversion of $50,000 of convertible debentures.
In February 2005, 400,000 common shares were issued for consulting services at the value of $44,000.
In March 2005, the Company issued 1,485,120 common shares upon the conversion of $80,000 of convertible debentures.
In March 2005, 1,905,136 common shares were issued upon the conversion of $140,000 of convertible debenture.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
EXHIBIT NUMBER | DESCRIPTION | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.* | |
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.* | |
_______
(b) Reports on Form 8-K.
Not Applicable
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 20, 2005
CINTEL CORP.
By:/s/ Sang Don Kim
Name: Sang Don Kim
Title: Chief Executive Officer
By:/s/ Kyo Jin Kang
Name: Kyo Jin Kang
Title: Principal Financial Officer
Principal Accounting Officer