UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(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, 2002.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ______.
Commission file number:
GOSUN COMMUNICATIONS LTD., INC.
-------------------------------
(Exact name of small business issuer as specified in its charter)
TEXAS 91-1939829
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
80 Zhong Shan Er Road Guangzhou, China 510080
-------------
(Address of principal executive offices)
011-86-208-387-9773
-------------------
(Issuer's Telephone Number, Including Area Code)
------------------------------------------------
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
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 Mar 31, 2002, there were 30,538,179 shares of common stock issued and
outstanding.
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FORM 10-QSB/A
GOSUN COMMUNICATIONS LIMITED, INC.
TABLE OF CONTENTS
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
-2-
PART I
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
included in this Form 10-QSB reflect all adjustments (consisting only of normal
recurring accruals and consolidations) necessary for a fair presentation of the
results of operations for the periods presented. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.
-3-
GOSUN COMMUNICATIONS LTD., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
--------- ---------
US$ US$
(Unaudited)
Current assets
Cash and cash equivalents 235,182 488,238
Accounts receivable, net of bad debt provision
(US$27,596, US$9,107) 788,376 561,887
Advances to suppliers 24,270 2,302
Other receivables 548,637 450,621
Compensation on services to be provided 133,875 --
Inventories 1,163,018 1,234,234
Amounts due from affiliates 1,641,096 1,500,954
--------- ---------
Total current assets 4,534,454 4,238,236
Investment in an equity investee 57,831 50,585
Deposits 323,791 300,649
Property, plant and equipment, net 499,595 539,409
--------- ---------
Total assets 5,415,671 5,128,879
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 603,119 700,922
Accrued employee compensation and benefits 11,792 24,440
Other payables and accrued expenses 1,613,484 998,567
Income taxes payable 332,014 153,116
Amounts due to affiliates 120,406 90,581
Short term bank loans 1,062,802 1,690,821
--------- ---------
Total current liabilities 3,743,617 3,658,447
Amount due to stockholder 178,744 178,744
Convertible note, net of debt discount of (US$73,676, US$89,400) 211,060 210,600
--------- ---------
Total liabilities 4,133,421 4,047,791
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock series A, par value US$0.001 per share; 100,000
shares authorized; no shares issued and outstanding -- --
Preferred stock series B, par value US$0.001 per share; 5,000
shares authorized; no shares issued and outstanding -- --
Common stock, par value US$0.001 per share; 49,000,000 shares
authorized; 30,538,179 (2001: 30,093,179) shares issued and
outstanding 30,538 30,093
Unissued common stock -- 39,375
Additional paid in capital 1,524,729 1,117,827
Accumulated losses (266,740) (113,182)
--------- ---------
1,288,527 1,074,113
--------- ---------
Minority interest (6,277) 6,975
--------- ---------
Total liabilities and stockholders' equity 5,415,671 5,128,879
========= =========
See accompanying notes to the condensed consolidated financial statements.
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GOSUN COMMUNICATIONS LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Three months ended
March 31, 2002 March 31, 2001
--------------------------- ------------------------
US$ US$
Revenue
Sales of cellular phones and pagers 6,441,225 6,218,133
Sales of smart cards 5,741,596 3,591,035
Agency service 400,099 362,138
----------- -----------
12,582,920 10,171,306
----------- -----------
Cost of revenue
Cost of cellular phones and pagers 6,160,129 6,003,607
Cost of smart cards 5,218,888 3,337,307
Agency service 13,783 36,455
----------- -----------
11,392,800 9,377,369
=========== ===========
Gross profit 1,190,120 793,937
Other operating income, net 51,830 50,020
----------- -----------
1,241,950 843,957
Selling expenses 521,977 494,294
General and administrative expenses 657,109 243,768
----------- -----------
Operating income 62,864 105,895
----------- -----------
Other income (expenses)
Interest income 12 686
Interest expenses (54,211) (20,024)
Share of profit (loss) of an equity investee 7,246 (1,983)
----------- -----------
Total other expenses, net (46,953) (21,321)
=========== ===========
Income before income taxes and minority interest 15,911 84,574
Income taxes 182,721 34,122
----------- -----------
Income (loss) before minority interest (166,810) 50,452
Minority interests (13,252) 926
----------- -----------
Net income (loss) (153,558) 49,526
=========== ===========
Earnings (loss) per share
- - basic and diluted (0.01) 0.00
=========== ===========
Weighted average common shares outstanding
- - basic and diluted 30,360,262 30,000,168
=========== ===========
See accompanying notes to the condensed consolidated financial statements
-5-
GOSUN COMMUNICATIONS LTD., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Three months ended
March 31, 2002 March 31, 2001
------------------------- -----------------------
US$ US$
Cash flows from operating activities
Net income (loss) (153,558) 49,526
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation 43,177 27,501
Disposal of property, plant and equipment 29,182 --
Imortization of debt discount 15,724 --
Expenses compensated by common stock 218,525 --
Interest on convertible note compensated by common stock 308 --
Unparticipated loss (profit) of an equity investee (7,246) 1,983
Minority interests (13,252) 926
Increase (decrease) from changes in
Accounts receivable (226,489) (136,754)
Advances to suppliers (21,968) (302,932)
Other receivables and deposits (121,158) (237,266)
Income tax recoverable -- 4,272
Inventories 71,216 (410,160)
Amounts due from affiliates, net (110,317) (279,429)
Accounts payable (97,803) 622,832
Accrued employee compensation and benefits (12,648) (15,261)
Other payables and accrued expenses 614,917 13,239
Income taxes payable 178,898 31,686
-------- --------
Net cash provided by (used in) operating activities 407,508 (629,837)
-------- --------
Cash flows from investing activities
Acquisition of property, plant and equipment (32,545) (60,755)
-------- --------
Net cash used in investing activities (32,545) (60,755)
-------- --------
Cash flows from financing activities
Advances from (repayment to) affiliates, net -- 44,376
Proceeds from issuing common stock -- 16,000
Repayment to stockholder -- (51,932)
Proceeds from short term bank loans 96,618 845,411
Repayment of short term bank loans (724,637) (241,547)
-------- --------
Net cash provided by financing activities (628,019) 612,308
-------- --------
Net increase (decrease) in cash and cash equivalents (253,056) (78,284)
Cash and cash equivalents, beginning of period 488,238 158,927
-------- --------
Cash and cash equivalents, end of period 235,182 80,643
======== ========
Supplemental disclosure of cash flow information
Interest paid 38,487 20,024
Income taxes paid 3,822 --
Supplemental disclosure of significant non-cash transactions
Issuance of common stock in connection with consulting services 218,525 --
Issuance of common stock in connection with consulting services
to be provided 133,875 --
Conversion of notes and interest payable to common stock 15,572 --
======== ========
See accompanying notes to the condensed consolidated financial statements
-6-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 1 - Basis of Financial Statement Presentation
Organization
Gosun Communications Ltd., Inc. ("GOSUN" or "the Company") was organized
under the laws of the State of Texas on January 20, 1998, under the name of
Blackwing Corporation. On April 4, 1989, Blackwing Corporation, a publicly held
corporation, acquired all of the issued and outstanding shares of a company
known as Surface Tech, Inc., which was originally known as Holmes Microsystems,
Inc.. The transaction had been accounted for as a recapitalization of Holmes
Microsystems, Inc. in a manner similar to a reverse acquisition. Accordingly,
Holmes Microsystems, Inc. has been treated as the surviving entity. As part of
this transaction, Blackwing Corporation changed its name to Holmes Microsystems,
Inc. ("Holmes") and the original Holmes Microsystems, Inc. which was then a
wholly owned subsidiary, was dissolved.
On January 12, 2001, the shareholders of Holmes entered into an exchange
agreement with the equity owners of Guangdong Gosun Communication Equipment
Sales Co, Ltd. ("GD Gosun"). Pursuant to the exchange agreement, the GD Gosun
equity owners transferred all of their equity interests in GD Gosun to Holmes in
exchange for 89% of the issued and outstanding shares of Holmes after giving
effect to the share exchange. The exchange agreement resulted in the equity
owners of GD Gosun obtaining a majority voting interest in Holmes and GD Gosun
was treated as the acquiring entity in the transaction for accounting purposes
according to generally accepted accounting principles. The reverse acquisition
process utilized the capital structure of Holmes and the assets and liabilities
of GD Gosun were recorded at predecessor cost. Being the continuing operating
entity, the historical financial statements of GD Gosun prior to December 31,
2000 are included for financial reporting purposes. The financial year end date
of Holmes has also been changed from January 31 to December 31 effective from
the financial year ended December 31, 2000. As part of this transaction, Holmes
Microsystems, Inc. changed its name to Gosun Communications Ltd., Inc..
In order to enforce the exchange agreement, GD Gosun needs to change its
legal status from a PRC private company into a Foreign Investment Enterprise in
the People's Republic of China (the "PRC"). As of March 31, 2002, the
registration of GOSUN as the registered owner of GD Gosun is not yet completed.
The documents effecting the transfer of legal ownership in GD Gosun have been
submitted to relevant PRC authorities in early March 2002. In March 2002, GD
Gosun changed its name to Guangdong Gosun Communication Equipment Information
Technology Co. Ltd.
Basis of Presentation
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
-7-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 1 - Basis of Financial Statement Presentation - Continued
Basis of Presentation - Continued
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual audited
financial statements for the year ended December 31, 2001. The Company follows
the same accounting policies in preparation of interim reports.
Results of operations for the interim periods are not necessarily
indicative of annual results.
Business Conducted
The principal activities of the Company and its subsidiaries are the retail
sale and distribution of telecommunication equipment including cellular phones,
pagers, cellular phone smart cards and value-refill smart cards, and acting as
an agent of cellular and paging services providers. The Company is a primary
agent of an affiliate, Guangdong Gosun Communication Development Company Limited
("GGCD"), a paging service provider in the PRC and a licensed primary agent of
China Mobile Communications Corporation, one of two exclusive cellular
communications providers in the PRC. As of March 31, 2002, the Company has
fourteen directly owned chain stores operating in the PRC.
Note 2 - Inventories
Inventories represent purchased finished goods and are stated at the lower
of cost or market.
Note 3 - Investment in an Equity Investee
Dongguan Gosun Network Science & Technology Co. Ltd. ("DGNST") is a company
incorporated in Dongguan, PRC. It is jointly established by the Company and an
affiliate, Guangdong Gosun Internet Information Industry Co., Ltd. on January
11, 2001 and it owned as to 49% by the Company. DGNST is engaged in retailing of
telecommunication equipment and operating ISP business.
Note 4 - Due From and To Affiliates
The majority owner of the Company owns minority equity interests in several
other companies including Guangdong Gosun Communication Development Co. Ltd.
("GGCD"), Shanghai Gosun Network Science & Technology Co., Ltd. ("SGNST"),
Guangdong Gosun Internet Information Industry Co. Ltd. ("GGIII"), Shenzhen Gosun
Communication Co. Ltd. ("SGC"), Shenzhen Gosun Digital Chain Operation Co. Ltd.
("SGDCO") and Kwok Shun Communication (Hong Kong) Investment Ltd. ("KSCI")
-8-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 4 - Due From and To Affiliates - Continued
GGCD operates a paging service in Guangzhou, PRC. The Company earned agency
service income from GGCD for the provision of services to their subscribers by
way of facilitating accounts opening and collection of subscriber fees. The
agency service income charging rate is revised from 30% in 2001 to 40% in 2002.
The agency service income earned was US$188,737 for the quarter ended March 31,
2002. The amounts due from GGCD represent unpaid agency fees and expenses paid
on behalf of GGCD to be recovered.
SGNST is an ISP in Shanghai, PRC, established in late 2000. It shares
office space and staff with Shanghai Chain Operation. For the quarter ended
March 31, 2001, operating expenses in the amount of US$2,400 were charged to
SGNST. The amounts due from SGNST represent expenses paid on behalf of SGNST to
be recovered.
GGIII operates an ISP business. The Company acquired internet network cards
from GGIII amounting to US$313,190 as merchandise for resale for the quarter
ended March 31, 2002. The amount due to GGIII represents unpaid purchase cost.
The amount due from GGIII represents temporary cash advances. Agreements were
signed between the Company and GGIII whereby interest at the Renminbi bank
borrowing rate will be charged on the cash advances and entire advances will
become due in September 2002.
SGC operates a paging service in Shenzhen, PRC. The amount due from SGC
represents temporary cash advances. An agreement was signed between the Company
and SGC whereby interest at the Renminbi bank borrowing rate will be charged as
from January 2002 on the cash advances and the advance will be due on September
30, 2002.
SGDCO is engaged in trading of telecommunication products. The amount due
from SGDCO represents unpaid sales for 2001.
KSCI is a trading company in Hong Kong. The amount due from KSCI represents
cash advances by the Company. The amount is interest-free, unsecured and without
fixed terms of repayment.
Note 5 - Short Term Bank Loans
Short term loans are obtained from creditworthy commercial banks in PRC to
finance operations. The loans are guaranteed by an affiliate, Guangdong Gosun
Network Science & Technology Inc.. Details of the bank loans are as follows:
-9-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 5 - Short Term Bank Loans - Continued
Outstanding Prevailing Maturity
principal interest rate date
-------------------------------------- ------------------ ---------------------
US$
RMB equivalent
March 31, 2002
Loan 1 2,000,000 241,546 6.435% April 23, 2002
Loan 2 2,000,000 241,546 6.435% August 21, 2002
Loan 3 2,000,000 241,546 6.138% June 23, 2002
Loan 4 2,000,000 241,546 5.841% October 12, 2002
Loan 5 800,000 96,618 6.720% August 9, 2002
----------------- -----------------
8,800,000 1,062,802
================= =================
Outstanding Prevailing Maturity
principal interest rate Date
-------------------------------------- ------------------ ---------------------
US$
RMB equivalent
December 31, 2001
Loan 1 5,000,000 603,864 6.138% January 17, 2002
Loan 2 2,000,000 241,546 6.435% January 23, 2002
Loan 3 3,000,000 362,319 6.435% February 17, 2002
Loan 4 2,000,000 241,546 6.435% March 14, 2002
Loan 5 2,000,000 241,546 6.435% August 21, 2002
---------------- ------------------
14,000,000 1,690,821
================ ==================
Note 6 - Convertible Note
On December 21, 2001, the Company entered into a Securities Purchase
Agreement with a Purchaser. Pursuant to the Securities Purchase Agreement, the
Company agreed to sell to the Purchaser 8% convertible note which amount should
be equal to US$300,000. The 8% convertible note has a maturity date of two years
from the date of issuance. Legal and professional fees incurred in connection
with the issuance of the convertible note, amounting to $71,250, are included in
deferred expenses to be amortized over a period of two years. During the
quarter, $8,906 of the deferred expenses has been amortized.
-10-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 6 - Convertible Note - Continued
The convertible note holder has the right from and after the issuance of
this convertible note and at any time until the convertible note is fully paid,
to convert any outstanding and unpaid principal portion of this convertible note
and, at the holder's discretion, interest accrued on the convertible note into
fully paid and non-assessable shares of common stock of the Company at the
conversion price.
The conversion price per share should be the lower of (i) 80% of the
average of the three lowest closing prices for the common stock for the 30
trading days prior to but not including the closing date in connection with
which this convertible note is issued or (ii) 80% of the average of the three
lowest closing prices for the common stock for the 30 trading days immediate
before the conversion.
Pursuant to the same agreement, 15,000 warrants were issued to the
Purchaser in conjunction with the convertible note. The exercise period of the
warrants is 5 years and entitles their holder to purchase up to 15,000 shares of
common stock of the Company.
During the quarter ended March 31, 2002, part of the convertible note and
interest accrued were converted into 35,000 shares of common stock on various
dates at per share prices of $0.5387 and $0.4293.
Note 7 - Income Taxes
Income is subject to tax in the countries in which the Company and its
subsidiaries operate. The Federal statutory tax rate is 34%. The standard
enterprise income tax rate in PRC is 33% of which 30% is attributable to the
central government and 3% to the provincial government. Newly established
commercial enterprises, on application and approval by the tax bureau, are
exempted from enterprise income taxes in respect of income earned during their
first year of operation.
The principal differences between taxes on income computed at the
applicable statutory income tax rates and recorded income tax expenses are as
follows:
Three months Three months
ended ended
March 31, March 31,
2002 2001
----------------- ----------------
Applicable statutory tax rates applied to income before
income taxes 1,972 29,779
Changes in valuation allowance 183,140 --
Income tax incentive program -- (29,779)
Others (2,391) --
----------------- ----------------
182,721 --
================= ================
-11-
GOSUN COMMUNICATIONS LTD., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the quarterly period ended March 31, 2002
and 2001 is unaudited)
Note 8 - Stock Issued as Compensation for Services
During the quarter ended March 31, 2002, common stock were issued as
compensation for services as follows:
Common stock Unissued Compensation on
common services to be Additional
Shares Amount stock provided paid in capital
------------- ------------- ------------- ----------------- ----------------
US$ US$ US$ US$
Issuance of shares in connection
with consulting services for
2001 43,750 44 (39,375) -- 39,331
Issuance of shares in connection
with consulting services 235,000 235 -- -- 218,290
Issuance of shares in connection
with consulting services to
be provided 131,250 131 -- (133,875) 133,744
------------- ------------- ------------- ----------------- ----------------
Total 410,000 410 (39,375) (133,875) 391,365
============= ============= ============= ================= ================
This resulted in the recognition of consulting expenses included in general
and administrative expenses of $218,525 for the quarter ended March 31, 2002 and
prepaid compensation expenses on the balance sheet of $133,875.
Note 9 - Commitments and Contingencies
Lease Commitments
Future minimum lease payments under operating leases with non-cancelable
lease terms in excess of one year are as follows:
US$
Nine months ending December 31, 2002 397,113
Year ending December 31,
2003 367,891
2004 360,603
2005 208,245
2006 and thereafter 987,663
-----------
2,321,515
===========
Other contingencies
The Company is a guarantor for an affiliate, Guangdong Gosun Communication
Development Company Limited, in respect of a bank loan granted amounting to
RMB13,000,000, equivalent to US$1,570,048.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The principal activities of the Company and its subsidiaries are selling
telecommunication equipment and related products and acting as an agent of
cellular and paging services providers in the PRC. Through our subsidiaries in
PRC, we operate a number of chain stores and sell a board range of
telecommunication products. One of our principal subsidiary, Guangdong Chain
Operation, is a primary agent of a related company, Guangdong Gosun
Communication Development Company Limited ("GGCD"), a paging service provider in
the PRC and a licensed primary agent of China Mobile Communications
Corporation("China Mobile"), one of two exclusive cellular communications
providers in the PRC, within the region of Guangzhou.
Critical Accounting Policies
Our consolidated financial statements have prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to use estimates and
assumptions and make judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. We based our estimation on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the result of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions and conditions.
Rebates and Subsidies Receivable
Our subsidiary, Guangdong Chain Operation, is one of the distributors of
China Mobile, China Unicom and Nokia in the PRC. According to distribution
agreements signed with the above suppliers, Guangdong Chain Operation is
entitled to receive certain rebates and subsidies for inventories sold and
subject to conditions as imposed by the suppliers. In general, the suppliers
will approve the applications for rebates and subsidies within a certain period
of time subsequent to the inventories sold. However, at the end of the reporting
period, the Company has to estimate the relevant rebates and subsidies
receivable based on the quantities of inventories sold and the anticipated
approvals to be obtained from the suppliers, therefore, actual results could
differ from our estimated amount.
Accounting for Income Taxes
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded. As of March 31, 2002, we have recorded a valuation allowance
of approximately $408,000 against our deferred tax assets balance due to
uncertainties mainly related to our deferred tax assets as a result of our
history of losses in the Company and its subsidiaries. The valuation is based on
our estimates of taxable income in the Company and its subsidiaries and the
period over which our deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or we adjust these estimates in the
future periods, we may need to change the valuation allowance, which could
impact our financial position and results of operations.
Management's Discussion and Analysis of Plan of Operations
The following discussion of the financial condition and results of
operations of Gosun Communications Ltd., Inc. should be read in conjunction with
Management's Discussion and Analysis of financial condition and result of
operations. And the Consolidated Financial Statements and the Notes thereto, for
the year ended December 31, 2001, included in the company's Form 10-KSB and SB-2
Registration Statement filed with the SEC.
In addition to historical information, the following discussion and
analysis of management contains forward-looking statements. These
forward-looking statements involve risks, uncertainties and assumptions. The
actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors. These risks and
uncertainties included, but are not limited to , those
-13-
described under the caption "Factors That May Impact Future Results" below, and
in the above referenced SB-2 Registration Statement filed on February 11,2002.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof.
Gosun Communications Ltd., Inc. undertakes no obligation to revise or publicly
release of any revision to these forward-looking statements.
We believe that period-to-period comparisons of our operating results,
including our revenues, cost of sales, gross margins, expenses, and capital
expenditures may not necessarily provide meaningful results and should not be
relied upon as indications of future performance. We do not believe that our
historical growth rates are indicative of future growth or trends.
Results of Operations
The following table shows the selected consolidated income statement data
of the Company and its subsidiaries for the three-month period ended March 31,
2002 and March 31, 2001. The data should be read in conjunction with, and is
qualified in its entirety by reference to, the consolidated financial statements
and the notes thereto included as part of the Quarterly Report:
Three-Month Period Ended Three-Month Period Ended
(In US$1, 000) March 31, 2002 March 31, 2001
Revenue
Sales of Cellular Phones and Pagers 6,441 6,218
Sales of Smart Cards 5,742 3,591
Agency Service 400 362
------ ------
12,583 10,171
Cost of Revenue
Cost of Cellular Phones and Pagers (6,160) (6,004)
Cost of Smart Cards (5,219) (3,337)
Agency Service (14) (36)
------ ------
(11,393) (9,377)
Gross Profit 1,190 794
Gross Profit Margin 9.5% 7.8%
Other Operating Income 52 50
Selling Expenses (522) (494)
General and Administration Expenses (657) (244)
Financing/Interest Expenses (54) (20)
Share of profit (loss) of an equity investee 7 (1)
------ ------
Income before Income Taxes 16 85
Income Taxes 183 34
Minority Interest (13) 1
------ ------
Net Income (Loss) (154) (50)
====== ======
-14-
Three-Month Period Ended March 31, 2002 Compared To Three-Month Period Ended
March 31, 2001
Revenue, Cost of Revenue, and Gross Profit Margin
Total revenue for the three-month period ended March 31, 2002 increased by
US$2.4 million or 23.5% to US$12.6 million, compared to US$10.2 million for the
three-month period ended March 31, 2001. The increase in total revenue was
primarily the result of the Company's effort on cooperation with the China
Mobile and China Unicom on the business of cellular communications, which
increased the sales income of smart cards by US$2.2 million. For the three-month
period ended March 31, 2002, the Company has three major sources of revenue,
namely from selling cellular phones and pagers, selling of smart cards and
acting as a licensed primary agent for one of the major cellular communication
providers in the PRC, China Mobile Communications Corporation. Of the total
revenue of US$12.6 million for the three-month period ended March 31, 2002,
51.2% was generated from the sales of cellular phones and pagers; 45.6% from the
sales of smart cards and 3.2% from agency service. Compared with the total
revenue of US$10.2 million for the three-month period ended March 31, 2001,
61.1% was generated from the sales of cellular phones and pagers; 35.3% from the
sales of smart cards; and 3.6% from agency service.
As of March 31, 2002, there were 13 stores in the Guangdong Province that
generated a total of US$11.7million in total revenue and 1 store in Shanghai
that generated a total of US$0.9 million in total revenue. The number of the
stores has not changed from the three-month period ended March 31, 2001, except
for replacing smaller stores with mega stores.
The 1.7% increased in gross profit margin from 7.8% for the three-month
period ended March 31, 2001 to 9.5% for the three-month period ended March 31,
2002 was the result of taking advantage of the marketing strategy which combines
the low cost of the company's brand mobile accessory and mobile, and the
agreement of Direct Resale Partner between the company and Nokia increase in
competition of selling cellular phones, pagers and smart cards. Thus the
capability to increasing gross profit margin is strengthened. The gross profit
margin of the cell phone and pager increased to 4.4% for the three-month period
ended March 31, 2002, compared to 3.4% for the same corresponding period in year
2001. The gross profit margin of the smart card increased to 9.1% for the
three-month period ended March 31, 2002, compared to 7.1% for the same
corresponding period in year 2001.
Management believes with the advantage of the sales and agency status on
communication productions and services, they can enlarge the sales and increase
the gross profit margin according to the market needs to adjust the marketing
assembling and adapt different business type. Management also believes, the
continuing increase in market share, working with strategic suppliers, can
remain and increase the company's competition in the fierce mobile and
communication product market.
Other Operating Income
Other Operating income for the three-month period ended March 31, 2002
increased by US$2,000, or 4% to US$52,000 compared to US$50,000 for the
three-month ended March 31, 2001. The increase was mainly due to additional
income generated from in-house repairs and maintenances of cellular phone
services.
Selling Expenses
Selling expenses for the three-month period ended March 31, 2002 increased
by US$28,000 or 5.6% to US$522,000, compared to US$494,000 for the three-month
period ended March 31, 2001. The increase was mainly due to increase in rental
expense in opening mega store while closing smaller stores.
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General and Administration Expenses
General and administration expenses for the three-month period ended March
31, 2002 increased by US$413,000 or 169% to US$657,000, compared to US$244,000
for the three-month period ended March 31, 2001. Most of the increase in general
and administrative expenses was related to the increase in non cash expenditure
of company shares to overseas financial advisors, promotion companies, PR
companies and attorney fee. The following items contributed to most of the
increase:
a) Professional fee--. Professional fee for the three-month period ended
March 31, 2002 increased by US$270,000, or 27,000% to US$271,000,
compared to US$1,000 for the three-month period ended March 31, 2001.
$219,000 of the expense represented the fair value of shares issued to
overseas financial advisors, promotion companies and PR companies in
compensation for their services provided to the Company.
b) Consultancy fee- Consultancy fee for the three-month period ended March
31, 2002 increased by US$28,000, or 2,800% to US$29,000, compared to
US$1,000 for the three-month period ended March 31, 2001. The fee was
mainly used to pay the consulting fee for domestic enterprise
coordination and development.
c) Staff Insurance- Staff Insurance for the three-month period ended March
31, 2002 increased by US$ 15,000. The increase was mainly due to
insurance payment to enhance welfare coverage for staffs.
d) Depreciation fee - Depreciation fee for the three-month period ended
March 31, 2002 increased by US$ 14,000, or 700%, to US$16,000, compared
to US$2,000 for the three-month period ended March 31, 2001. The
increase was mainly due to purchase of fixed assets.
Financing Expenses
Financing expenses was US$54,000 for the three-month period ended March 31,
2002, compared to US$20,000 for the three-month period ended March 31, 2001. The
increase was mainly due to the amortization of the debt discount that related to
the convertible debt issued in December of 2001.
Income Taxes
The standard enterprise income tax rate in the PRC is 33% of which 30% is
attributable to the central government and 3% to the provincial government.
Newly established commercial enterprises, on application and approval by the tax
bureau, are exempted from enterprise income taxes in respect of income earned
during their first year of operation. Most of the subsidiaries have already
expired their tax holidays. The provision for income taxes was due primarily to
the impact of the earning subsidiaries as well as the setting up of valuation
allowances against net tax benefit earned by other subsidiaries.
Minority Interest
Minority interest (loss) of US$(13,000) for the three-month period ended
March 31, 2002 was the result of sharing loss of the Shanghai Gosun
Communication Chain Operation Co., Ltd.
Net Income
Net income (loss) was US$(154,000) for the three-month period ended March
31, 2002, a decrease of US$204,000 or 408% as compared to US$50,000 for the
three-month period ended March 31, 2001. The net loss was primarily due to U.S.
operating expenditures, attorney fee, and service fees in form of stock
compensation to overseas financial advisors, promotion companies, and PR
companies of US$328,000. Excluding expenses incurred by the U.S. public entity,
net income from retail operations for the three-month period ended March 31,
2002 was US$174,000, an increased of 248% compared to US$50,000 for the
three-month period ended March 31, 2001.
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Liquidity and Capital Resources
Cash and cash equivalents were US$235,000 as of March 31, 2002, This
represents a decrease of US$253,000 from December 31,2001. The decrease was
primarily due to a negative cash flow from repayment of short-term bank loans,
which was partially offset by positive cash flow from operating activities.
Management believes that the company has certain advantages of brand
recognition, variety of products, resource, loyal customers, market share and
vast of operation experiences. The company is ready at any time to raise
additional capital through debt or equity financing to strengthen its financial
position, facilitate growth and provide the Company with additional flexibility
to take advantage of business opportunities.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use
of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognized acquired
intangible assets apart from goodwill if they meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. The adoption
of SFAS No. 141 did not have a material effect on the Company's consolidated
results of operations or financial position.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. This Statement changes the accounting for
goodwill from an amortization method to an impairment-only method. The
amortization of goodwill, including goodwill recorded in past business
combinations will cease upon adoption of this Statement, which will begin with
the Company's fiscal year beginning January 1, 2002. However, goodwill and
intangible assets acquired after June 30, 2001 will be subject to immediate
adoption of the Statement. The adoption of SFAS No. 142 did not have a material
effect on the Company's consolidated results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", in that it removes goodwill from its impairment scope
and allows for different approaches in cash flow estimation. However, SFAS No.
144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business
segment concept in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued operation. However, SFAS No.144
retains the requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations. The Company is required to adopt the
provision of SFAS No. 144 beginning with its fiscal year that starts January 1,
2002. The adoption of SFAS No. 144 did not have a material effect on the
Company's consolidated results of operations or financial position.
Factors That May Impact Future Result
The short-term loans from commercial banks amounting to US$821,256 as of
June 13, 2002 will mature throughout 2002. If successful refinancing is not
obtained, the Company's normal operation might be affected.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
a) Exhibits: None.
b) Reports on Form 8-K: None.
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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.
GOSUN COMMUNICATIONS LTD., Inc.
Date: June 21, 2002 By: /S/ YI-BIAO CHEN
-------------------------
Yi-Biao Chen
Chairman of the Board
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