Chun Can Capital (CNCN) 10QSB 2007 Q2 Quarterly report (small business)

CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2007, AND 2006 (RESTATED)

(UNAUDITED)

CONTENTS

Consolidated Balance Sheets	4

Consolidated Statements of Operations and Comprehensive (Loss)	5

Consolidated Statements of Stockholders’ Equity	6

Consolidated Statements of Cash Flows	7

Notes to Consolidated Financial Statements	8 - 30

CINTEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2007, and 2006
(Unaudited)

				Restated
				(Note 15)
	2007			2006
ASSETS

Current Assets:
Cash and cash equivalents (Note 3)	$	30,006,969		$	1,395,406
Investments in trading securities		-			175,051
Accounts receivable - Trade (Less - Allowance for doubtful accounts of $1,349,132; 2006 - $1,114,358)		8,400,723			1,636,762
Inventory (Note 4)		7,260,091			557,326
Prepaid and other current assets		1,484,243			813,401
Current portion - Loans receivable (Note 5)		1,755,004			158,100
Deferred financing costs		4,142,290			-

Total Current Assets		53,049,320			4,736,046

Property, Plant and Equipment, net (Note 8)		30,298,614			509,893

Other Assets:
Loans receivable - Less current portion (Note 5)		153,909			-
Investments (Note 7)		42,072,228			1,920,936
Investments in Available for Sale Securities		-			16,977
Land Rights (Note 9)		344,610			-
Goodwill		11,795,619			-

Total Other Assets		54,366,366			1,937,913

Total Assets	$	137,714,300		$	7,183,852

LIABILITIES

Current Liabilities:
Accounts payable - Trade	$	13,238,486			1,368,723
Deferred revenue (Note 15b)		-			136,412
Tenant deposit		75,740			-
Current portion - Loans payable (Note 10)		16,803,643			43,076

Total Current Liabilities		30,117,869			1,548,211

Long-Term Debt:
Accrued Severance		109,951			83,314
Loans payable, less current portion (Note 10)		3,545,218			39,051
Convertible Debentures (Note 11)		91,024,295			-

Total Long-Term Debt		94,679,464			122,365

Total Liabilities		124,797,333			1,670,576

Non-Controlling Interest		8,783,666			-

Commitments and Contingencies (Note 14)

STOCKHOLDERS' EQUITY

Common Stock (Note 12):
Authorized-
300,000,000 Common shares; par value $0.001 per share
Issued-
89,124,896 Common shares (87,179,896 in 2006)		89,124			87,179
Additional Paid-in Capital		14,755,903			14,249,448
Less - Treasury Stock		(5,630	)		(5,630	)
Accumulated Other Comprehensive (Loss) Income		481,814			(322,346	)
Accumulated (Deficit)		(11,187,910	)		(8,495,375	)

Total Stockholders' Equity		4,133,301			5,513,276

Total Liabilities and Stockholders' Equity	$	137,714,300		$	7,183,852

(The accompanying notes are an integral part of these consolidated financial statements.)

CINTEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive (Loss)
Three Months and Six Months Ended June 30, 2007, and 2006
(Unaudited)

				Restated						Restated
				(Note 15)						(Note 15)
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006
Revenues:
Finished goods	$	30,145,254		$	57,660		$	46,630,171		$	88,049
Merchandise		325			1,332,523			211,771			3,681,954
Services		986,232			21,118			987,210			49,150

Total Revenues		31,131,811			1,411,301			47,829,152			3,819,153

Cost of Revenues:
Finished goods		28,642,582			24,492			44,803,492			61,985
Merchandise		316			1,267,195			207,955			3,531,625
Services		620,310			-			620,310			-

Total Cost of Revenues		29,263,208			1,291,687			45,631,757			3,593,610

Gross Profit		1,868,603			119,614			2,197,395			225,543

Expenses:
General and administrative		1,703,890			546,661			2,119,998			954,355
Research and development		5			250			10,635			18,891
Depreciation and amortization		111,321			57,502			211,718			108,916

Total Expenses		1,815,216			604,413			2,342,351			1,082,162

Income (Loss) from Operations		53,387			(484,799	)		(144,956	)		(856,619	)

Other Income (Expense):
Interest and other income		132,824			33,799			266,173			143,215
Interest (expense) and amortization of deferred financing fees		(792,221	)		(40,414	)		(1,135,373	)		(82,487	)
Loss on disposal of equipment		-			-			-			-
Share of (loss) income from equity investment		(433,645	)		16,260			(433,645	)		16,260

Total Other Income (Expense)		(1,093,042	)		9,645			(1,302,845	)		76,988

(Loss) Before Income Taxes and Non-Controlling Interest		(1,039,655	)		(475,154	)		(1,447,801	)		(779,631	)
Income taxes - Current (Note 6)		(8,313	)		(20,625	)		(8,313	)		(44,057	)
Non-Controlling Interest		(341,163	)		-			(274,254	)		-

Net (Loss)		(1,389,131	)		(495,779	)		(1,730,368	)		(823,688	)

Comprehensive Income (Loss):
Foreign currency translation		917,356			148,073			869,698			389,239

Total Comprehensive (Loss) before
Non-Controlling Interest		(471,775	)		(347,706	)		(860,670	)		(434,449	)

Foreign Currency Translation
Adjustment - Non-Controlling Interest		221,046			-			217,078			-

Total Comprehensive Income (Loss)	$	(250,729	)	$	(347,706	)	$	(643,592	)	$	(434,449	)

Basic and Diluted (Loss) per Share (Note 16)	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.01	)

Weighted Average Number of Shares Outstanding
During the Periods - Basic and Diluted		88,791,563			57,562,868			88,319,063			49,971,111

(The accompanying notes are an integral part of these consolidated financial statements.)

CINTEL CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Periods Ended June 30, 2007 and 2006

(Unaudited)

										Cumulative
					Additional					Other						Total
	Number		Capital		Paid-in		Treasury			Comprehensive			Accumulated			Stockholders'
	of Shares		Stock		Capital		Stock			Loss			Deficit			Equity
Balance, January 1, 2006		42,379,354	$	42,378	$	5,351,058	$	(5,630	)	$	121,739		$	(7,269,855	)	$	(1,760,310	)
Adjustment due to restatement (note 18)		-		-		-		-			(110,755	)		(267,801	)		(378,556	)
Adjustment due to restatement (note 18)		-		-		-		-			(2,032	)		(134,026	)		(136,058	)

		42,379,354		42,378		5,351,058		(5,630	)		8,952			(7,671,682	)		(2,274,924	)
Foreign currency translation adjustment		-		-		-		-			241,166			-			241,166
Net loss for the period		-		-		-		-			-			(221,695	)		(221,695	)
Adjustment due to restatement (note 18a)		-		-		-		-			-			(78,472	)		(78,472	)
Adjustment due to restatement (note 18b)		-		-		-		-			-			(27,743	)		(27,743	)

Balance, March 31, 2006		42,379,354		42,378		5,351,058		(5,630	)		250,118			(7,999,592	)		(2,361,668	)

Balance, March 31, 2006		42,379,354		42,378		5,351,058		(5,630	)		250,118			(7,999,592	)		(2,361,668	)
Unrealized loss on investment (note 7)		-		-		-		-			(720,536	)		-			(720,536	)
Common shares issued for consulting services (note 14)		500,000		500		89,500		-			-			-			90,000
Conversion of convertible debenture into common stock (note 13)		44,300,542		44,301		8,808,890		-			-			-			8,853,191
Foreign currency translation		-		-		-		-			148,072			-			148,072
Net loss for the period		-		-		-		-			-			(365,459	)		(365,459	)
Adjustment due to restatement (note 18a)		-		-		-		-			-			(166,195	)		(166,195	)
Adjustment due to restatement (note 18b)		-		-		-		-			-			35,871			35,871

Balance, June 30, 2006		87,179,896	$	87,179	$	14,249,448	$	(5,630	)	$	(322,346	)	$	(8,495,375	)	$	5,513,276

Balance, January 1, 2007		87,619,896	$	87,619	$	14,319,408	$	(5,630	)	$	(170,806	)	$	(9,343,747	)	$	4,886,844
Adjustment due to restatement (note 18)		-		-		-		-			-			(113,795	)		(113,795	)

		87,619,896		87,619		14,319,408		(5,630	)		(170,806	)		(9,457,542	)		4,773,049
Common shares issued for consulting services (note 14)		580,000		580		98,020		-			-			-			98,600
Common shares issued for employee remuneration (note 14)		100,000		100		19,900		-			-			-			20,000
Foreign currency translation adjustment		-		-		-		-			(43,690	)		-			(43,690	)
Net loss for the period		-		-		-		-			-			(455,032	)		(455,032	)
Adjustment due to restatement (note 18)		-		-		-		-			-			113,795			113,795

Balance, March 31, 2007		88,299,896		88,299		14,437,328		(5,630	)		(214,496	)		(9,798,779	)		4,506,722

Balance, March 31, 2007		88,299,896		88,299		14,437,328		(5,630	)		(214,496	)		(9,798,779	)		4,506,722
Common shares issued for consulting services (note 14)		825,000		825		318,575		-			-			-			319,400
Foreign currency translation		-		-		-		-			696,310			-			696,310
Net loss for the period		-		-		-		-			-			(1,389,131	)		(1,389,131	)

Balance, June 30, 2007		89,124,896		89,124		14,755,903		(5,630	)		481,814			(11,187,910	)		4,133,301

(The accompanying notes are an integral part of these consolidated financial statements.)

CINTEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2007, and 2006
(Unaudited)

				Restated
				(Note 15)
	Six Months			Six Months
	Ended			Ended
	June 30,			June 30,
	2007			2006

Cash Flows from Operating Activities:
Net (loss)	$	(1,730,368	)	$	(823,688	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		2,360,922			108,916
Amortization of financing fees		-			60,000
Common stock issued for consulting services and employee remuneration		438,000			45,000
Share of income from equity investment		-			(16,260	)
Net changes in assets and liabilities-
Accounts receivable - Trade		(2,780,030	)		(502,992	)
Inventory		(1,605,501	)		(81,026	)
Prepaid and other current assets		(415,619	)		(384,841	)
Accounts payable - Trade		5,074,131			353,173
Deferred revenue		(113,795	)		355
Accrued severance		12,547			9,645
Tenant deposit		75,740			-

Net Cash Provided by (Used in) Operating Activities		1,316,027			(1,231,718	)

Cash Flows from Investing Activities:
Acquisition of investments, net		(40,113,019	)		-
Investment in trading securities		5,257			(184,367	)
Loans receivable		(1,325,004	)		(159,375	)
Acquisition of plant and equipment		(6,670,730	)		(2,428	)
Change in non-controlling interest		57,174			-
Proceeds from disposal of securities held for investment		-			36,000
Acquisition of goodwill		(4,055,348	)		-

Net Cash (Used in) Investing Activities		(52,101,670	)		(310,170	)

Cash Flows from Financing Activities:
Proceeds from convertible debenture, net		75,740,000
Deferred financing fees		(4,296,199	)
Common shares issued for repayment of convertible debenture		-			8,853,191
Repayment of convertible debentures		-			(8,853,191	)
Loans payable		4,359,103			(650,516	)

Net Cash (Used in) Financing Activities		75,802,904			(650,516	)

Foreign Exchange on Cash and Cash Equivalents		652,620			98,361

Net Increase (Decrease) in Cash and Cash Equivalents		25,669,881			(2,094,043	)

Cash and Cash Equivalents - Beginning of Period		4,337,088			3,489,449

Cash and Cash Equivalents - End of Period	$	30,006,969		$	1,395,406

Supplemental Disclosures of Cash Flow Information:
Interest and Tax Paid-
Interest	$	462,910		$	22,487
Income taxes	$	8,313		$	42,403

(The accompanying notes are an integral part of these consolidated financial statements.)

Cintel Corp. and Subsidiaries, 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.

1.	Operations and Business

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.

On October 30, 2006, the Company entered into an Equity Purchase Agreement with STS Semiconductor & Telecommunications Co., Ltd. ("STS"), a Korean corporation for the acquisition of 51% of the total equity of Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. ("PSTS") for an aggregate purchase price of $16,500,000. The purchase price was paid from the proceeds of Cintel's convertible bonds financing pursuant to which the Company sold an aggregate of $15,284,295 principle amount in convertible bonds.

PSTS conducts its operations in the Wujiang Economic Development Zone, Jinagsu, People's Republic of China ("PRC"). The Company was incorporated on March 2, 2004, without share capital, pursuant to the commercial law of the PRC to engage in the business of manufacturing semiconductor and other electrical components for sale to the Korean market.

On May 18, 2007, the Company entered into a Share Sale and Purchase Agreement to purchase 100% of the issued and outstanding shares of common stocks of Bluecomm Korea, Co. Ltd. (“Bluecomm”). Pursuant to the Purchase Agreement, the Company acquired an aggregate of 220,000 shares of Bluecomm for aggregate consideration of Korean Won 6,027,600,00 (approximately $6,483,053).

Bluecomm is a Korean company engaged in the business of Customer Relationship Management (CRM) solution and consulting, call center operation, and database marketing. It also provides total solutions for call center outsourcing and Home Service Center (HSC) hosting. Bluecomm commenced its CRM related business in October 2005 and in June 2006 entered into an agreement with PizzaHut Korea to provide HSC and data base management operations services

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:

2.	Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

These consolidated 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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirement of item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission ("SEC").

Basis of Consolidation

The consolidated financial statements of the Company included the financial results of Cintel Corp., Cintel Korea, PSTS, and Bluecomm. 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.

The acquisition of PSTS and Bluecomm has been accounted for by the purchase method, with the net assets of PSTS and Bluecomm brought forward at their fair market value basis.

Unit of Measurement

The United States dollar has been used as the unit of measurement in these financial statements.

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 period.

2.	Summary of Significant Accounting Policies (Cont'd)

Use of Estimates

Research and Development

Research and development costs are expensed as incurred. Research and development expenses consist primarily of salaries and subcontracting expenses.

Revenue Recognition

For finished goods, the Company recognizes revenue when there is a definitive sales agreement, and upon shipment of products, when title is passed and the amount collectible can reasonably be determined.

For merchandise sales, the Company recognizes revenue upon shipment of products, when title is passed and the amount collectible can reasonably be determined.

For service revenues, the Company recognizes such revenues when services are rendered.

For the call centers revenue, the Company recognizes revenue at the end of the month for services rendered when the relating time costs can be reasonably determined.

Cash and Cash Equivalents

Cash includes currency, checks issued by others, other currency equivalents, current deposits and passbook deposits held by financial institutions. 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.

Investments in securities are recorded in accordance with Statement of Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Investments in available for sale 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. Investments in trading securities are recorded at fair value. Unrealized holding gains and losses from investments are excluded from earnings and reported as a separate component of stockholders' equity.

2.	Summary of Significant Accounting Policies (Cont'd)

Investments

Investments subject to significant influence have been recorded using the equity method.

Inventories

Raw material and supplies are stated at the lower of cost or market value, using the first-in, first-out weighted average cost method.

Work-in-progress is stated at the lower of cost or market value, using the first-in, first-out cost method. Market value is determined by deducting applicable selling expenses from the product selling price.

Merchandise inventory is stated at the lower of cost or net realizable value. Net realizable value is determined by deducting selling expenses from selling price.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition of an asset; its cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized. Depreciation, based on the estimated useful lives of the assets, is provided as follows:

Buildings - China	20 years	Straight line
Buildings - Korea	30 years	Straight line
Equipment	5 - 10 years	Straight line
Measuring equipment	5 years	Straight line
Furniture and fixtures	5 years	Straight line
Vehicles	5 years	Straight line
Software	5 years	Straight line
Landscaping	5 years	Straight line
Structure	5 years	Straight line

Government grants are recognized as income over the periods necessary to match them with the related costs that they are intended to compensate.

2.	Summary of Significant Accounting Policies (Cont'd)

Land Right

Land right is stated at cost. Amortization, based on the estimated useful life of the asset, is provided on a straight line basis over 50 years.

Government Grants

Currency Translation

The Company's functional currencies are the Korean won and the Chinese RMB. Adjustments to translate those statements into United States dollars at the balance sheet date are recorded in other comprehensive income (loss).

Foreign currency transactions of the Korean and Chinese operations have been translated to Korean Won and Chinese RMB at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses have been charged to income in the period.

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.

Income Tax

The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). 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.

The Company adopted SFAS 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 period. 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, warrants, and convertible debentures for each period.

2.	Summary of Significant Accounting Policies (Cont'd)

Earnings or (Loss) per Share

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 receivables, 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.

For the period ended June 30, 2007, PSTS had three major customers as follows:

	% of Total Revenue
STS - Minority shareholder of PSTS		60	%
Samsung China		12	%
Elastic Networks, Inc.		10	%

Impairment of Long-lived Assets

The Company evaluates the recoverability of long-lived assets and the related estimated remaining lives when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable. For the periods ended June 30, 2007, and 2006, no events or circumstances occurred for which an evaluation of the recoverability of long-lived assets was required.

In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. SFAS No. 159 requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements.” Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation. The Company is currently evaluating the impact, if any, adoption of SFAS No. 159 will have on its financial statements.

2.	Summary of Significant Accounting Policies (Cont'd)

Recently Issued Accounting Standards

3.	Cash and Cash Equivalents

Cash and cash equivalent includes restricted cash in the amount of $81,464 (2006 - nil), which has been pledged as collateral on performance bonds as required by the Chinese Customs Department.

Loans receivable to unrelated Korean companies include the following;

4.	Inventory

		2007		2006

Raw materials	$	5,537,672	$	158,054
Work-in-progress		490,096		-
Supplies		996,257		-
Merchandise		236,066		399,272

	$	7,260,091	$	$557,326

5.	Loans Receivable

	2007			2006
Loan receivable #1	$	-		$	52,700
Loan receivable #2		-			105,400
Loan receivable #3		153,909			-
Loan receivable #4		1,731,200			-
Other miscellaneous short term loans receivable		23,804			-

		1.908.913			158,100
Less: current portion		(1.755.004	)		(158,100	)

	$	153,909		$	-

Loan receivable #1 and #2 from a private Korean company and its chief executive officer were repaid during 2006.

Loan receivable #3 to a private Chinese company is unsecured, bears interest at 7% payable quarterly, interest only, and matures on January 3, 2009. The loan is guaranteed by the shareholders of the debtor.

Loan receivable #4 to a private Chinese company is unsecured, bears interest at 5% per annum. Principal and interest are repayable upon maturity on July 11, 2007. The loan was repaid on July 11, 2007 subsequent to the period end.

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 2007 and 2006 are 16.5 percent of the first 100 million Korean Won ($105,700) 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 likely 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 $7,780,000 and $2,260,000 of taxable losses in its Korea and US operations, respectively, which can be used to offset future taxable income. The utilization of the Korean losses expires in years 2008 to 2011 and the US losses in years 2019 to 2021.

6.	Income Taxes

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.

For the first two profitable taxation years, taxable income of the Company's Chinese subsidiary, PSTS, is exempt from income taxes. Taxable income in the third to fifth profitable taxation years will be taxed at 5% and subsequently the applicable tax rate will be 10%.

The taxable income is determined by off-setting the income for tax purposes of the period with tax losses carried forward from prior years. Tax losses can be carried forward for five years. The Company provided a valuation allowance equal to the deferred tax amounts resulting from the tax losses as it is not more likely than not that they will be realized. The Company has accumulated approximately $1,828,000 of taxable losses, which can be used to offset future taxable income. The utilization of the losses expires in 2008 ($509,187), 2009 ($939,866), 2010 ($2,839,746), 2011 ($912,909) and 2012 ($1,156,100).

The Company has deferred income tax assets as follows:

6.	Income Taxes (Cont’d)

	2007			2006
Deferred income tax assets:
Research and development expenses amortized over 5 years for tax purposes	$	271,955		$	258,646
Other timing differences		257,620			(53,810	)
Net operating loss carryforwards		3,128,857			1,999,849
		3,658,432			2,204,685
Valuation Allowance		(3,658,432	)		(2,204,685	)
	$	-		$	-

7.	Investments

	2007		2006
Investment in Cintel Systems Corp.	$	507,458	$	-
Equity Investment in Global Assets		1,530,770		-
Convertible Debenture A - STS, 24.5% owners of PSTS		10,820,000		-
Convertible Debenture B-STS, 24.5% owners of PSTS		29,214,000		-
Guarantee deposits		-		-
Korea Metal Industry Co-Operative		-		-
	$	42,072,228	$	-

Investment in Cintel Systems Corp. represents 23,280 shares, 16% ownership in a private Korean company, Cintel Systems Corp. The investment has been accounted for by the cost method.

Investment in Global Assets Inc. represents 500,000 common shares, 20% ownership in a private Korean company, Global Assets Inc. The investment has been accounted for by the equity method. Carrying cost of the investment has been written off to the net equity balance of the investee.

Summarized financial information of Global Assets Inc. based on the March 31, 2007, audited statements are as follows:

7.	Investments (Cont’d)

	100%		20%
Total Assets	$	7,772,968	$	1,554,594
Total Liabilities		119,113		23,823
Total Equities		7,653,855		1,530,771
Gross Revenue		1,874,709		374,942
Net Loss		2,167,242		433,448

The Convertible Debenture A, maturing on April 20, 2012, is non-interest bearing until the date of conversion. However, if conversion right is not exercised during the conversion period (i.e., the period from one year after the Issue Date until one month prior to the Maturity Date), then regardless of the coupon rate, the Company shall guarantee a compounded interest rate of 8.0% per annum in total on the Bond. At any time between one year after the Issue Date and one month prior to the Maturity Date, the Bond may, at the option of the Holder, be converted into common shares in the Company at a conversion price of $8.60 (8,010 won). The conversion price will be adjusted based on the fair market value of the debtor's share. The adjustment shall be limited to a maximum of 30% of the conversion price. The debenture has been pledged as security for Convertible debenture #2 as per note 11.

The Convertible Debenture B, maturing on April 20, 2009, is non-interest bearing until the date of conversion. However, if conversion right is not exercised during the conversion period (i.e., the period from one year after the Issue Date until one month prior to the Maturity Date), then regardless of the coupon rate, the Company shall guarantee a compounded interest rate of 4.0% per annum in total on the Bond. At any time between one year after the Issue Date and one month prior to the Maturity Date, the Bond may, at the option of the Holder, be converted into common shares in the Company at a conversion price of $8.60 (8,010 won). The conversion price will be adjusted base on the fair market value of the debtor's share. The adjustment shall be limited to a maximum of 30% of the conversion price. The debenture has been pledged as security for Convertible debenture #2 as per note 11.

Upon conversion of these Convertible Debentures, Cintel will own 23% of STS and will be the major shareholder of STS.

Equipment is comprised as follows:

8.	Property, Plant and Equipment, Net

			2007				2006
			Accumulated				Accumulated
	Cost		Depreciation		Cost		Depreciation

Land		1,191,360		-		-		-
Buildings - China		11,407,333		1,185,572		-		-
Buildings - Korea		2,690,475		77,115		-		-
Furniture and fixtures		1,092,173		360,449		71,416		36,941
Equipment		19,394,917		5,492,893		906,424		680,337
Measuring equipment		1,853,213		515,711		-		-
Vehicles		211,928		65,384		17,700		1,770
Software		783,992		668,151		732,205		498,804
Landscaping		62,351		23,853		-		-

	$	38,687,742	$	8,389,128	$	1,727,745	$	1,217,852

Net carrying amount			$	30,298,614			$	509,893

9.	Land Right

The Company has an agreement with the government of the PRC for the use of land until February 14, 2054. According to the agreement, the Company is obligated to pay an annual management fee of approximately $2,400, and the land has to be used for manufacturing. The Company has the right to apply for renewal by notifying the government no later than six months prior to the expiry of the agreement. The government has no obligation to approve the renewal application.

The cost of the land right is capitalized and amortized over the life of the land right (50 years) on the straight-line method.


			2007				2006
			Accumulated				Accumulated
	Cost		Depreciation		Cost		Depreciation

	$	369,224	$	24,614	$	-	$	-

Net carrying amount			$	344,610			$	-

10.

Loans Payable

						2007			2006
	Current		Long-term			Total			Total

Bank loan	$	-	$	-		$	-		$	-
Promissory note		39,000		-			39,000			39,000
Note payable		-		-			-			-
Government loans		10,669		21,340			32,009			38,019
Company #4		-		-			-			-
Discount of interest-free government loans		-		(2,816	)		(2,816	)		(8,619	)
Vehicle Loan		-		-			-			13,727
Note payable		-		-			-			-
Industrial and Commercial Bank of China (Loan #1)		2,001,616		-			2,001,616			-
Industrial and Commercial Bank of China (Loan #3)		3,001,767		-			3,001,767			-
China Misheng Banking Corp. Ltd.		1,501,016		-			1,501,016			-
China Construction Bank (Loan #1)		1,818,576		2,275,848			4,094,424			-
China Construction Bank (Loan #2)		1,000,677		1,250,846			2,251,523			-
Notes payable		4,898,862		-			4,898,862			-
Hana Bank		2,531,460		-			2,531,460			-

	$	16,803,643	$	3,545,218		$	20,348,861		$	82,127

The promissory note is non-interest bearing, unsecured, and due on demand.

10.

Loans Payable (Cont’d)

Promissory Note

Government Loan

The loan is non-interest bearing, unsecured, repayable in annual payments of $10,669; and, matures in October 2009.

Industrial and Commercial Bank of China Loan #1

The loan is unsecured, payable monthly; interest only at LIBOR plus 0.85% per annum; and is maturing December 21, 2007.

Industrial and Commercial Bank of China Loan #2

The loan is unsecured, payable monthly; interest only at LIBOR plus 0.85% per annum; and, matures April 29, 2008.

China Minsheng Banking Corp. Ltd.

The loan is unsecured, payable monthly interest only at 6.36% per annum, and is maturing September 27, 2007.

Notes Payable

Notes payable are unsecured, bear interest at 8% per annum, payable semi-annually, and maturing on May 17 , 2008.

Hana Bank

The loans, bear interest at 6.93% to 7.81% per annum, are secured by the building located in Korea as per note 8 with a net book value $2,613,360. The loans are repayable monthly interest only and will mature on March 30, 2008.

China Construction Bank loans

China Construction Bank Loan # 1 bears interests at China Construction Bank's prime rate, matures in July 2009, and is repayable in quarterly installments of $454,644, commencing October 29, 2006.

China Construction Bank Loan # 2 bears interests at LIBOR plus 1.18% per annum, matures in July 2009, and is repayable in quarterly installments of $250,000, commencing October 29, 2006.

The loans are guaranteed by property, plant and equipment of PSTS with a net book value of $25,068,408 as described in Note 10.

Future principal repayments of the loans payable is comprised as follows:

10.

Loans Payable (Cont’d)

2006	$	-
2007		-
2008		16,803,643
2009		2,829,921
2010		715,297

		20,348,861

11.

Convertible Debentures


	2007		2006

Face value	$	-	$	-

Convertible Debenture #1		15,284,295		-
Convertible Debenture #2		64,920,000		-
Convertible Debenture #3		10,820,000		-

	$	91,024,295		-

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.

Convertible Debenture #1

The convertible debentures are non-interest bearing, unsecured, and mature on October 30, 2011. The bonds are convertible to common stock of the Company at $0.50 per share. The holders have a right to adjust the conversion price at any time between April 1, 2008 to September 30, 2011. The adjustment discount will be 100% X ($0.50 - Previous 3 months average share price)/$0.50, to a maximum of 30%. The holders can exercise their conversion rights any time from October 25, 2006 to September 30, 2011. As of June 30, 2007, no bonds have been converted.

For any unconverted amount on October 30, 2011, the Company shall pay interest at the rate of 8% per annum provided that PSTS generates total revenues of $65,800,000 and an operating profit of $6,800,000 in 2007, and total revenue of $95,400,000, and an operating profit of $10,600,000 in 2008. If the conditions are not achieved, interest shall be calculated at 10% per annum. Interest shall be due and payable in cash on the maturity date of October 30, 2011.

11.

Convertible Debentures (Cont’d)

Convertible Debenture #2

The Debenture will mature on April 12, 2012 and is convertible into shares of common stock of the Company, at the option of the holder, at a rate of $0.70 per share. The coupon rate of the bond shall be at the compounded interest rate of 2.3% per annum; provided however, if the bond is not converted during the period commencing on the issuance date through one month prior to the maturity date, the Company shall guarantee a compounded interest rate of 8% per annum.

Per the debenture agreement, the Company will undertake to apply for listing of its common stock on any of the NASDAQ, London Stock Exchange, Hong Kong Stock Exchange and Singapore Exchange Securities Trading Limited and use its best efforts to obtain such listing by October 31, 2009. In the event that the Company does not secure such listing by October 31, 2009 for any reason not solely attributable to Woori, Woori shall be entitled to exercise its put option to redeem the Debenture at the face value and shall also be entitled to receive from the Company the payment of interest on the outstanding principal balance of the Debenture calculated at the compounded rate of ten per cent per annum. In the case of the Company completing the listing process prior to the end of October of 2009, Woori shall be entitled, on or after the fourth anniversary of the issuance of the Debenture, to exercise its put option to redeem the Debenture at the face value thereof and shall also be entitled to receive from the Company the payment of interest on the outstanding principal amount of the Debenture calculated at the compounded rate of eight percent per annum. In case of the occurrence of any event of default by the Company, Woori shall be entitled to exercise its put option to redeem the Debenture at the face value thereof if such event of default is not cured within sixty days of notice, in which case Woori shall also be entitled to receive from the Company the payment of default interest on the outstanding principal balance of the Debenture calculated at the compounded rate of nineteen percent per annum.

The Company has agreed to pledge as security all convertible bonds to be issued by any entity and subscribed by the Company using the proceeds from the Debenture in favor of the Company and all the shares of any such entity to be acquired by the Company. As of June 30, 2007, proceeds from the bond have been invested in $40,034,000 convertible debentures issued by STS as per note 8.

Convertible debenture #3

The debenture will mature on April 12, 2012 and are convertible into shares of common stock of the Company, at the option of the holder at a rate of $0.70 per share. The coupon rate of the bond shall be at the compounded interest rate of 2.3% per annum. If the bond is not converted during the period commencing on the issuance date through one month prior to the maturity date, the Company shall guarantee a compounded interest rate of 8% per annum.

At any time during the period from November 1, 2009 to March 12, 2012, the holders are entitled to exercise their put option to redeem the Debentures at the face value thereof, in which case the holder shall also be entitled to receive from the Company the payment of interest on the outstanding principal balance of the Debentures calculated at the compounded rate of 8 % per annum. Upon the occurrence of any event of default by the Company, the holders will be entitled to exercise their put option to redeem the Debentures at the face value thereof if the event of default is not cured within sixty days of notice thereof, in which case the holders shall also be entitled to receive from the Company default interest on the outstanding principal balance of the Debentures calculated at the compounded rate of 19 % per annum.

11.

Convertible Debentures (Cont’d)

The convertible debentures have not been included in the calculation of the diluted (loss) per share as their inclusion would be anti-dilutive.

12.

Capital Stock

Authorized

300,000,000 common shares, par value $0.001 per share

	2007		2006
Issued
89,214,896 common shares (2006 - 87,179,896)	$	89,214	$	87,179

		89,214		87,179

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.

12.

Capital Stock (Cont’d)

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.

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.

In April 2006, 500,000 common shares were issued for consulting services at the value of $90,000.

In May 2006, the Company issued 44,300,542 common shares for the repayment of $8,853,191 of the convertible debenture including interest.

In July 2006, 440,000 common shares were issued for consulting services at the value of $70,400.

In February 2007, 580,000 common shares were issued for consulting services at the value of $98,600.

In March 2007, 100,000 common shares were issued as employee remuneration at the value of $20,000.

In June 2007, 825,000 common shares were issued for consulting services at the value of $319,400.

12.

Capital Stock (Cont’d)

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:

	2007			2006
Interest rate		6.5	%		6.5	%
Expected volatility		70	%		70	%
Expected life in years		6			6
Expected dividends	$	0		$	0

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.

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 years ended December 31, 2006 and 2005.

The stock options have not been included in the calculation of the diluted earnings per share as their inclusion would be anti-dilutive.

The following table summarizes the stock option activity during 2007 and 2006:

12.

Capital Stock (Cont'd)

	2007			2006
Outstanding, beginning of period		106,000			106,000
Exercised		-			-
Cancelled		-			-
Expired		(106,000	)		-
Outstanding, end of period		-			106,000
Weighted average fair value of options granted during the period	$	-		$	-
Weighted average exercise price of common stock options, beginning of period	$	-		$	0.62
Weighted average exercise price of common stock options granted in the period	$	-		$	-
Weighted average exercise price of common stock options, end of period	$	-		$	0.67
Weighted average remaining contractual life of common stock options		-			1 year

During the year, the Company's Chinese subsidiary PSTS entered into the following transactions with STS and BKLCD Corporation (“BKLCD”, formerly We-Tech Corporation). STS and BKLCD are each 24.5% owners of PSTS respectively:

13.

Related Party Transactions

	2007
Accounts receivable - STS	$	2,025,395
Accounts receivable - BKLCD	$	203,050
Accounts payable - STS	$	4,687,322
Accounts payable - BKLCD	$	636,142
Sales - STS	$	17,415,354
Sales - BKLCD	$	2,288,143
Purchase - STS	$	13,819,547
Purchase - BKLCD	$	2,316,130

These transactions were in the normal course of business and recorded at an exchange value established and agreed upon by the above mentioned parties.

14.

Commitments and Contingencies

The Company 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.

The Company is committed to premise lease obligations which expire in December 2007 and February 2008. Future minimum annual payments (exclusive of taxes and insurance) under the leases are as follows:

2007	$	35,622
2008		1,950
	$	37,572

The Company is committed to pay interest of 8% or 10% on its convertible bonds payable, should PSTS fail to achieve the predetermined earnings threshold as disclosed in Note 11.