UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
Form 10-QSB
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
o 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 small business issuer in its charter)
NEVADA (State or other jurisdiction of incorporation or organization) | 52-2360156 (I.R.S. Employer Identification No.) |
9900 Corporate Campus Drive, Suite 3000, Louisville, KY 40223
(Address of principal executive offices)
Issuer’s telephone number: (502) 657-6077
WITH COPIES TO:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 19, 2006, the issuer had 42,879,654 outstanding shares of Common Stock, $.001 par value.
EXPLANATORY NOTE
This quarterly report on Form 10-QSB/A (“Form 10-QSB/A”) is being filed to amend our quarterly report on Form 10-QSB for the fiscal quarter ended March 31, 2006 (the “Original Form 10-QSB”), which was originally filed with the Securities and Exchange Commission (“SEC”) on May 15, 2006 and amended on December 1, 2006. Accordingly, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Form 10-QSB/A contains current dated certifications from the Principal Executive Officer and the Principal Financial Officer. The Form 10-QSB/A is being amended to reflect certain changes in opening retained earnings and comparative figures.
We have not updated the information contained herein for events occurring subsequent to May 15, 2006, the filing date of the Original Form 10-QSB.
Page | |
PART I - FINANCIAL INFORMATION | |
Item 1. Financial Statements | 2 |
Item 2. Management’s Discussion and Analysis or Plan of Operation | 22 |
Item 3. Controls and Procedures | 25 |
PART II - OTHER INFORMATION | |
Item 1. Legal Proceedings | 25 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
Item 3. Defaults Upon Senior Securities | 26 |
Item 4. Submission of Matters to a Vote of Security Holders | 26 |
Item 5. Other Information | 26 |
Item 6. Exhibits | 26 |
SIGNATURES | 28 |
1
Item 1. Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
Cintel Corp.
We have reviewed the accompanying consolidated balance sheet of Cintel Corp. and subsidiaries (the “Company”) as of March 31, 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the nine-month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
“SF PARTNERSHIP, LLP”
Toronto, Canada | CHARTERED ACCOUNTANTS |
May 10, 2006 except as to note 13
which is as of November 13, 2006, and note 14 which is as of February 2, 2007.
2
CINTEL CORP.
Consolidated Balance Sheets
March 31, 2006 and 2005
Restated (note 13) | Restated (note 14) | ||||||
2006 | 2005 | ||||||
ASSETS | |||||||
Current | |||||||
Cash and cash equivalents (note 3) | $ | 1,793,396 | $ | 141,789 | |||
Short term investment | 291,427 | - | |||||
Accounts receivable (net of allowance for doubtful accounts of $1,087,980; 2003 - $972,014) | 3,340,302 | 326,192 | |||||
Inventory (note 4) | 489,017 | 290,032 | |||||
Prepaid and sundry assets | 728,995 | 257,842 | |||||
Loans receivable (note 5) | 154,358 | - | |||||
6,797,495 | 1,015,855 | ||||||
Deferred Financing Fees | - | 60,000 | |||||
Investments (note 7) | 2,624,350 | 49,094 | |||||
Equipment (note 8) | 552,312 | 513,218 | |||||
$ | 9,974,157 | $ | 1,638,167 | ||||
LIABILITIES | |||||||
Current | |||||||
Accounts payable | $ | 2,532,854 | $ | 873,358 | |||
Convertible Debenture | - | 320,000 | |||||
Loans payable - current (note 9) | 666,789 | 1,630,679 | |||||
Shareholder loan | - | 114,079 | |||||
3,199,643 | 2,938,116 | ||||||
Accrued Severance | 74,788 | 125,315 | |||||
Loans Payable (note 9) | 39,121 | 30,538 | |||||
Convertible Debenture (note 10) | 8,853,191 | - | |||||
12,166,743 | 3,093,969 | ||||||
STOCKHOLDERS’ DEFICIENCY | |||||||
Capital Stock (note 11) | 42,379 | 30,324 | |||||
Paid in Capital | 5,351,058 | 4,941,120 | |||||
Treasury Stock | (5,630 | ) | (105,185 | ) | |||
Accumulated Other Comprehensive Income | 257,430 | (65,609 | ) | ||||
Accumulated Deficit | (7,837,823 | ) | (6,256,452 | ) | |||
(2,192,586 | ) | (1,455,802 | ) | ||||
$ | 9,974,157 | $ | 1,638,167 |
3
CINTEL CORP.
Consolidated Statement of Operations
Three Months Ended March 31, 2006 and 2005
Restated (note 13) | Restated (note 14) | ||||||
2006 | 2005 | ||||||
Revenue | |||||||
Merchandise | $ | 2,218,198 | $ | 112,004 | |||
Finished goods | 75,469 | - | |||||
Services | 28,032 | 14,514 | |||||
2,321,699 | 126,518 | ||||||
Cost of Sales | |||||||
Merchandise | 2,137,305 | 111,678 | |||||
Finished goods | 50,724 | - | |||||
2,188,029 | 111,678 | ||||||
Gross Profit | 133,670 | 14,840 | |||||
Expenses | |||||||
Salaries and employee benefits | 182,911 | 148,252 | |||||
Professional fees | 100,667 | 124,351 | |||||
Office and general | 95,914 | 98,650 | |||||
Depreciation | 51,414 | 55,750 | |||||
Travel | 31,425 | 45,394 | |||||
Research and development | 18,641 | - | |||||
Taxes and dues | 121 | 32,782 | |||||
481,093 | 505,179 | ||||||
Operating Loss | (347,423 | ) | (490,339 | ) | |||
Other Expense (Income) | |||||||
Interest and other income | (109,416 | ) | (1,459 | ) | |||
Foreign exchange | (3,344 | ) | - | ||||
Interest expense | 12,073 | 74,849 | |||||
Amortization of deferred financing fees | 30,000 | 60,000 | |||||
(70,687 | ) | 133,390 | |||||
Loss Before Income Taxes | (276,736 | ) | (623,729 | ) | |||
Current | 23,432 | - | |||||
Net Loss | $ | (300,168 | ) | $ | (623,729 | ) | |
Basic Loss per Share | $ | (0.01 | ) | $ | (0.02 | ) | |
Fully Diluted Loss per Share | $ | (0.01 | ) | $ | (0.02 | ) | |
Weighted Average Number of Shares (note 11) | 42,379,354 | 27,692,499 | |||||
Fully Diluted Weighted Average Number of Shares (note 11) | 42,379,354 | 27,692,499 |
4
CINTEL CORP.
Consolidated Statement of Stockholders’ Equity
Three Months Ended March 31, 2006 and 2005
Paid in | Accumulated | |||||||||||||||||||||
Capital in | Other | Restated | Total | |||||||||||||||||||
Number of | Capital | Excess of | Treasury | Comprehensive | Accumulated | Stockholders’ | ||||||||||||||||
Shares | Stock | Par value | Stock | Loss | Deficit | Equity | ||||||||||||||||
Balance, January 1, 2005 | 23,409,800 | $ | 23,409 | $ | 4,573,535 | $ | - | $ | 23,826 | $ | (4,789,132 | ) | $ | (168,362 | ) | |||||||
Adjustment due to restatement (note 14) | - | - | - | - | (91,166 | ) | (843,591 | ) | (934,757 | ) | ||||||||||||
23,409,800 | 23,409 | 4,573,535 | - | (67,340 | ) | (5,632,723 | ) | (1,103,119 | ) | |||||||||||||
Common shares issued for consulting services | 640,000 | 640 | 63,860 | - | - | - | 64,500 | |||||||||||||||
Conversion of convertible debentures into common stock | 4,369,744 | 4,370 | 165,630 | - | - | - | 170,000 | |||||||||||||||
Conversion of convertible debentures into common stock | 1,905,136 | 1,905 | 138,095 | - | - | - | 140,000 | |||||||||||||||
Repurchase of employees’ stock | - | - | - | (105,185 | ) | - | - | (105,185 | ) | |||||||||||||
Foreign exchange on translation | - | - | - | - | 1,731 | - | 1,731 | |||||||||||||||
Net loss | - | - | - | - | - | (623,729 | ) | (623,729 | ) | |||||||||||||
Balance, March 31, 2005 | ||||||||||||||||||||||
- restated (note 14) | 30,324,680 | $ | 30,324 | $ | 4,941,120 | $ | (105,185 | ) | $ | (65,609 | ) | $ | (6,256,452 | ) | $ | (1,455,802 | ) | |||||
Balance, January 1, 2006 | 42,379,354 | $ | 42,379 | $ | 5,351,058 | $ | (5,630 | ) | $ | 121,739 | $ | (6,426,265 | ) | $ | (916,719 | ) | ||||||
Adjustment due to restatement (note 13) | - | - | - | - | (110,755 | ) | (1,111,390 | ) | (1,222,145 | ) | ||||||||||||
42,379,354 | 42,379 | 5,351,058 | (5,630 | ) | 10,984 | (7,537,655 | ) | (2,138,864 | ) | |||||||||||||
Foreign exchange on translation | - | - | - | - | 246,446 | - | 246,446 | |||||||||||||||
Net loss | - | - | - | - | - | (300,168 | ) | (300,168 | ) | |||||||||||||
Balance, March 31, 2006 | ||||||||||||||||||||||
- restated (note 13) | 42,379,354 | $ | 42,379 | $ | 5,351,058 | $ | (5,630 | ) | $ | 257,430 | $ | (7,837,823 | ) | $ | (2,192,586 | ) |
5
CINTEL CORP.
Consolidated Statement of Cash Flows
Three Months Ended March 31, 2006 and 2005
Restated (note 13) | Restated (note 14) | ||||||
2006 | 2005 | ||||||
Cash Flows from Operating Activities | |||||||
Net loss | $ | (300,168 | ) | $ | (623,729 | ) | |
Adjustments for working capital and non-cash items: | |||||||
Depreciation | 51,414 | 55,750 | |||||
Amortization of financing fees | 30,000 | 75,380 | |||||
Common stock issued for consulting services | - | 64,500 | |||||
Net Changes in Assets & Liabilities | |||||||
Accounts receivable | (2,269,479 | ) | 272,019 | ||||
Inventory | (23,273 | ) | 7,337 | ||||
Prepaid and sundry assets | (353,849 | ) | 12,605 | ||||
Accounts payable | 1,682,146 | 45,000 | |||||
Accrued severance | 2,781 | 2,345 | |||||
(1,180,428 | ) | (88,793 | ) | ||||
Cash Flows from Investing Activities | |||||||
Short term investments | (290,354 | ) | - | ||||
Loans receivable | (153,789 | ) | - | ||||
Acquisition of equipment, net | (1,244 | ) | (356 | ) | |||
(445,387 | ) | (356 | ) | ||||
Cash Flows from Financing Activities | |||||||
Payments of deferred financing fees | - | (240,000 | ) | ||||
Proceeds from loans payable | - | (77,342 | ) | ||||
Proceeds from convertible debenture - net | - | (20,000 | ) | ||||
Advances from shareholder loan | - | 81,144 | |||||
Proceeds from common shares issued for repayment of convertible debenture | - | 310,000 | |||||
Repurchase of employees’ stocks | - | (105,185 | ) | ||||
Loans payable | (9,517 | ) | - | ||||
(9,517 | ) | (51,383 | ) | ||||
Foreign Exchange on Cash and Cash Equivalents | (60,721 | ) | 934 | ||||
Net Decrease in Cash and Cash Equivalents | (1,696,053 | ) | (139,598 | ) |
Cash and Cash Equivalents - beginning of year | 3,489,449 | 281,387 | |||||
Cash and Cash Equivalents - end of year | $ | 1,793,396 | $ | 141,789 | |||
During the year, the company had cash flows arising from interest and income taxes paid as follows: | |||||||
Interest paid | $ | 12,073 | $ | 51,469 | |||
Income taxes paid | $ | 23,432 | $ | - |
6
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
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.
c) | Unit of Measurement |
The US Dollar has been used as the unit of measurement in these financial statements.
7
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
2. | Summary of Significant Accounting Policies (cont’d) |
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 includes currency, cheques issued by others, other currency equivalents, current deposits and passbook deposits. Cash equivalents include securities and short-term money market instruments that can be easily converted into cash. The investments that mature within three months from the investment date, are also included as cash equivalents.
g) | Investments |
Investments in available-for-sale securities are 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 when it is readily determinable, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity.
Investments subject to significant influence have been recorded using the equity method.
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.
8
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
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.
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.
9
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
2. Summary of Significant Accounting Policies (cont’d)
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 December 2004, the FASB issued a revision to SFAS No. 123, “Share-Based Payment” (Statement 123). 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.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154). Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 requires retrospective application of any change in accounting principle to prior periods’ financial statements. Statement No. 154 is effective for the first fiscal period beginning after December 15, 2005. We do not expect the implementation of Statement No. 154 to have a significant impact on our consolidated financial statements.
10
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
3. | Cash and Cash Equivalents |
In 2005, the company provided $136,738 as security for one of the bank loans as described in note 9. As at March 31, 2005, the amount of loan outstanding was $615,321. In 2006, the bank loan was repaid.
4. | Inventory |
Inventory includes $334,705 (2005 - $18,752) of merchandise and $154,312 (2005 - $271,280) of raw materials.
5. | Loans Receivable |
Loans receivable are comprised of the following;
2006 | 2005 | ||||||
Loan receivable #1 | $ | 51,450 | $ | - | |||
Loan receivable #2 | 102,908 | - | |||||
$ | 154,358 | $ | - |
Loan receivable #1 to a private Korean company is non-interest bearing and matures on May 12, 2006. The loan is due on demand and secured by a personal guarantee and the shares of the chief executive officer of the indebted company.
Loan receivable #2 to the chief executive officer of the indebted company per loan receivable #1 bears interest at 6% per annum, and is due on demand. The loan is secured by 100% of the shares of a new private company incorporated in March 2006.
11
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
6. | 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 Korean subsidiary in 2006 and 2005 are 16.5 percent of the first 100 million Korean Won ($84,000) of taxable income and 29.7 percent on the excess. For the United States operation, the corporate tax rate is approximately 34%. The company provided a valuation allowance equal to the deferred tax amounts resulting from the tax losses in the United States, as it is not more likely than not that they will be realized. Tax losses from the Korean subsidiary can be carried forward for five years to offset future taxable income. The U.S. tax losses can be carried forward for fifteen years to offset future taxable income. The company has accumulated approximately $7,054,794 of taxable losses, which can be used to offset future taxable income. The utilization of the losses expires in years 2008 to 2010.
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:
Restated | Restated | ||||||
2006 | 2005 | ||||||
Deferred income tax assets | |||||||
Research and development expenses amortized over 5 years for tax purposes | $ | 258,646 | 231,788 | ||||
Other timing differences | (53,810 | ) | 155,522 | ||||
Net operating loss carryforwards | 1,799,654 | 626,035 | |||||
2,004,490 | 1,013,345 | ||||||
Valuation Allowance (note 13 and note 14) | (2,004,490 | ) | (1,013,345 | ) | |||
$ | - | - |
12
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
7. | Investments Available for Sale |
2006 | 2005 | ||||||
Stock #1 | $ | 2,572,624 | $ | - | |||
Stock #2 | 51,453 | 48,835 | |||||
Other miscellaneous | 273 | 259 | |||||
$ | 2,624,350 | $ | 49,094 |
Stock #1 represents 500,000 shares, 20% ownership in a private Korean company. As the financial statement of the investee are not readily available, income from the investment has not been recorded.
Stock #2 represents a minority interest in a private Korean company which is carried at cost.
8. | Equipment |
Equipment is comprised as follows:
2006 | 2005 | ||||||||||||
Accumulated | Accumulated | ||||||||||||
Cost | Depreciation | Cost | Depreciation | ||||||||||
Furniture and fixtures | 69,725 | 33,757 | 38,484 | 25,494 | |||||||||
Equipment | 882,442 | 642,223 | 640,866 | 522,833 | |||||||||
Vehicles | 17,281 | 864 | 15,117 | 15,115 | |||||||||
Software | 715,833 | 456,125 | 674,467 | 292,274 | |||||||||
$ | 1,685,281 | $ | 1,132,969 | $ | 1,368,934 | $ | 855,716 | ||||||
Net carrying amount | $ | 552,312 | $ | 513,218 |
13
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
9. | Loans Payable |
2006 | 2005 | ||||||||||||
Current | Long-term | Total | Total | ||||||||||
Bank loan | $ | 617,430 | $ | - | $ | 617,430 | $ | 1,220,875 | |||||
Promissory Note | 39,000 | - | 39,000 | 39,000 | |||||||||
Note payable | 6,380 | - | 6,380 | 309,790 | |||||||||
Government loans | - | 40,589 | 40,589 | 100,891 | |||||||||
Discount of interest-free government loans | - | (8,415 | ) | (8,415 | ) | (9,339 | ) | ||||||
Vehicle Loan | 3,979 | 6,947 | 10,926 | - | |||||||||
$ | 666,789 | $ | 39,121 | $ | 705,910 | $ | 1,661,217 |
Bank Loan
The bank loan bears interest at 7.5% and matures in December 2006. The loan is repayable upon maturity and guaranteed by the Korea Credit Guaranteed Fund for $524,816.
Promissory Note
The promissory note is non-interest bearing, unsecured, and due on demand.
Note Payable
The note payable is non-interest bearing and due on August 24, 2006.
Government Loan
The loan is non-interest bearing, unsecured, repayable in annual payments of $10,143 and matures in October 2009.
Vehicle Loan
The loan is interest bearing, secured by the vehicle as disclosed in note 8, and is repayable in 36 monthly installments of $331. The loan matures in December 2008.
14
CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
10. | 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.
The convertible debentures outstanding as at March 31, 2006 are unsecured and non-interest bearing. The debenture holders have sixteen months from the date of their agreements (the conversion date) to convert their debentures into common stock of the company. Balances outstanding after the conversion date are repayable twenty months after the conversion date (or thirty six months after the date of the agreements).
Conversion | Conversion | ||||||||||||
Price | Date | Maturity date | Amount | ||||||||||
Convertible note #1 | $ | 0.35 | 6/15/2007 | 12/15/2008 | $ | 492,800 | |||||||
Convertible notes #2 | 0.04 | 4/17/2007 | 10/17/2008 | 440,000 | |||||||||
Convertible notes #3 | 0.14 | 4/17/2007 | 10/17/2008 | 2,161,334 | |||||||||
Convertible note #4 | 0.35 | 5/17/2007 | 11/17/2008 | 5,759,057 | |||||||||
Total | $ | 8,853,191 |
The two convertible debentures outstanding at March 31, 2005 had an annual coupon rate of 12% and 5%. The convertible debentures were repaid in 2005.
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
11. | Capital Stock |
Authorized
300,000,000 common shares, par value $0.001 per share
2006 | 2005 | ||||||
Issued | |||||||
42,379,354 common shares (2005 - 30,324,680) | $ | 42,378 | $ | 30,324 |
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 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 placed in escrow for future conversion to repay the convertible debt. |
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
11. | Capital Stock (cont’d) |
In November 2004, the Company issued 412,286 common shares from escrow upon the conversion of $20,000 of the convertible debentures. |
In December 2004, the Company issued 1,763,214 common shares from escrow upon the conversion of $40,000 of the convertible debentures. |
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 from escrow upon the repayment of $40,000 of the convertible debenture. |
In February 2005, the Company issued 622,200 common shares from escrow upon the repayment of $50,000 of the 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 from escrow upon the repayment of $80,000 of the convertible debenture. |
In March 2005, the Company repurchased 93,830 common shares for $105,259. The excess of repurchase price over fair market value was recorded as an employee benefit. |
In March 2005, 1,905,136 common shares were issued upon the conversion of $140,000 of convertible debenture. |
In April 2005, the Company issued 1,311,769 common shares from escrow upon the repayment of $40,000 of the convertible debenture. |
In April 2005, 1,200,000 common shares were issued for consulting services at the value of $48,000. |
In April 2005, 712,500 common shares were issued upon the conversion of $20,000 of convertible debenture. |
In May 2005, 1,329,346 common shares were issued upon the conversion of $50,000 of convertible debenture. |
In May 2005, the Company issued 2,333,551 common shares from escrow upon the repayment of $70,000 of the convertible debenture. |
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
11. Capital Stock (cont’d)
In June 2005, 150,000 common shares were issued for consulting services at the value of $4,500. |
In June 2005, the Company issued 3,268,031 common shares from escrow upon the repayment of $80,000 of the convertible debenture. |
In July 2005, the Company issued 704,225 common shares from escrow upon the repayment of $20,000 of the convertible debenture. |
In September 2005, 500,000 common shares were issued for consulting services at the value of $15,000. |
In October 2005, 400,000 common shares were issued for consulting services at the value of $36,000. |
In December 2005, the Company issued 145,252 common shares for the repayment of $38,492 of the convertible debenture including interest. |
The balance of shares held in escrow in March 2006 of 10,837,180 was returned to the company. |
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:
2006 | 2005 | ||||||
Interest rate | 6.5 | % | 6.5 | % | |||
Expected volatility | 70 | % | 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.
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
11. | 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 during the year ended December 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 2006 and 2005:
2006 | 2005 | ||||||
Outstanding, beginning of year | 106,000 | 106,000 | |||||
Exercised | - | - | |||||
Cancelled | - | - | |||||
Outstanding, end of year | 106,000 | 106,000 | |||||
Weighted average fair value of options granted during the year | $ | - | $ | - | |||
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 | $ | - | $ | - | |||
Weighted average exercise price of common stock options, end of year | $ | 0.67 | $ | 0.67 | |||
Weighted average remaining contractual life of common stock options | 1 years | 2 years |
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
12. | 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) | The Company is committed to office spaces’ leases obligations which expires in December 2006 and February 2007. Future minimum annual payments (exclusive of taxes and insurance) under the leases are as follows: |
2006 | $ | 72,097 | ||
2007 | 2,000 | |||
$ | 74,097 |
Rent expenses paid in 2006 and 2005 were $ 36,731 and $28,288 respectively. |
c) | 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. No amount was outstanding as at March 31, 2006 ($240,000-2005). |
13. | Restatement of the Previously Issued Consolidated Financial Statements |
On further consideration, the Company determined that at March 31, 2006 it was not more likely than not that deferred tax benefits would be realized, therefore, the Company provided a 100% valuation allowance against the deferred tax assets.
The effects of this restatement are to increase the valuation allowance to $2,004,490 from $657,039 (note 6); to decrease the deferred tax assets on the consolidated balance sheets to nil from $1,347,451 (comprised of $10,851 current and $1,336,599 long term); and to decrease the deferred income taxes recoverable to nil from $78,473 on the consolidated income statements.
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CINTEL CORP.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005.
14. | Restatement of Comparative Figures |
On further consideration, the Company determined that at March 31, 2005 it was not more likely than not that deferred tax benefits would be realized, therefore, the Company provided a 100% valuation allowance against the deferred tax assets.
The effects of this restatement are to increase the valuation allowance to $1,013,345 from nil (note 6); to decrease the deferred tax assets on the 2005 comparative consolidated balance sheets to nil from $1,013,345 (comprised of $213,470 current and $799,875 long term); and to decrease the deferred income taxes recoverable from $77,314 to an expense of nil on the 2005 comparative consolidated income statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this quarterly report on Form 10-QSB contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements of Cintel Corp. (referred to herein as the “Company,” “we,” “us,” and “our”) included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
OVERVIEW
Management believes the Internet Traffic Management (“ITM”) market continues to expand globally in the near future due to an increase in Web-based applications, server based applications and more process intensive applications in Web-based interfaces in the market. The Company can expect to show additional revenue in the coming quarters with the strong relationships it has established with its enterprise level customers. In accordance with the directive of the Company’s Board of Directors, management will use the balance of fiscal year 2006 to expand its products and markets. In the Korean market, the Company plans to leverage its alliance with Hyundai HDS and expand the solution portfolio from the single ITM solutions to include more enterprise IT solutions, including security products with Hyundai HDS. We believe this partnership with HDS will continue to enable growth for the Company in the current IT environment. The Company is also taking steps to establish several business partnerships in the United States. Additionally, the Company plans to study other markets to enter where management believes the Company will be able to leverage its distribution channels and product strengths.
The Company has selected “digital content with ITM” as a new target market and plans to launch an online game business in 2006 to help boost sales and secure growth within the Company. In December 2005 we applied for a game server patent that will be used to manage traffic of online game servers. Our strategy for online gaming is not to develop online games but to enter the online game market by a potential acquisition of an online Korean game company. As CinTel positions itself as an online game publisher CinTel plans to expand into China, Japan, other Asian countries, Europe and North America with additional licensing of qualified Korean online games.
RESULTS OF OPERATIONS
(Unit: USD) | |||||||
3/31/2006 | 3/31/2005 | ||||||
Revenue | 2,321,699 | 126,518 | |||||
Cost of sales | 2,188,029 | 111,678 | |||||
Gross Profit | 133,670 | 14,840 | |||||
Expenses | 481,093 | 505,179 | |||||
Operating (Loss) | (347,423 | ) | (490,339 | ) | |||
Loss Before Income Taxes | (276,736 | ) | (623,729 | ) |
Cost of sales also increased significantly from $111,678 in the first quarter of 2005 to $2,188,029 in the first quarter of 2006, and gross profit increased from $14,840 in the first quarter of 2005 to $133,670 in the first quarter of 2006. The increase in cost of sales and gross margins for the first quarter of 2006 compared to the previous year was primarily attributable to the relative increase in revenue. While revenue increased 1,735% the actual gross profit only increased by 801%. This was due to the fact that some items in the transactions were third party equipment with less gross margin that our product line and thus there was less profit on their sale.
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Despite our increase in revenues, our operating expenses decreased. Total expenses for the first quarter of 2006 and 2005 totaled approximately $0.48 million and approximately $0.51 million, respectively, resulting in a decrease of 5%. The decrease in total expenses was primarily due to a reduction of fixed charges through restructuring that mainly applied to sales and services related to human resources within the Company. These changes included reduction in staff, reductions in entertainment fees, reductions in travel expenses and reductions in office equipment purchases.
The operating loss for the first quarter of 2006 and 2005 totaled $0.35 million and $0.49 million respectively due primarily to the increase of gross profit and decrease of expenses discussed above. Total loss before income taxes the first quarter of 2006 and 2005 totaled $0.28 million and $0.62 million respectively due to the increase of interest and other income and decrease of interest expense.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, CinTel had cash and cash equivalents totaling $1.79 million. At March 31, 2006, the Company had a working capital surplus of $3,608,697 and an accumulated deficit of $6,647,960. Management believes it has the resources necessary to maintain its current business operations for at least twelve months from the date this report was filed.
CASH FLOWS FROM OPERATING ACTIVITIES
During the first quarter of 2006, cash flow from operating activities had a net reduction of approximately $1.18 million. The main reason for this reduction of cash is attributable to the increase of accounts receivable, inventory, advance payments in spite of the decrease net loss. Almost all the accounts receivable occurred in the first quarter and will be collected to the next quarter. So, the company expects that cash flow will improve in the next quarter. Inventory and Advanced payments were increased by more “just in time” ordering of technology parts for equipment.
CASH FLOWS FROM INVESTING ACTIVITIES
During the first quarter of 2006, cash flow from investing operating activities had a net reduction approximately $0.45 million where we had no numbers in 2005. The main reason for this reduction of cash is attributable to the increase of the Short term investments and Loans receivable. The Short term investments could be disposed at any time in marketing aspect and the Loans the receivable collected sooner or later.
CASH FLOWS FROM FINANCING ACTIVITIES
During the first quarter of 2006, cash flow from financing activities had a net reduction approximately $9,517. During the first quarter of 2006 we had limited cash flows from financing activities.
BUSINESS TRENDS
The ITM market is currently undergoing 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. The Company must incorporate these functions into its current product line to better compete in the marketplace.
Wireless ISP market access penetration is rapidly increasing in North America as wireless and broadband technologies are being deployed. As the 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 the Company and others in this space.
The Korean game industry is quit unique in the world market. According to our research the market share of Korean video games, which are strong in the USA and Japan, is just 3.8% and ranked as 8th in the world. But the global market share of Korean online games is almost 70% (including exports to oversea markets like Japan and China) and 100 million users in over 33 countries are enjoying Korean online games. (Source: News clipping of Daily Sports (“Ilgan Sports”), 10-25-2005)
Online gaming is strong in Asian countries like Korea, Taiwan and China, but the online game market in the USA and Japan is expected to grow gradually as broadband services are becoming affordable and available. Current online game market in USA relies on business model of advertisement, sponsor and e-commerce through casual gaming portal site. (Source: A Study On Global Digital Contents - game by KIPA (Korea IT Industry Promotion Agency 2003). According to our research it is expected that the USA online game market will grow to as much as $2.6 billion by the year 2007. (Source: 10/2003: Datamonitor, `Global Online games’ 7/2002, IDC, Online game forecast 2002-2007). And the online game market in Europe is also expected to grow gradually as broadband is becomes more popular.
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ALLOWANCE FOR CREDIT LOSS
The allowance for credit losses is management’s estimate of incurred losses in our customer and commercial accounts receivables. Management performs detailed review of individual portfolios to determine if an impairment has occurred and to assess the adequacy of the allowance for credit losses, based on historical and current trends and other factors affecting credit losses. When receivables are past due for a period exceeding 2 years, a 100% allowance for credit losses is established without an individual analysis of the customer. A 100% allowance for credit losses is established, in an amount determined to be uncollectible, for the customer whom is not discontinuing operations or is facing financial issues that could result in discontinuance of business based on the assumptions management believes are reasonably likely to occur in future.
On December 31, 2005, the allowance for credit losses was $1,048,068 of $2,071,528 in accounts receivables and on December 31, 2004, the allowance for credit losses was $970,421 of $1,565,712 of accounts receivables. The allowance for credit losses in 2005 saw an increase of $77,647 (8%) compared to 2004. The $970.421 allowance was established for credit losses as of December 31, 2004, for 100% credit losses of more than 2 years. The increasing of allowances for credit losses as of December 31, 2005 was primarily due to receivables which occurred in 2003. We established a 100% allowance for credit losses for the receivables of more than 2 years and for customers who have an impairment of capital assets, are discontinuing business operations or are suffering from bad cash flow and liquidity issues. The accounts receivables older than 2 years were incurred because of national economic issues in the Korean market with changing many management situations, with bankrupt companies and bad cash flow of many companies in Korea beginning in 2000. Our credit losses ratio is moderately high but we expect a decrease of credit losses ratio in future as most Korean companies have restructured to establish more stable organizations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Allowance for Credit Loss - The allowance for credit losses is management’s estimate of incurred losses in our customer and commercial accounts receivables. Management performs detailed review of individual portfolios to determine if an impairment has occurred and to assess the adequacy of the allowance for credit losses, based on historical and current trends and other factors affecting credit losses. When receivables are past due for a period exceeding 2 years, a 100% allowance for credit losses is established without an individual analysis of the customer. A 100% allowance for credit losses is established, in an amount determined to be uncollectible, for the customer whom is not discontinuing operations or is facing financial issues that could result in discontinuance of business based on the assumptions management believes are reasonably likely to occur in future.
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On December 31, 2005, the allowance for credit losses was $1,048,068 of $2,071,528 in accounts receivables and on December 31, 2004, the allowance for credit losses was $970,421 of $1,565,712 of accounts receivables. The allowance for credit losses in 2005 saw an increase of $77,647 (8%) compared to 2004. The $970.421 allowance was established for credit losses as of December 31, 2004, for 100% credit losses of more than 2 years. The increasing of allowances for credit losses as of December 31, 2005 was primarily due to receivables which occurred in 2003. We established a 100% allowance for credit losses for the receivables of more than 2 years and for customers who have an impairment of capital assets, are discontinuing business operations or are suffering from bad cash flow and liquidity issues. The accounts receivables older than 2 years were incurred because of national economic issues in the Korean market with changing many management situations, with bankrupt companies and bad cash flow of many companies in Korea beginning in 2000. Our credit losses ratio is moderately high but we expect a decrease of credit losses ratio in future as most Korean companies have restructured to establish more stable organizations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision to SFAS No. 123, “Share-Based Payment” (Statement 123). 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.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154). Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 requires retrospective application of any change in accounting principle to prior periods’ financial statements. Statement No. 154 is effective for the first fiscal period beginning after December 15, 2005. We do not expect the implementation of Statement No. 154 to have a significant impact on our consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.
Exhibit Number | Description | |
4.1 | Standby Equity Distribution Agreement, dated August 4, 2004, between Cornell Capital Partners, L.P. and the Company (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-119002), filed with the Securities and Exchange Commission on September 15, 2004) | |
4.2 | $240,000 principal amount Compensation Debenture, due August 4, 2007, issued to Cornell Capital Partners, L.P., in connection with the Standby Equity Distribution Agreement (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-119002), filed with the Securities and Exchange Commission on September 15, 2004) | |
4.3 | Convertible Note in the principal amount of $40,000 issued to Sang Yong Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2005) | |
4.4 | Convertible Note in the principal amount of $400,000 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2005) | |
4.5 | Convertible Note in the principal amount of $9,640 issued to Meung Jun Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.6 | Convertible Note in the principal amount of $28,930 issued to Jin Yong Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.7 | Convertible Note in the principal amount of $48,300 issued to Su Jung Jun (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.8 | Convertible Note in the principal amount of $48,300 issued to Se Jung Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.9 | Convertible Note in the principal amount of $48,300 issued to Sun Kug Hwang (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.10 | Convertible Note in the principal amount of $192,864 issued to Woo Young Moon (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.11 | Convertible Note in the principal amount of $336,000 issued to Joo Chan Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) |
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4.12 | Convertible Note in the principal amount of $483,000 issued to Sang Ho Han (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.13 | Convertible Note in the principal amount of $483,000 issued to Jun Ro Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.14 | Convertible Note in the principal amount of $483,000 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005) | |
4.15 | Convertible Note in the principal amount of $2,082,500 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.16 | Convertible Note in the principal amount of $280,000 issued to Joo Chan Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.17 | Convertible Note in the principal amount of $281,065 issued to Sang Yong Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.18 | Convertible Note in the principal amount of $246,400 issued to JungMi Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.19 | Convertible Note in the principal amount of $59,172 issued to Sung Min Chang (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.20 | Convertible Note in the principal amount of $246,400 issued to Eun Suk Shin (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.21 | Convertible Note in the principal amount of $492,800 issued to Overnet Co., Ltd. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.22 | Convertible Note in the principal amount of $98,620 issued to Yeun Jae Jo (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.23 | Convertible Note in the principal amount of $985,950 issued to Equinox Partners Inc. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.24 | Convertible Note in the principal amount of $788,950 issued to Kei Wook Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005) | |
4.25 | Convertible Note in the principal amount of $492,800 issued to Seok Kyu Hong (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2005) | |
4.26 | Convertible Note in the principal amount of $197,200 issued to Moon Soo Park (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2005) | |
10.1 | Distribution Agreement dated March 15, 2006 among Cintel Corp. and InterSpace Computers, Inc. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2006) | |
31.1* | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
31.2* | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
32.1* | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
32.2* | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code |
* Filed Herewith
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
Dated: February 9, 2007 | By: | /s/ Sang Don Kim |
Sang Don Kim | ||
Chief Executive Officer |
Dated: February 9, 2007 | By: | /s/ Kyo Jin Kang |
Kyo Jin Kang | ||
Principal Financial Officer and Principal Accounting Officer |
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