As filed with the Securities and Exchange Commission on December 31, 2008.
File No. 000-53366
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
AMENDMENT NO. FOUR
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
CHINA VOICE HOLDING CORP.
(Exact name of registrant as specified in its charter)
NEVADA 16-1680725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
327 Plaza Real, Suite 319, Boca Raton, Florida 33432
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (561) 394-2482
Copies to:
Bill Burbank
Chief Executive Officer and President
China Voice Holding Corp.
327 Plaza Real, Suite 319
Boca Raton, Florida 33432
(561) 394-2482
Ronald L. Brown, Esq.
Andrews Kurth LLP
1717 Main Street, Suite 3700
Dallas, Texas 75214
(214) 659-4400
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Not applicable. Not applicable.
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company [X]
(Do not check if a smaller reporting company)
TABLE OF CONTENTS
ITEM 1. BUSINESS..........................................................1
ITEM 1A. RISK FACTORS.....................................................12
ITEM 2. FINANCIAL INFORMATION............................................24
ITEM 3. PROPERTIES.......................................................34
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...34
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.................................37
ITEM 6. EXECUTIVE COMPENSATION...........................................39
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE............................................40
ITEM 8. LEGAL PROCEEDINGS................................................42
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS...........................43
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES..........................44
ITEM 11. DESCRIPTION OF SECURITIES........................................50
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS........................54
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................56
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................57
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS................................58
SIGNATURES....................................................................60
FINANCIAL STATEMENTS.........................................................F-1
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EXPLANATORY NOTE
You should rely only on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. You should assume that the information contained
in this document is accurate as of the date of this Form 10 only.
As used in this Form 10, unless the context otherwise requires the terms "we,"
"us," "our," "CHVC" and the "Company" refer to China Voice Holding Corp., a
Nevada corporation, and its subsidiaries.
FORWARD-LOOKING STATEMENTS
Except for statements of historical fact, certain information described in this
document contains "forward-looking statements" that involve substantial risks
and uncertainties. You can identify these statements by forward-looking words
such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will," "would" or similar words. The statements that contain these or
similar words should be read carefully because these statements discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other "forward-looking" information. China
Voice Holding Corp. believes that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able accurately to predict or control. Further, we urge you to be
cautious of the forward-looking statements which are contained in this Form 10
because they involve risks, uncertainties and other factors affecting our
operations, market growth, service, products and licenses. The factors listed
below in the section captioned "Risk Factors" within Item 1A, "Description of
Business," as well as other cautionary language in this Form 10, describe such
risks, uncertainties and events that may cause our actual results and
achievements, whether expressed or implied, to differ materially from the
expectations we describe in our forward-looking statements. The occurrence of
any of the events described as risk factors could have a material adverse effect
on our business, results of operations and financial position.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
When our Registration Statement on Form 10 becomes effective, we will file
reports, proxy statements, information statements and other information with the
Securities and Exchange Commission. You may read and copy this information, for
a copying fee, at the SEC's public reference room at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on its public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from commercial document
retrieval services, and at the web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
Our internet address is www.chvc.com. Upon the effectiveness of this
registration statement with the SEC, we will make available through a link to
the SEC's web site, electronic copies of the materials we file with the SEC
(including our annual reports on Form 10-K, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, the Section 16 reports filed by our executive
officers, directors and 10% stockholders and amendments to those reports). To
receive paper copies of our SEC materials, please contact us by mail addressed
to China Voice Holding Corp., c/o Investor Relations, 327 Plaza Real, Suite 319,
Boca Raton, Florida 33432, (561) 394-2482.
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ITEM 1. BUSINESS
General Information
Our business address is 327 Plaza Real, Suite 319, Boca Raton, Florida 33432,
and our telephone number is (561)394-2482. Our website is www.chvc.com. The
information contained in, or that can be accessed through, our website is not
part of this registration statement.
History
China Voice Holding Corp. was incorporated in New York on August 7, 2003 under
the name "Surf Franchise, Inc." On April 1, 2004, we entered into an Agreement
and Plan of Reorganization with China Voice Corp., a Nevada Corporation,
pursuant to which China Voice Corp. became our wholly-owned subsidiary through a
reverse acquisition, whereby the former stockholders of China Voice Corp.
received a controlling interest of our common stock. On April 14, 2004, we
changed our name from "Surf Franchise, Inc." to "China Voice Holding Corp." On
July 22, 2008, we reorganized the company from a New York corporation to a
Nevada corporation.
Since the acquisition of China Voice Corp. was closed through the issuance of a
controlling interest in our common stock, a subsidiary of China Voice Corp.,
Voium Technologies Ltd., was deemed as the survivor for accounting purposes.
Company Overview
We are a United States (Nevada) public holding company headquartered in Boca
Raton, Florida with a portfolio of next-generation communications products and
services doing business in the People's Republic of China and the United States.
Through our subsidiaries, we provide Voice over Internet Protocol ("VoIP")
telephone services, office automation, wireless broadband, unified messaging,
video conferencing, prepaid calling cards and prepaid cellular as well as other
advanced voice and data services primarily in China and North America. Licenses
that our Chinese subsidiaries hold give us legal status as an approved and
licensed telecommunications company to provide VoIP, telecommunication and
office automation services throughout China. During the last two fiscal years
ended June 30, 2008 and 2007, 97% and 69%, respectively, of our revenues were
derived from operations in the United States, primarily from our calling card
distribution business. See "Revenues by Segment" on page 6.
We also provide wholesale termination, which is a service described as VoIP
minutes sold on a wholesale basis utilizing the Company's telecommunications
switch and terminating the call on the service provider customer's network who
in turn terminates the call to the end user customer.
We further provide mobility services, which are the Company's ability to design,
integrate, build, deploy and manage dynamic mobile applications; engage
consulting services facilitating business development; and provide application
management services for flexible deployment options. The Company's Chinese based
technology and expertise enables its customers to provide business-critical
information to mobile employees.
Our North American operations from time to time provide an infrastructure to
support the marketing, sale and fulfillment of Asian communication products and
services in the United States. In turn, our Chinese operations provide a vehicle
to distribute and deploy U.S. telecommunication, wireless and next generation
technology products within Asia. An example of this interaction is that Cable
and Voice Corporation, one of our U.S. subsidiaries imports cable and
telecommunications products from China and because of our Chinese subsidiary,
Candidsoft, we were able to use their relationship with InterEdge Technologies
for Cable and Voice Corporation to become the sole distributor for InterEdge
VoIP devices in the United States. InterEdge VoIP products were originally
acquired for the Company's Chinese contracts.
Chinese operations also provide suppliers and customer leads for the Company's
U.S. subsidiary CVC International, Inc. Our U.S. operations source and acquire
Dell computers, servers and technology in the United States for use in China. An
example of U.S. operations providing American technology for deployment and sale
in the China market are the company's exclusive sales and marketing license
agreements with WRIO for their advanced wireless broadband technology and with
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Essential Security Software, Inc for Cypher, a patented next generation email
security and encryption application.
Our Growth Strategy
Our growth strategy starts with our existing relationships with
telecommunications companies and government entities. Our Chinese subsidiary,
Candidsoft, has enjoyed many long-term relationships with numerous government
and academic customers, such as China Foreign Trade Commission, China
Telecommunication Administration Bureau, China Tourism Bureau, China National
Anti-Poverty Organization (NAPO), Navigation Affair Administration Bureau of the
GuangXi Autonomous Region, Guang Xi Land Transport Bureau, Beijing Normal
University, and Zhong Shan University.
We have signed agreements with China's second largest telecommunications
carrier, China Netcom (CNC), to provide us with preferential rates and
cooperation. The agreements call for CNC to provide connectivity, network
expansion, installation, billing, collection and on-going support of our
government contracts. The initial phase of the agreement is for the GuangXi
Autonomous Region where we have approximately half of our contracts for our SKY
O/A integrated Office Automation and VoIP solution. In addition, CNC is private
labeling SKY O/A to sell to the Private Sector in China under the ICT Business
brand. CNC plans to market ICT following the installation of our government
contracts in the GuangXi Region. China Netcom (CNC) is currently going through a
merger with China Unicom (CUC) which is expected to be completed in January
2009. The name of the merged company is China Unicom (CUC).
These relationships give us the opportunity to reach large numbers of customers
quickly. In China, we will continue to expand and strengthen relationships with
government entities and telecommunications companies to expand our market and
customer reach. In the United States we have acquired and established multiple
companies that have extensive distribution and customers and as such generate
significant revenue. We are currently developing higher margin products and
services to sell into our customer base.
In addition, we have made multiple acquisitions and plan to continue a strategy
of pursuing targeted acquisitions of synergistic companies to achieve growth in
profitable businesses. We can gain quick access to a large number of customers
through properly planned acquisitions.
We currently have fourteen subsidiary companies; eleven in the United States
that are wholly owned, one in the Cayman Islands and two in China.
U.S. Companies
- --------------
o On February 27, 2004, China Voice Corp. entered into an agreement with
Hughes Corporation, Voium Technologies Ltd., Nations Corp. Limited and
Integrated Performance Systems, Inc. pursuant to which Voium Technologies
Ltd. became a wholly-owned subsidiary of China Voice Corp. and China Voice
Corp. acquired Hughes Corporation's exclusive VoIP license issued by the
Government of China. As consideration for the acquisition of Voium
Technologies Ltd. and the VoIP License from Hughes Corporation, China Voice
Corp. issued 50,000,000 shares of common stock to the parties to the
agreement and the remaining stockholders of Voium Technologies Ltd. On
April 1, 2004, we acquired China Voice Corp. in a reverse merger
transaction whereby China Voice and Voium Technologies became wholly-owned
subsidiaries of the Company and we issued an amount of common stock to the
stockholders of China Voice Corp. representing a controlling interest in
our Company.
o Effective June 30, 2005, we acquired East West Global Communications, Inc.,
a Florida Corporation, for the issuance of 20,028,000 shares of our common
stock.
o Pursuant to the terms of the Agreement and Plan of Merger, dated August 25,
2006, DTNet Technologies became a wholly-owned subsidiary of our company in
exchange for cash consideration of $325,000, a convertible promissory note
in the original principal amount of $675,000, and 1,000,000 shares of our
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common stock. We agreed to issue up to an additional 1,000,000 shares of
common stock if certain future earnings conditions are met.
o CVC International, Inc. was established in January 2007, a provider of
wholesale VoIP telecommunications services located in South Florida.
o Phone House, Inc. was acquired in June 2007. Pursuant to the terms of an
Agreement and Plan of Merger with the sole stockholder of Phone House we
agreed to pay cash consideration of $100,000, a promissory note in the
original principal amount of $180,000, and 650,000 shares of our common
stock. We may also issue up to an additional 1,500,000 shares of our common
stock to Phone House's former sole stockholder upon satisfaction of certain
future earnings conditions.
o We acquired Dial-Tone Communication, Inc., now a Florida corporation, on
July 19, 2007 pursuant to the terms of an Agreement and Plan of Merger in
which we agreed to pay cash consideration of approximately $47,500, a
promissory note in the original principal amount of $20,000 and 450,000
shares of our common stock. In addition, we may issue up to an additional
200,000 shares of our common stock to the former sole stockholder of
Dial-Tone Communication if certain future earnings conditions are met.
o We acquired StreamJet.Net, Inc., a Texas corporation, on October 22, 2007,
pursuant to the terms of an Agreement and Plan of Merger, dated as of March
15, 2007. Under the terms of the Agreement and Plan of Merger,
StreamJet.Net became a wholly-owned subsidiary of our company in exchange
for 4,725,000 shares of our common stock and warrants to purchase up to
16,000,000 additional shares of our common stock for $0.30 per share.
o Cable and Voice Corporation was established on June 1, 2008, a master
distributor of advanced broadband products and services located in Tampa,
Florida.
o StarCom Alliance, Inc. was established in January 2008, as a Master
Distributor of prepaid cellular products and services.
o Three other U.S. subsidiaries are not active.
Foreign Companies
- -----------------
o Voium Technologies, Ltd. is a Cayman Islands corporation that acts as the
holding company for our Chinese companies.
o In China, we own 100% of Vastland Holding Beijing Co. Ltd., a Wholly-Owned
Foreign Enterprise (WOFE) established in July 2007, that is an approved and
registered legal entity operating within China that allows us to bank
through HSBC, and Candidsoft Technologies Company Ltd. of Beijing, Inc.,
acquired in January 2006, of which we own 65%. As consideration, we issued
4,925,000 shares of our common stock and, subject to satisfaction of
certain future earnings objectives of Candidsoft, we may issue up to an
additional 2,000,000 shares of common stock to the selling Candidsoft
stockholders.
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An organizational chart of our Chinese operating structure is as follows:
China Voice Holding Corp. (US)
-----------------------------
VOIUM Technologies, Ltd. (Cayman Islands)
-----------------------------------------
100% 65%(1)
Vastland Holding Beijing Co. Ltd. Candidsoft Technologies Company, Ltd.
--------------------------------- ------------------------------------
(PRC) (PRC)
(1) Our ownership of Candidsoft is maintained as follows. We acquired 65%
beneficial ownership from Chun Lin Xing, who retained 35% and retained
ownership of record and entered into the following agreements:
1. Trust Agreement, which provides for Mr. Xing to vote the stock and
elect directors for the benefit and at the direction of our subsidiary
Voium Technologies Ltd. We are also holding 100% of the stock
certificates of Candidsoft endorsed in blank.
2. Technology Agreement provides for a payment to Voium of 65% of the
profits of Candidsoft, thus allowing for payments to Voium which can
then be remitted to us.
3. Asset Purchase Agreement conveying all Candidsoft assets to Voium and
allowing us to control the Candidsoft contracts and intellectual
property.
The result of these agreements is that neither VOIUM nor the Company owns an
equity interest of record in Candidsoft, and our control of Candidsoft and
ability to derive benefit from Candidsoft is derived only through these
contractual arrangements. We have obtained an opinion from Chinese counsel that
these agreements effectively convey ownership of Candidsoft to VOIUM under
Chinese law.
Products and Services
We offer a variety of next generation communications products and services to
government and business entities in the United States and China through our
portfolio of subsidiaries. Our business interests are separated into four
segments; Communications Software Development, Telecommunications Services,
Calling Card Distribution and Advanced Broadband Hardware Distribution. The
following is a description of each of our subsidiaries and the products and
services they provide as well as their business segment that they fit into. All
subsidiaries provide monthly financial reporting to our Controller in South
Florida.
As referenced above, we classify our business interests into four segments:
Communications Software Development - In China, we have developed patented
Office Automation and Internet Telephony technology platforms for large
enterprise and government applications. Our web-based technology was designed
around the specific needs of the Chinese Government and allows multiple workers
to collaborate on a singe project and enables management to effectively monitor
virtually every aspect of the workers on-line and telephony experience.
Candidsoft Technologies Company Ltd. of Beijing, Inc. (Candidsoft) is an
international software company based in the Zhong-Guan-Cun Science and
Technology Park in Beijing, China. CandidSoft has used local expertise to
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research, develop, and establish information and communication platforms for
business and government applications. CandidSoft uses "SKY O/A" as the product
trademark and separates products into three general categories: O/A Cooperative
Office Solutions, O/A Integrated Office Solutions, and O/A Unified Processing
Solutions. The Company provides office automation and integration services to
government, academic and commercial customers and has developed China's first
patented Office Automation application, in large part guided by the needs of
Chinese Government Agencies. This platform was designed for flexibility and may
be easily modified or extended to meet the specific needs of each Chinese
Government Agency or Large Enterprise Company. SKY O/A(TM) uses a web-based
technology and allows multiple workers to collaborate on a single project. The
SKY O/A(TM) Office Automation platform currently supports over one million users
within China. We are currently installing "seats" that consist of our SKY O/A
office automaton application, VoIP and telephony services to our five contracts
with three large Chinese Government agencies. We are focused on delivering our
voice and data solutions to Chinese Government Customers and have partnered with
China Netcom to private label our services to sell to the private sector. Our
service offerings are designed to generate significant cost savings on capital
expenditures and ongoing expenses for customers.
Telecommunications Services - We provide VoIP telecommunications services to
Carriers, Cable companies, large Call Contact Centers and other communication
Service Providers. Our Network Operations Center (NOC) is based in Florida and
utilizes a next generation Enhanced Services platform that is manned 24/7. Fully
redundant technologies are deployed in a scalable network environment to enable
the Company to compete effectively and efficiently in the ever-evolving and
rapidly growing IP telecommunications marketplace. We are focused on proving
high quality and large volume international routes at competitive prices.
CVC International Inc. serves fixed line, mobile, wholesale and VoIP carriers as
well as calling card, ISPs and content providers around the world who buy and
sell voice and IP telecommunications capacity. The Company's Network Operations
Center (NOC) is fully manned 24 x 7. Our NOC is a secure location that contains
battery backup and power generators to eliminate electrical outages, and several
rack-mounted servers and other equipment needed to support our network. The NOC
monitors all aspects of the technical environment, from its extensive backbone
to network routers, SIP proxies, numerous routing gateways and soft switches.
The Company's network consists primarily of communications services providers
that buy and sell voice minutes and Internet capacity through our enhanced
services platform. Most of the Company's business is generated by us acting as a
cost-effective middleman to direct connections. Most of the time, our customers
do business with us because they do not have the ability, knowledge or
relationships to purchase on a direct basis. When a price and quality of the
route are agreed upon, voice calls or Internet capacity are then routed through
our platform. In this very fluid and ever changing business, rates change
frequently as do the availability of quality routes. The Company focuses on
selling high volumes of international termination business. The Company has
Network Operations Centers located in Tampa and Boca Raton, Florida. Currently,
CVC International's network is utilized exclusively to support its VoIP
wholesale termination business. In early 2009, CHVC plans to develop, market and
distribute a private branded prepaid calling card line through its subsidiaries
Phone House, Dial Tone and StarCom Alliance. CHVC plans to use CVC
International's network, billing and switching platform to support this new
product line which is expected to generate higher profit margins on cards sold
through these subsidiaries. Through the licenses and relationships of CHVC's
China subsidiaries, the Company has legal access to various origination and
termination telecommunication services. We believe the Company can provide a
vehicle for the marketing and sale of these hard-to-find China services.
Effectively, the Company acts as a middleman between a phone company and a
country by placing its own hardware in a telecommunications hub. It takes a fee
for calls originating (made from) or terminating (final connection) through its
hub based hardware. Additional information on the company may be found at
www.CVCINTL.com.
Calling Card Distribution - Our calling card distribution business sells prepaid
telephone and cellular calling cards purchased from various telecommunications
carriers through a network of private distributors located primarily in southern
California. We currently have three subsidiaries that fit into this business
segment.
Phonehouse U.S.A., Inc. and Dial-Tone Communications provide discount calling
cards that enable users who purchase cards in the United States to call China,
India, Mexico, Africa, South America, Brazil, Bangladesh, and other countries
throughout the world at significant savings. We do not resell calling cards that
provide long-distance minutes in restricted areas such as Cuba, Syria, Sudan or
Iran. These calling cards may be used to call from the United States to other
countries, to call from other countries to the United States, or to call between
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countries outside the United States. Although the communications business is
changing everyday, there will always be a place for selling discount calling
cards to a very large population which has little or no access to credit, or are
unable to establish a bank account or a postpaid telephone services account. We
plan to leverage the special termination rates that we have negotiated through
our CVC International, Inc and China subsidiaries to develop profitable
private-labeled calling cards that will be marketed to targeted ethnic
populations within the United States. The Company's calling cards are currently
sold through a network of over 90 private distributors. Through this network,
the Company estimates that its calling cards are sold through over 10,000 retail
outlets in the United States, of which more than 5,000 retail outlets are
located in Southern California.
StarCom Alliance, Inc. was established in January 2008 as a master distributor
of prepaid cellular products. StarCom's products provide customers with reduced
calling rates for both national and international destinations. The Company's
prepaid products include cellular phones, sim cards, cellular calling cards and
refill pins. While there will always be a demand for the traditional prepaid
calling cards, currently major growth is on prepaid cellular products. This
growth is fueled by the desire of customers to better manage their mobile costs
and to have certain features and flexibility that the "contract" (or post-paid)
services do not offer.
Advanced Broadband Hardware Distribution - The hardware distribution line
supplies broadband, WIFI, and VoIP components hardware to broadband service
providers.
As referenced above, on June 1, 2008 we established Cable and Voice Corporation,
a Florida Corporation to better take advantage of the opportunities in the Cable
industry.
Cable and Voice Corporation is a value-added distributor of advanced broadband
products and services. This operation also provides centralized, cost-effective
and efficient warehousing, shipping, receiving and fulfillment for all U.S.
operations. For over nine years Cable and Voice Corporation (formerly DTNet
Technologies) has delivered quality broadband, VoIP and wireless products to
enterprise, government, and service provider customers throughout the world. The
Company's products include cable modems, DSL/ADSL modems, cables, UPS units, AV
Powerline and Homeplug adapters, WIFI and cellular wireless hardware and
software applications, Intelligent Telephone Adapters (ITA) and IP Telephones
for VoIP services and other customer premise equipment. Working closely with its
international partners, the company has been able to provide excellent quality
at very competitive prices. Cable and Voice Corporation also sells an enhanced
residential VoIP broadband private label services offering to complement its
customers' core services. Cable and Voice Corporation's clients include many of
the top 10 largest cable operators, as well as regional and local providers. The
Company was awarded one of the first Platinum Vendor designations from the
National Cable Television Cooperative (NCTC), which gives the Company access to
more than 1000 independent cable companies with over 15 million subscribers
throughout the United States. We believe that good service, knowledgeable
salespeople and capable technical support have given the Company our edge over
its competition. Additional information on the company may be found at
www.CableandVoice.com.
Revenues by Segment. Each of these segments has contributed the following in
revenues during the last two fiscal years and first quarters:
Communications Telecommunication Calling Card
Period Software Services Distribution Hardware Distribution
YE 06-30-07 $ 184,116 $ 626,397 $ 719,124 $ 811,533
YE 06-30-08 309,343 3,521,385 31,446,244 1,156,775
Q1 09-30-07 136,081 581,634 5,051,339 304,456
Q2 09-30-08 95,985 669,453 14,746,421 457,493
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Total revenues by such periods were derived from operations in the United States
and China, respectfully, as follows:
Period US Operations China Operations
YE 06-30-07 $ 1,626,153 $ 716,070
YE 06-30-08 35,486,367 947,380
Q1 09-30-07 5,655,763 417,747
Q2 09-30-08 15,868,367 95,985
Distribution and Marketing
Our marketing strategy in China is based on our existing relationships with
government agencies and China's number two telecommunications carrier, China
Netcom, (CNC). CHVC will utilize CNC for sales of the Company's services to the
private sector through Sky O/A software licensing. CNC has also entered into an
agreement to provide Data Center hosting, broadband services, installation,
first level support, billing and collection of Candidsoft's services for its
Chinese Government Contracts. Our business model in China is recurring, whereas
we typically bill for our services on a monthly basis and our technology
solutions are licensed and not sold.
Our United States marketing strategy builds on our established customer base and
business relationships of DTNet Technologies/Cable and Voice Corporation, CVC
International, Phone House, Dial Tone Communications and StarCom Alliance
described above.
Technology and Intellectual Property
We employ a number of technologies, some of them proprietary, to deliver our
next-generation communications services. Through our China subsidiary,
Candidsoft, we have developed China's first patented groupware/office automaton
with integrated VoIP, which can be easily customized to meet specific needs of
customers to provide a web-based collaborative work venue.
In China, we have assembled a substantial and valuable collection of next
generation technology licenses to operate and deploy our services. The Chinese
government does not own any proprietary rights in any of the Company's
technology.
Our licenses consist of:
(1) Value-added Telecom Services Operating License -- reissued on March
31, 2006 -- expires on May 7, 2010 -- for: Value-added Telecom
Information Services (limited to VAS on Mobile network), Fax storage
and forwarding services, Internet Connection Services, Call Center
Services -- Renewable upon request This license enables the Company to
deploy its services throughout China directly to private sector
customers.
(2) Telecom and Information Service Operating License -- issued on March
21,2006 -- expires on June 1, 2010 -- for: Internet Content Service --
All services except news, publication, education, health care,
medication, and medical equipment -- Renewable upon request. This
license enables the Company to deploy its services throughout China
directly to private sector customers
(3) Our China subsidiary, Candidsoft is able to use, under its contract
partner -- China Netcom's "Facilities Based Operator", a license which
grants the right to operate and provide basic telecom services for
much of the companies' current deployments. This also enables us to
sell and deploy its application software to China Netcom on a private
label basis.
The core technology for our advanced hosted services platform consists of both
licensed and open source softswitch technology. We have developed a number of
supplemental processes to enhance the platform, enabling us to offer multiple
platform features and seamlessly integrate the platform with customer office
automation systems.
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The equipment necessary to run the platform is connected by a private IP
network, which helps to eliminate the poor latency, high jitter, and high packet
loss often found in Chinese internet and IP networks. Our network is fully
connected to public land lines and mobile networks in China, major internet
service providers in China and international call carrying systems. Our
technical infrastructure is fully scalable, needing only additional hardware to
support new contracts.
Through Candidsoft, the company has developed China's first patented and
copyrighted groupware/office automaton application now with integrated VoIP,
which can be easily customized to meet specific needs of customers to provide a
web-based collaborative work venue. The Company's patents and copyrights protect
CHVC's China operations from competition.
Our software patents and copyrights consist of the following:
(1) Software Patent: Guo Li Xin Office Automation System - China - Issue
Date: March 6, 2006
(2) Software Patent: National Anti-Poverty Organization Integrated
Information System for Counties and Villages - China - Issue Date:
March 6, 2006
(3) Software Patent: National Anti-Poverty Organization Integrated
Information System - Training system for labor movement, Anti-Poverty
system, and digital library subsystem - China - Issue Date: March 6,
2006
(4) Software Patent: CoMaster VoIP System for Virtual Area Networks -
Singapore - Issue Date March 8, 2004
(5) SkyOA Office Automation Groupware - National Copyright Administration
of The People's Republic of China - This is the original copyright
certification issued in 2001, SKY O/A no telephony component
(6) SkyOA Unified Communications Groupware - National Copyright
Administration of The People's Republic of China - This is the
certification issued in December 2006 for SKY O/A with telephony
(7) SkyOA Unified Communications Groupware - Beijing Municipal Science and
Technology Commission - This the latest license that was issued by
Beijing City, essentially the same as (2) but from a different issuing
body.
All certificates are valid for five years and they are renewable.
StreamJet.Net holds the exclusive sales and marketing license for China from
Essential Security Software for a patented next generation email security and
encryption application.
WRIO Wireless Broadband Technology has awarded us with exclusive sales and
marketing rights in China.
From time to time, we may be subject to proceedings or claims alleging
infringement of intellectual property rights of third parties or where we
initiate claims to protect the intellectual property rights of our technology.
Such matters may require us to expend significant sums in litigation and/or in
licensing fees. Moreover, such claims could result in significant damages being
awarded, and/or the requirement to develop non-infringing technology, or acquire
additional licenses to the technology that is the subject of the asserted
infringement, any of which could have a material adverse effect on our business.
We rely upon copyright, trademark, patents and trade secret protection to
protect our proprietary rights in our products and processes; however, there can
be no assurance that these protections will be adequate to deter
misappropriation of our technologies or independent third-party development of
potentially infringing technologies.
8
The business telecommunications industry is characterized by rapid technological
change. Industry participants often find it necessary to develop products and
features similar to those introduced by others, with incomplete knowledge of
whether patent protection may have been applied for or may ultimately be
obtained by competitors or others. The telecommunications industry has
historically witnessed numerous allegations of patent infringement and
considerable related litigation among industry participants. As noted above, we
may receive claims of patent infringement from third parties seeking substantial
sums and may be sued in federal court for patent infringement. In response to
prior infringement claims, we may pursue settlements and/or obtain nonexclusive
licenses entitling us to utilize the patented technologies or processes that are
widely licensed and used in the telecommunications industry. These licenses may
either expire at the end of the patent license or the end of an agreed-to
period.
During the most recent two years ended June 30, 2008, we spent $155,315 on the
research and development of our SKY O/A office automation and VoIP system in
China.
The Company's Essential Security Software and WRIO agreements do not currently
impact the Company's revenue nor are they the focus of the Company. CHVC does
however expect them to make a significant contribution to the Company's revenue
and profitability in the future. The Company expects to commit resources to
these technologies in the third or fourth quarter of 2009.
Customers and Certain Contracts
We serve primarily the China and United States market, with a focus on
established communications companies, cable television providers and government
entities. Our customers have been acquired primarily through the acquisition of
existing companies. We are also leveraging our relationships with established
telephone companies and government entities to reach new customers. In China,
our Communications Software Development company, Candidsoft, has sold its Office
Automation application, SKY O/A to agencies such as the China Foreign Trade
Commission, China Telecommunication Administration Bureau, China Tourism Bureau,
China National Anti-Poverty Organization, Beijing Normal University, Zhongshan
University, Ningxia Population Control Bureau, Chong Wen Education
Administration, Xiag Jiang Military Division, He Bei Province Economic
Development Bureau, Qin Zhong Merchant Bank, Chang Sha Navigation Affair
Administration Bureau, China Cotton Network, Beijing Engine Manufacturer,
Beijing Language School and the Shang Xi Province School of Chemical
Engineering. As discussed above, revenue from these customers has been
immaterial, consisting of $947,300 for the year ended June 30, 2008 and $95,925
for the three months ended September 30, 2008.
In the past, Candidsoft's sales model was to sell the use of SKY O/A to its
customers and configure, integrate and customize each installation to meet each
customer's specific needs on a contract per contract basis. During the last 18
months Candidsoft has transitioned to an Application Service Provider (ASP)
model sometimes referred to as "hosted" or a rental model to provide reoccurring
monthly revenue rather than the one time contract sale model used in the past.
The Company currently has five Contracts with three Government Agencies that
call for 103,000 Office Automation with VoIP telephony services (Seats). The
National Anti-Poverty Organization (NAPO) is an existing customer of the
Company's Office Automation applications. They have contracted the Company to
integrate voice applications into its Office Automation platform so that data
and voice communications can be truly unified. The integrated solution is
specially designed to meet NAPO's unique needs as a multi-level and
multi-location Chinese government agency. In addition, the Navigation Affairs
Administration Bureau of the GuangXi Autonomous Region is a relatively new
customer that has entered into an agreement to purchase Candidsoft's integrated
office automation system and voice applications. This agency wants to provide
end users the ability to combine video, voice, and data services, convert
information from different networks and present to the users in a unified
format. End users are able to access different functions of the platform easily
no matter what time it is, where they are, and what access media they use.
The government agencies that make up most of Candidsoft's current contracts and
future expected revenue are the National Anti-Poverty Organization (NAPO),
Navigation Affairs Administration, and the Guang Xi Land Transport Bureau (GXT).
Another government entity and partner, China Unicom is also a customer for
Candidsoft's new SCDMA cellular for application for SKY O/A that enables
teleconferencing and IM Chat. In addition, the Company also has a contract with
a private company called GuangXi ChaoDa Group ("ChaoDa"). ChaoDa is recognized
as a member of the Chinese Service Industry 500, the Chinese Transportation 100,
the Chinese Land Transportation 100 and the GuangXi Enterprise 50 Companies.
9
In the United States, our Advanced Broadband Hardware subsidiary, Cable and
Voice Corporation, customers include the National Cable Television Cooperative,
which gives us access to more than 1,000 independent cable companies. Our
Telecommunications Services subsidiary, CVC International, customer's are
service providers, Call Centers and Telecommunications Carriers and VoIP
Providers. Calling Card Distribution subsidiaries, Phone House, Dial Tone, and
StarCom Alliance, sell wholesale prepaid calling cards and prepaid cellular
products and services to distributors that typically service convenience stores
in Southern California.
We expect our revenue concentration in China vs. the U.S. to be greater in the
U.S. during the next six months. In the United States, through our StarCom
Alliance Inc and Phone House Inc subsidiaries, we have signed Exclusive Supplier
Agreements with two large distributors; Prepaid Power Distribution and Sarah
Enterprises. Approximately 37% of our total revenue during fiscal 2008 was
derived through the Prepaid Power contract, and an additional 4% through the
Sarah Enterprises contract.
Most of our government contracts in China are for periods of five or ten years
and generally have the right to cancel ongoing or planned orders. Such right to
cancel applies to the contract with China Netcom. If any of these contracts were
canceled or there were significant reductions in expected orders under any of
the contracts, our current and projected revenues could decrease significantly
and our business could be severely harmed.
In the U.S. we are dependant upon the continuation of our Exclusive Supplier
Agreements with the companies referenced above. If any of these contracts were
discontinued or there are significant reductions in expected orders under any of
the contracts, our current and projected revenues could decrease significantly,
and our business could be severely harmed.
Backlog
We currently have five contracts with three large government agencies in China
that call for the installation of 103,000 seats. The Company has installed
approximately 1,000 seats, trained two groups of CNC personnel for installation
and customer support and we are increasing installations at a rapid pace. A seat
consists of a SKY O/A office automation license and configuration and IP Phone
or ITA end devices to deliver VoIP telephone services.
Competition
We are subject to significant competition that could impact our ability to gain
market share, win business and increase the price pressure on our products. We
face strong competition from a wide variety of firms, including large, national
and international telecommunications companies. Many of our competitors have
considerably greater financial, marketing and technological resources, which may
make it difficult to win new contracts and compete successfully. Certain
competitors operate larger facilities and have longer operating histories and
presence in key markets, greater name recognition, larger customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources. As a result, these competitors may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources to the
promotion and sale of their products. Moreover, we may not have sufficient
resources to undertake the continuing research and development necessary to
remain competitive.
We believe the principal factors that generally determine a company's
competitive advantage in Communications Software Development products and
services market include the following:
o applications developed in China around the specific needs and requirements
of the Chinese Government and large enterprise companies;
o patented, copyrighted and licensed technology in China;
o well established relationships that make opportunities available to the
company and protect our interests in China;
o engineering and design capabilities;
10
o broad functionality, durability and reliability of products and services;
o proven record of products and service with over 1 million users on Sky O/A
platform in China;
o investment in research and development;
o broad understanding of the availability of products in the industry;
o flexibility and configurability to meet complex customer requirements;
o commonality of parts, hardware and transparency; o ease of integration with
existing equipment; and
o competitive sales and marketing capabilities.
The Company has different competition in each of its subsidiary companies. In
the U.S., the primary competitors for Cable and Voice Corporation are Motorola,
Arris Telewire, Westel, Comtrends, VoIP Supply, Scott Cable, Adams Global, and
SMC. In addition some of Cable and Voice Corporation's suppliers have the
ability to make direct sales to our customers. CVC International competes with
all telecommunications carriers and suppliers. Most of CVC's Sales Agreements
are reciprocal, meaning that both companies can either buy or sell to each
other. Phone House and Dial Tone's primary competition in Southern California
are Base Communications, Krossland International, NPR Telecommunications and
NSI/TSI. Starcom Alliance, Inc.'s primary competitors are Lunes
Telecommunications, Vincent Communications and Universal One Distribution.
In China, the Company has very little competition at this time primarily because
the Company's product was developed in Chinese, by Chinese Nationals, around the
specific needs of the Government and large Enterprise companies. In addition
because of the Company's business relationship with China Netcom (soon to be
China Unicom), where they provide connectivity and installation of the Company's
Government contracts and will also private label our platform for sale to the
private sector, the Company believes that this partnership provides a strong
validation of our technology. The closest product to the Company's technology is
IBM's Lotus 8, however, it was designed and manufactured in the U.S. in English
and therefore, it does not pose any competitive threat to the Company's business
in China.
Employees
As of September 30, 2008, we had approximately 49 full-time employees, 27 of
which are located in China working with Candidsoft, our Communications Software
Development subsidiary. Employees working in the U.S. include corporate
administrative and executive personnel. Our employees are not represented by any
collective bargaining agreement, and we have never experienced a work stoppage.
We believe we have good relations with our employees. To continue expanding our
revenues we will require additional staffing and support, particularly in the
areas of administrative, engineering, sales and administration.
Future Prospective Operations
We have a number of plans for operations and prospects we intend to pursue in
the future after we develop a substantial base of operations and cash flow. Many
of these will require additional capital funding and will depend upon market
conditions for equity and debt financing, which are not possible to predict.
These future plans may include one or more of the following. Our ability to
implement these plans will depend upon having adequate resources from financing
sources or cash flow from operations:
o Pursue targeted acquisitions of companies that complement our business. We
may finance future activities through the sale of our equity securities,
borrowings from lending institutions or through the issuance of our equity
securities as consideration for the sale of an acquisition target. If we
11
finance future acquisitions through the sale of our equity securities or
issue equity securities as consideration, our stockholders may experience
dilution of their ownership percentage in our company. If we make
borrowings through lending institutions, we may be subject to restrictions
that may inhibit our ability to take certain corporate actions, may be
required to pledge all or substantially all of our assets as collateral or
may issue additional securities to our lenders that may further dilute our
current stockholders. We can provide no assurances that financing for
future activities will be available at all, or on terms that are acceptable
to the Company. There are no acquisitions pending as of the date of this
report.
o East West Global Communications Inc. has acquired licenses allowing us to
offer advanced communications services in China. This Subsidiary opened the
door to China to the Company with established relationships and licenses to
support next generation technologies. Our operations in China are discussed
elsewhere in this Item 1.
o StreamJet.Net holds the exclusive sales and marketing license from Cypher,
a patented next generation email security and encryption application owned
by Essential Security Software, Inc. for China. The Company is currently
developing a project plan to localize, sell and market this product in
China through Candidsoft. We expect to allocate resources to this project
during the second half of 2009.
o Develop, market and deploy private branded prepaid calling cards utilizing
the Company's Network and Enhanced Services Platform. Implementation of
this project will require funding, and is a longer-term objective.
o Commit time and resources to the business of selling pre-paid cellular
calling cards and other products through our StarCom Alliance subsidiary.
This has begun.
o Supply a wireless broadband network built upon the patent-pending Hybrid
Digital Video Broadcast (HDVB(TM)) technology developed by WRIO Wireless
Broadband Technology, which utilizes a proprietary, centralized,
long-range, high-data rate forward link based on the Digital Video
Broadcast (DVB) international standard. The technology provides very
high-speed transmission of voice, data, and video information at an
infrastructure cost which is less than 20% of competitive technologies. In
addition, due to its unique topology and its full quality of service
support, WRIO's network supports a wide variety of applications, such as
video broadcasting, Voice over IP (VoIP), video conferencing, and digital
radio. This allows the Company to provide VoIP services on its own network.
It also allows flexible configuration for secure, inter-office virtual
private networks and custom, high-data rate applications. We expect to
allocate resources to this project during the second half of 2009.
o Increase our Chinese revenues upon the implementation of our government
contracts and the launch of our SKY O/A solution on a private label basis
through China Netcom to private companies. We expect these results during
2009.
o Enter into new contracts to provide telecom solutions to the Chinese
government. These are being pursued.
ITEM 1A. RISK FACTORS
You should consider carefully the following risk factors before you decide to
purchase our common stock. Investing in our securities is speculative and
involves a high degree of risk.
Risks Related to Our Business
We depend on key management personnel and the loss of their services could
adversely affect our business.
We rely substantially on the efforts and abilities of our executive officers,
Bill Burbank, Chief Executive Officer and President, D. Ronald Allen, Chief
Financial Officer, Chun Lin Xing, President of China Operations, Jose Ferrer,
Chief Operating Officer, Rafael Zambrano, Chief Technology Officer, John
Iacovelli, Chief Information Officer, and Jason H. B. Lim, Chief Operating
12
Officer--Asia Operations. The loss of the services of any of our executive
officers may have a material adverse effect on our business, operations,
revenues or prospects.
Also, we believe that our future success will depend in large part on our
ability to attract and retain highly skilled, knowledgeable, sophisticated and
qualified managerial, professional and technical personnel. We have experienced
significant competition in attracting and retaining personnel who possess the
skills that we are seeking. As a result of this significant competition, we may
experience a shortage of qualified personnel.
We need to successfully manage the integration of our acquired businesses to
maximize our potential growth and achieve expected revenues, and our failure to
do so will disrupt our growth and affect our ability to generate revenue.
Our growth strategy is based on pursuing targeted acquisitions of synergistic
companies to achieve growth in profitable niches. Our financial condition and
growth depend upon the successful integration of these acquired businesses.
Successful integration will depend on our ability to efficiently and effectively
combine operations, realize opportunities for revenue growth presented by
strengthened capabilities and expanded geographic markets and eliminate
redundant and excess costs. Also, difficulties in combining geographically
distant operations may add to existing integration challenges. Our failure to
efficiently and effectively integrate recently acquired operations may
negatively affect our ability to realize the anticipated benefits from such
acquisitions and may ultimately prevent us from generating the revenues we
expect.
If we are unable to manage the many risks associated with integrating our
acquisitions our business and financial condition will be adversely affected.
The integration of our acquired businesses and any future businesses that we may
acquire involves a number of risks, including, but not limited to:
o demands on management related to the significant increase in size after the
acquisition;
o the disruption of ongoing business and the diversion of management's
attention from the management of daily operations to the integration of
operations;
o loss of key personnel of the recently acquired operations;
o loss of customers post-integration;
o higher integration costs than anticipated;
o failure to fully achieve expected synergies and costs savings;
o difficulties in the assimilation and retention of highly qualified,
experienced employees;
o resistance to the assimilation of different cultures and practices, and
complexity in the assimilation of personnel and operations which are
broadly geographically dispersed; and
o unanticipated impediments in the integration of departments, systems,
including accounting systems, technologies, books and records and
procedures, as well as in maintaining uniform standards, controls,
including internal control over financial reporting required by the
Sarbanes-Oxley Act of 2002, procedures and policies.
Our inability to efficiently and effectively manage these risks as they arise
will have a material adverse effect on our business, financial condition,
results of operations and future prospects.
13
We may be unable to successfully identify, manage and assimilate future
acquisitions, investments and strategic alliances, which could adversely affect
our results of operations.
We continually evaluate potential investments and strategic opportunities to
expand and add traffic to our network and enhance connectivity. In the future,
we may seek additional investments, strategic alliances or similar arrangements,
which may expose us to various risks, including:
o difficulty identifying appropriate investments, strategic allies or
opportunities;
o the possibility that senior management may be required to spend
considerable time negotiating agreements and monitoring these arrangements;
o the possibility that definitive agreements will not be finalized;
o regulatory issues related to the telecommunications business;
o loss or reduction in value of our capital investments;
o inability of management to capitalize on the opportunities presented by
these arrangements; and
o the possibility of a strategic ally becoming insolvent.
There can be no assurance that we will successfully overcome these risks or any
other problems encountered in connection with our investments, strategic
alliances or similar arrangements.
Our recurrent inability to continue as a going concern may require us to cut
back operations which would have a negative effect on our business.
Our independent registered public accounting firm's opinion regarding our 2008
and 2007 financial statements, included herein expresses doubt regarding our
ability to continue as a going concern. For the past two years or more we have
operated with limited operating capital, we continue to face immediate and
substantial cash needs, and there is a risk we may continue to require more
investment capital to fund our business plan.
Our plans to become cash flow positive may not be successful, and other actions
by the Company may become necessary. We have been successful raising capital in
the past and we may need to raise additional capital in the future or reduce the
level of our operations. Cutting back our operations will result in a material
adverse effect on our business and revenue.
We must be able to increase the volume of traffic on our network to become
profitable.
Certain aspects of our business depend on the increased volume of traffic on our
network. In order to realize our targets for sales and revenue growth, cash
flow, operating efficiencies and other network benefits, we must continue to
increase the volume of Internet, data, voice and video transmissions on our
communications network at acceptable prices. If we do not maintain or improve
our current relationship with existing customers and develop new large-volume
and enterprise customers, we may not be able to substantially increase traffic
on our network. The failure to increase network traffic will adversely affect
our ability to become profitable.
Intellectual property and proprietary rights of others may prevent us from using
the technology necessary to provide our services and may subject us to expensive
intellectual property litigation.
If a court determines that the technology necessary for us to provide our
services infringes a patent held by another person, and if that person is
unwilling to grant us a license on acceptable terms, we may be ordered not to
use the technology. We may also be ordered to pay significant monetary damages
to the patent-holder. If we are ordered not to use the technology, we may be
forced to cease offering services that depend on such use. In the event that a
claim of infringement is brought against us based on the use or sale of our
14
technology, or against any of our customers based on the use of our technology
which we have agreed to indemnify our customers against, we may be subject to
litigation to determine whether there is an infringement. Such litigation is
expensive and distracting to our business and operations, regardless of the
outcome of the suit.
Our business depends on our ability to continue to develop effective business
support systems, and the failure to do so would have a negative effect on our
achievement of financial goals and objectives.
Developing effective business support systems is a complicated undertaking
requiring significant resources and expertise and support from third-party
vendors. Business support systems are needed to:
o implement customer orders for services;
o provision, install and deliver these services; and
o bill monthly for these services.
Because our business provides for continued rapid growth in our number of
customers and our volume of services we offer, we need to continue to develop
our business support systems on an accelerated schedule. Our failure to continue
to develop effective business support systems and meet proposed service rollout
dates will materially adversely affect our ability to implement our plans for
growth and meet our financial goals and objectives.
Termination of relationships with key suppliers could cause delay and increased
costs which may adversely affect our business.
Our business is dependent on third-party suppliers for computers, software,
transmission electronics and related components that are integrated into our
network. If any of these relationships is terminated or a supplier fails to
provide reliable services or equipment and we are unable to reach suitable
alternative arrangements quickly, we may experience significant additional
costs. If that happens, our business may be materially adversely affected. We
depended on our contractual relationship with Prepaid Power Distribution for
approximately 37% of our revenue in the fiscal year ended June 30, 2008, and for
approximately 50% of our revenues in the first quarter ended September 30, 2008,
and the loss of that contract could have a material adverse effect on us. The
contract is in effect through January 10, 2009 and renews automatically in
January of each year unless either party sends a notice of non-renewal 60 days
prior to the renewal date.
We will depend upon our relationship with China Netcom for the development of a
major portion of our business in China.
We depend greatly on China Netcom's ability to provide timely broadband and
standard telephone connectivity, installation, first level support and the
monthly billing of our Government contracts. If this relationship was lost, the
Company's Chinese business could be materially adversely affected. Although we
have a contract with China Netcom, China Netcom has the right to cancel the
contract for any reason. This cancellation feature is contained in all of our
contracts with agencies of the Chinese government.
We may lose customers if we experience system failures that significantly
disrupt the availability and quality of the services that we provide.
Our operations depend on our ability to avoid and mitigate interruptions in
service. It is possible that we may experience a failure of the equipment or
facility on our network could result in a significant interruption. Our network
is subject to a number of events that could affect its ability to transfer
information, including power outages, security breaches and computer viruses.
Many of these events may be due to forces beyond our control, such as weather
conditions, natural disasters and terrorist attacks. As a result, our network
may experience information delays or require costly modifications that could
interrupt service to our customers or significantly harm our business.
Interruptions in service undermine consumer confidence in our services and
affect our ability to retain existing customers and attract new ones. Also,
because many of our services are critical to our customers' businesses, any
15
interruption will result in loss to our customers. Although we disclaim
liability for loss arising from interruptions in service beyond our control in
our service agreements, a court may not enforce such limitations. As a result,
we may be exposed to financial loss if a court orders us to pay monetary
damages.
During our history we have generated substantial losses, which we expect will
continue.
The development of our communications business has required, and may continue to
require, significant expenditures. These expenditures may result in substantial
negative cash flow from operating activities and substantial net losses in the
near future. For the fiscal years ended June 30, 2008 and June 30, 2007, we
incurred net losses of approximately $5.3 million and $4.7 million,
respectively. We may continue to experience losses and may not be able to
achieve or sustain operating profitability in the future. Continued operating
losses may limit our ability to obtain the cash needed to expand our network,
make interest and principal payments on our debt and fund our other business
needs.
Risks Related to Our Industry
If we are unable to fund the expansion and adaptation of our network to stay
competitive in the communications industry, our business will be adversely
affected.
The communications industry is subject to rapid and significant changes in
technology. In addition, the introduction of new services and technologies, as
well as further development of existing services and technologies, may reduce
the cost or increase the supply of those we provide. As a result, our most
significant competitors in the future may be new entrants to the communications
industry. These new entrants may not be burdened by an installed base of
outdated equipment and may be better able to respond to the demands of our
industry, such as:
o growing number of customers;
o development and launching of new services;
o increased demands by customers to transmit larger amounts of data;
o changes in customers' service requirements;
o technological advances by competitors; and
o governmental regulations.
In order to stay competitive in our industry we must expand and adapt our
network according to these demands. This will require substantial additional
financial, operational and managerial resources, which may not be available when
needed. If we are unable to fund the expansion or adaptation of our network
quickly and at a commercially reasonable cost, our business will be materially
adversely affected.
Failure to complete development, testing and introduction of new services,
including VoIP services, could negatively affect our ability to compete in the
industry.
We continuously develop, test and introduce new communications services that are
delivered over our communications network. These new services are intended to
allow us to address new segments of the communications marketplace and to
compete for additional customers. In certain instances, the introduction of new
services requires the successful development of new technology. To the extent
that upgrades of existing technology are required for the introduction of new
services, the success of these upgrades may depend on successful dealings with
our vendors and on our vendors fulfilling their obligations in a timely manner.
If we are not able to successfully complete the development and introduction of
new services in a timely manner, our business could be materially adversely
affected.
16
In addition, new service offerings may not be widely accepted by our customers.
If our new service offerings are not widely accepted by our customers, we may
discontinue those services and impair any assets or information technology used
to develop or offer them.
The prices we charge for our communications services may decrease over time
resulting in lost revenue.
Over the past few years the prices telecommunications providers have been able
to charge for certain services have decreased. This decrease results from
downward market pressure and other factors, including:
o increased transmission capacity by telecommunications companies on their
existing and new networks;
o customer agreements containing volume-based pricing or other contractually
agreed upon price decreases during the term of the agreement; and
o technological advances or otherwise.
If we are unable to increase traffic volume through additional services and
derive additional revenue as prices decrease, our operating results will
decline. Declining operating results may lead to lost revenue.
The success of our VoIP services depends on the public acceptance of VoIP
telephony and there is no guarantee that our VoIP services will garner broad
market appeal.
The success of our Voice over Internet Protocol (or VoIP) services depends on
future demand for VoIP telephony services in general in the marketplace. In
order for the IP telephony market to continue to grow, several industry
developments must take place, including:
o telephone and cable service providers continuing to invest in the
deployment of high speed broadband networks to residential and commercial
customers;
o VoIP networks continuing to improve quality of service for real-time
communications, managing effects such as packet jitter, packet loss and
unreliable bandwidth, so that toll-quality service can be provided;
o VoIP telephony equipment and services achieving a similar level of
reliability that users of the public switched telephone network have come
to expect from their telephone service, including emergency calling
features and capabilities; and
o VoIP telephony service providers offering cost and feature benefits to
their customers that are sufficient to cause the customers to switch from
traditional telephony service providers.
If any or all of these developments fail to occur, our VoIP services business
may not continue or grow as expected.
In addition, our VoIP services are a relatively new offering and we have limited
experience implementing the related programs. As a result, we may encounter many
difficulties, including regulatory hurdles, technological issues, intellectual
property matters, developmental constraints and other problems that we may not
anticipate. We can provide no assurances that we will be successful in
generating significant VoIP revenues.
We are subject to significant regulation which may adversely affect our business
and profitability.
The telecommunications industry is subject to significant regulation at the
national, state, local and international levels. These regulations affect our
business and our existing and potential competitors. Obtaining required
regulatory approvals, including those related to acquisitions or financing
activities, performing under agreements with local carriers or the enactment of
adverse regulation may have a material adverse effect on our business. In
addition, future legislative and judicial actions could have a material adverse
effect on our business.
17
Federal legislation provides for a significant deregulation of the U.S.
telecommunications industry, including the local exchange, long distance and
cable television industries. This legislation remains subject to judicial review
and additional Federal Communications Commission (or FCC) rulemaking. As a
result, we cannot predict the legislation's effect on our future operations.
Many regulatory actions are under way or are being contemplated by federal and
state authorities regarding important items. These actions could have a material
adverse effect on our business.
The FCC has, to date, treated Internet service providers as enhanced service
providers. In addition, Congress has not, to date, sought to heavily regulate
intellectual property (or IP) based services. Both Congress and the FCC are
considering proposals that involve greater regulation of IP-based service
providers. Depending on the content and scope of proposed legislation, the
imposition of new regulations could have a material adverse effect on our
business and the profitability of our services.
Increased scrutiny of financial disclosure, particularly in the
telecommunications industry, may adversely affect our investor confidence and
any restatement of earnings may increase litigation risk and limit our ability
to access the capital markets.
Congress, the SEC, other regulatory authorities and the media pay very close
attention to financial reporting practices. Particular attention has been
focused on the telecommunications industry and companies' interpretations of
generally accepted accounting principles. If we were required to restate our
financial statements as a result of a determination that we had incorrectly
applied generally accepted accounting principles, that restatement could
adversely affect our ability to access the capital markets or the trading price
of our securities. The recent scrutiny regarding financial reporting has also
resulted in an increase in litigation in the telecommunications industry. There
can be no assurance that any such litigation against us would not materially
adversely affect our business or the trading price of our securities.
Our ability to withstand competition in the communications industry may be
impeded by participants with greater resources and a greater number of existing
customers.
The communications industry is highly competitive. Many of our existing and
potential competitors have resources that are significantly greater than ours
with respect to finances, personnel, marketing and other business aspects. Many
of these competitors have the added advantage of a larger existing customer
base. In addition, significant new competition could arise as a result of:
o the consolidation in the industry led by AT&T and Verizon in the United
States and China Telecom and China Netcom in China;
o allowing foreign carriers to compete in the U.S. and Chinese market;
o further technological advances; and
o further deregulation and other regulatory initiatives.
If we are unable to compete successfully, our business could be significantly
harmed.
Our international operations and investments expose us to risks that could
materially adversely affect the business.
We have operations and investments outside of the United States that expose us
to risks inherent in international operations, including:
o general economic, social and political conditions;
o difficulty enforcing agreements and collecting receivables through certain
foreign legal systems;
18
o tax rates in foreign countries exceeding those in the U.S.;
o foreign currency exchange rate fluctuations, which may adversely affect our
results of operations and the value of our international assets and
investments;
o foreign earnings subject to withholding requirements or tariffs, exchange
controls or other restrictions;
o difficulties and costs of compliance with foreign laws and regulations
imposing restrictions on our investments and operations, with penalties for
noncompliance, including loss of licenses and monetary fines;
o difficulties obtaining licenses or interconnection arrangements on
acceptable terms, if at all; and
o changes in U.S. laws and regulations relating to foreign trade and
investment.
Risks Related to Doing Business in China
Changes in Chinese political and economic policies may have a material adverse
effect on the overall economic growth of China, which may reduce the demand for
our products and materially and adversely affect our competitive position.
A portion of our business operations is conducted in China, and a significant
portion of our sales will be made in China. Accordingly, our business, financial
condition, results of operations and customer and acquisition prospects are
sensitive to economic, political and legal developments in China. Aspects of
Chinese economic development that may be difficult to predict and which may
affect our ability to maintain our competitive position include:
o amount of government involvement;
o level and acceleration of development;
o growth rate;
o control of foreign exchange; and
o allocation and availability of resources.
While the Chinese economy has grown significantly in the past 20 years, its
growth has been uneven, both geographically and across various sectors. The
Chinese government has implemented various measures to encourage growth and
guide the allocation of resources. Some of these measures benefit the overall
Chinese economy but my have a negative effect on our ability to develop our
products and services there. We cannot predict the future direction of economic
reforms or the effects reform measures may have on our business, financial
condition or results of operations.
Moreover, regardless of predictability, any adverse change in the economic
conditions, government policies or laws and regulations in China may have a
material adverse effect on overall economic growth, which in turn could lead to
a reduction in demand for our products and consequently have a material adverse
effect on our business.
We may be unable to enforce our legal rights due to the volatility of and our
unfamiliarity with certain aspects of the Chinese legal system.
Unlike the common law system prevalent in the United States, the Chinese civil
law system is based on written statutes and decided legal cases have little
value as precedents. China does not have a well developed, consolidated body of
law governing foreign investment enterprises. As a result, the administration of
laws and regulations by government agencies and the judiciary are largely
subject to the discretion of the Chinese government. Certain government
19
decisions may also be subject to influence by external forces unrelated to the
legal merits of a particular matter.
Additionally, China's regulations and policies with respect to foreign
investments are evolving. Definitive regulations and policies regarding aspects
of foreign investment, such as the permissible percentages and rates of equity
returns, have not yet been published. As a result, we may not be aware that we
have violated these policies until we are notified of the violation. It is
difficult for us to avoid violations because statements regarding the evolving
policies have been conflicting and if administered are likely subject to broad
interpretation. These uncertainties present risks that may affect our ability to
achieve our business objectives. If we are unable to enforce our legal rights
our ability to compete with other companies in our industry may be materially
adversely affected. Moreover, litigation in China may be protracted and result
in substantial cost and the diversion of our resources and management's
attention. The relative inexperience of China's judiciary in many cases creates
additional uncertainty as to the outcome of disputes and may make it difficult
to obtain enforcement of a judgment by a court of another jurisdiction in China.
We will rely on dividends and other distributions from our Chinese subsidiaries
to meet our cash needs, and Chinese regulations may prevent our subsidiaries
from making the necessary distributions.
We are a holding company and conduct all of our China revenue through our
subsidiaries and affiliates in China. The Company has focused on building and
leveraging the strengths, relationships, licenses and technology of Candidsoft
Technologies Co Limited of Beijing . In July, 2007, CHVC formed Vastland
Holdings (Beijing) Co Ltd a Wholly Owned Foreign Enterprise to enable the
Company to legally move profits out of China when available. We rely on
dividends and other distributions paid by our Chinese subsidiaries for our cash
needs to service any debt we may incur and pay our operating expenses.
Current regulations in China permit payment of dividends only out of accumulated
profits in accordance with Chinese accounting standards. Also, if our Chinese
subsidiaries incur debt on their own behalf in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other
distributions to us, which in turn will adversely affect our available cash.
Governmental control of currency conversion may affect our ability to satisfy
our non-RMB obligations.
The Chinese government imposes controls on the convertibility of the RMB into
foreign currencies and, in certain cases, the remittance of currency out of
China. We receive substantially all revenues for our China operations in RMB.
Under our current corporate structure, income from our Chinese operations is
primarily derived from dividend payments from our Chinese subsidiaries.
Shortages in the availability of foreign currency may restrict the ability of
our Chinese subsidiaries and affiliated entity to make payments and otherwise
satisfy their foreign currency denominated obligations. Under existing Chinese
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
State Administration of Foreign Exchange (or SAFE) by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
sent out of China to pay capital expenses. The Chinese government may also, in
its sole discretion, restrict future access to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may
not be able to pay dividends in foreign currencies to our stockholders.
Fluctuation in the value of the RMB may result in foreign currency translation
losses or in increased costs to us.
The value of the RMB is affected by changes in political and economic conditions
and its value against the U.S. dollar and other currencies may fluctuate. On
July 21, 2005, the Chinese government changed its decade-old policy of pegging
the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 9.3% appreciation of the RMB against the U.S. dollar between July
21, 2005 and September 30, 2007.
20
While the international reaction to the RMB revaluation has generally been
positive, there is significant international pressure on the Chinese government
to adopt an even more flexible currency policy, which could result in further
and more significant appreciation of the RMB against the U.S. dollar. Our
revenues and costs are mostly denominated in the RMB, as are a significant
portion of our financial assets. We rely entirely on dividends and other fees
paid to us by our subsidiaries in China. Any significant revaluation of the RMB
may materially and adversely affect our cash flows, revenues and overall
financial position, in addition to the value of dividends payable on common
stock in U.S. dollars. For example, an appreciation of the RMB against the U.S.
dollar would make any new RMB-denominated investments or expenditures more
costly to us, to the extent such cost would be converted to U.S. dollars.
An appreciation of the RMB against the U.S. dollar would also result in foreign
currency translation losses in our financial reports when we translate our U.S.
dollar denominated assets into the RMB.
The control of our Candidsoft unit is maintained through contractual
relationships and not through direct ownership.
Chinese law prohibits direct ownership of telecommunications companies by
foreign owners. Based upon the advice of Chinese counsel, we acquired a 65%
beneficial interest through contracts with the seller that provided for
effective voting control of the shares, control of the Company and the capture
of revenues. Our beneficial ownership position could be jeopardized if the
seller (who is also an executive officer of CHVC) fails to abide by the
Agreements or if governmental regulations were to be adopted that restrict the
ability to operate in this manner.
Future inflation in China may inhibit our ability to conduct business profitably
in China.
In recent years, the Chinese economy has experienced periods of rapid expansion
and highly fluctuating rates of inflation. During the past ten years, the rate
of inflation in China has been as high as 20.7% and as low as -2.2%. These
factors have led to the adoption by the Chinese government, from time to time,
of various corrective measures designed to restrict the availability of credit
or regulate growth and contain inflation. High inflation may in the future cause
the Chinese government to impose controls on credit and/or prices, or to take
other action, which could inhibit economic activity in China, and thereby harm
the market for our products.
An outbreak of a pandemic avian influenza, SARS or other contagious disease may
have an adverse effect on the Chinese economy which may adversely affect our
results of operations.
During the past four years, large parts of Asia experienced unprecedented
outbreaks of avian influenza. Currently, no fully effective avian flu vaccines
have been developed and there is evidence that the H5N1 virus is evolving. An
effective vaccine may not be discovered in time to protect China against an
avian flu pandemic. Also, in the first half of 2003, certain countries in Asia
experienced an outbreak of severe acute respiratory syndrome, or SARS, a highly
contagious form of atypical pneumonia, which seriously interrupted the economic
activities in the affected regions.
An outbreak or perceived outbreak of avian flu, SARS or other contagious disease
may seriously interrupt our production operations or those of our suppliers and
customers in China, which may have a materially adverse effect on the result of
our operations.
Uncertainty regarding the impact of implementing China's new corporate income
tax law on our financial position and operating results may adversely affect our
business.
On January 1, 2008, China's new corporate income tax law was implemented to
unify the application scope, tax rate, tax deduction and preferential policy for
both domestic and foreign-invested enterprises. According to the new law, the
applicable income tax rate for our operating subsidiaries is subject to change.
Because implementation details have not yet been announced, we cannot be sure of
the potential impact of this new corporate income tax law on our financial
position and operating results.
21
Failure to comply with Chinese regulations governing the establishment of
offshore special purpose companies by Chinese residents may subject our Chinese
resident stockholders to personal liability and may limit our ability to acquire
Chinese companies or to inject capital into our Chinese subsidiaries.
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign
Exchange Control over Financing and Return Investment Through Special Purpose
Companies by Residents Inside China (or Circular 75). Circular 75 requires
Chinese residents to register with the local SAFE branch before establishing or
acquiring control over an offshore special purpose vehicle (or SPV) and engaging
in equity financing outside of China on the strength of domestic assets that
were originally held by those residents. The guidelines issued by SAFE in June
2007 (or Notice 106), expanded the reach of Circular 75 and added requirements
relating to the source of the Chinese resident's funds used to establish or
acquire control.
In addition, Notice 106 imposed burdensome filing requirements which, among
other things, hold the domestic SPV affiliate responsible for accurately
reporting aspects of foreign operations that it may not be familiar with.
Failure to comply with the requirements of Circular 75 in accordance with Notice
106, may result in fines and other penalties for evasion of foreign exchange
restrictions under Chinese laws. Failure to comply may also result in the SPV's
affiliates being impeded or prevented from distributing profits and proceeds and
from engaging in other transfers of funds into or out of China.
We believe our stockholders who are Chinese residents under Circular 75 have
registered with a SAFE branch as required; however, we cannot provide any
assurances that existing registrations have fully complied with Circular 75.
Moreover, because of uncertainty regarding how Circular 75 will be interpreted
and implemented in the future and whether SAFE will apply to us, we cannot
predict how it will affect our business operations or future strategies.
For example, it is possible that our present and prospective Chinese
subsidiaries' ability to conduct foreign exchange activities, such as paying
dividends and making payments in foreign currency, may be subject to our Chinese
resident holders' compliance with Circular 75. However, these residents may not
always be able to complete the necessary registration procedures required by
Circular 75. We also have little or no control over our present and prospective
direct or indirect stockholders' compliance with Circular 75 or SAFE. The
failure of any of our Chinese resident holders to comply may subject them to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries' ability to make distributions or pay
dividends and affect our ownership structure.
It may be difficult for investors to enforce foreign judgments or bringing
original actions in China based upon U.S. law violations.
A portion of our current operations are conducted in China. Moreover, a number
of our current directors and officers are nationals or residents of China. All
or a substantial portion of the assets of these persons are located outside the
United States and in China. As a result, it may not be possible to effect
service of process upon these individuals within the United States or outside
China. In addition, uncertainty exists as to whether the courts of China would
recognize or enforce the judgments of U.S. courts or be competent to hear
original actions brought in China arising from violations of U.S. or state
securities law by us or our officers and directors.
Our unfamiliarity with recent changes in Chinese property rights law and its
impact on our assets and financial position may affect our interests in our
properties.
The Chinese Law on Property Rights went into effect on October 1, 2007. It is
the first piece of mainland Chinese legislation that comprehensively regulates
the different types of rights which can be created or acquired over tangible
property. We are currently evaluating the impact of the Property Rights Law on
our assets and financial position.
22
We may be unable to complete a business combination transaction efficiently or
on favorable terms due to complicated Chinese merger and acquisition
regulations.
On September 8, 2006, the Chinese Ministry of Commerce, or "MOFCOM," together
with several other government agencies, promulgated a comprehensive set of
regulations governing the approval process by which a Chinese company may
participate in an acquisition of its assets or equity interests and pursue
public trading of its securities foreign exchange. Depending on the structure of
the transaction, these regulations require Chinese parties to submit to a
complicated application process with governmental agencies. Due to the lengthy
application process and strict reporting requirements, compliance with these
regulations is likely to be time consuming and expensive. This is particularly
concerning to us considering we have to maintain the compliance of two
businesses.
The regulations also limit our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited. As a
result, we may not be able to negotiate and complete a business combination
transaction on financial terms that satisfy our investors and protect our
stockholders' economic interests
Risks Relating to Our Common Stock
Our stockholders' ability to dispose of their stock is limited because there is
currently a limited public trading market for it.
Our common stock is currently quoted on the "Pink Sheets" and is not publicly
traded on any stock exchange. As a result, our stockholders may find it more
difficult to dispose of or obtain accurate market value quotations. Also, our
common stock may be substantially less attractive for margin loans, investment
by financial institutions, or as consideration in future capital raising
transactions. An active public market for shares of our common stock may not
develop, or if one should develop, it may not be sustained. Therefore, our
stockholders may not be able to find purchasers for their shares of our common
stock. Further, prior to our approval for trading on an exchange, the liquidity
of our shares of common stock will be reduced, which could adversely affect our
business and results of operations by making it more difficult for us to raise
equity financing if necessary.
Volatility of our stock price could adversely affect stockholders.
The market price of our common stock could fluctuate significantly as a result
of:
o quarterly variations in our operating results;
o interest rate changes;
o changes in the market's expectations about our operating results;
o our operating results failing to meet the expectation of investors in a
particular period;
o operating and stock price performance of other companies that investors
deem comparable to us;
o news reports relating to trends in our markets;
o changes in laws and regulations affecting our business;
o the climate for doing business in China;
o the state of the Chinese economy;
o material announcements by us or our competitors;
23
o sales of substantial amounts of common stock by our directors, executive
officers or significant stockholders or the perception that such sales
could occur; and
o general economic and political conditions such as recessions and acts of
war or terrorism.
Fluctuations in the price of our common stock could contribute to the loss of
all or part of an investor's investment in the company.
We may never issue dividends.
We currently do not plan to declare dividends on our common stock in the
foreseeable future. Any payment of cash dividends will depend upon our financial
condition, capital requirements, earnings and other factors deemed relevant by
our board of directors. Agreements governing future indebtedness will likely
contain similar restrictions on our ability to pay cash dividends. See "Dividend
Policy" for more information. Consequently, an investor's only opportunity to
achieve a return on investment will be if the market price of our common stock
appreciates and the shares are sold for a profit.
Additional issuances of equity securities by us would dilute the ownership of
our existing stockholders
We have issued a significant amount of equity securities in the past and will
continue to do so pursuant to certain strategic transactions, to fund expansion
of our operations or for other purposes. In connection with previous
acquisitions, we have agreed to issue up to 3,598,750 shares of our common stock
in the future subject to the financial performance of the acquired businesses.
We may issue shares of our common stock in the future for consideration that is
greater than or less than the prevailing market price. To the extent we issue
additional equity securities, our shareholders' ownership percentage may be
reduced, perhaps substantially.
ITEM 2. FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
Balance Sheet Data
September 30, June 30, June 30,
2008 2008 2007
----------- ----------- -----------
Total assets $21,987,902 $24,043,271 $16,162,786
Long-term liabilities, net 50,000 1,550,000 218,750
Total liabilities 3,357,529 4,642,403 3,847,348
Shareholders' equity 18,630,373 19,400,868 12,315,438
Year Ended Three Months Ended
June 30, September 30,
---------------------------- ----------------------------
Statements of Operations Data: 2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 36,433,747 $ 2,342,223 $ 15,964,352 $ 6,073,510
Operating (loss) (5,371,711) (2,768,410) (1,110,685) (344,869)
Net (loss) (5,277,203) (4,746,446) (869,581) (486,675)
Net (loss) per common share (.04) (.05) 0.06 0.05
See "Financial Statements" beginning on Page F-1.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this registration
statement. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this registration statement, particularly in "Risk Factors" in Item 1A.
General
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and the other financial information
appearing elsewhere in this Registration Statement. Certain statements contained
in this Registration Statement and other written material and oral statements
made from time to time by us do not relate strictly to historical or current
facts. As such, they are considered "forward-looking statements" that provide
current expectations or forecasts of future events. Such statements are
typically characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expect," "estimate," "project," "strategy"
and similar expressions. Our forward-looking statements generally relate to the
prospects for future sales of our products, the success of our marketing
activities, and the success of our strategic corporate relationships. These
statements are based upon assumptions and assessments made by our management in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factor our management
believes to be appropriate. These forward-looking statements are subject to a
number of risks and uncertainties, including the following: our ability to
achieve profitable operations and to maintain sufficient cash to operate its
business and meet its liquidity requirements; our ability to obtain financing,
if required, on terms acceptable to it, if at all; the success of our research
and development activities; competitive developments affecting our current
products; our ability to successfully attract strategic partners and to market
both new and existing products; exposure to lawsuits and regulatory proceedings;
our ability to protect our intellectual property; governmental laws and
regulations affecting operations; our ability to identify and complete
diversification opportunities; and the impact of acquisitions, divestiture,
restructurings, product withdrawals and other unusual items. A further list and
description of these risks, uncertainties and other mattes can be found
elsewhere in this Registration Statement. Except as required by applicable law,
we undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
Plan of Operation
We were incorporated on August 7, 2003 and began business as China Voice Holding
Corp after a reorganization and name change on April 1, 2004. The Company
obtained licenses to provide telecommunications services in The People's
Republic of China in 2005 and acquired its Chinese operating subsidiary,
Candidsoft Technologies Co. Ltd. of Beijing ("Candidsoft") effective January 18,
2006. Candidsoft had developed its patented SKY O/A (TM) office automation
platform, which is currently supporting over one million users in China, and
during 2006 we began to develop the SKY O/A (TM) platform into an Office
Automation with VOIP and Telephony services platform capable of providing fully
integrated voice and data telephony solutions to Government Agencies and large
enterprises. This service offering proved to be very popular and we were awarded
five contracts with three large Chinese government agencies.
During the years ended June 30, 2007 and 2008 our focus in China has revolved
around improving the SKY O/A (TM) Enhanced Services Platform and establishing
the infrastructure to support our Chinese government contracts. As a result of
the narrowed focus, the Company completed the abandonment of an unsuccessful
operation in China and bought and then sold another Chinese company which proved
to be incompatible with our plans. Candidsoft's revenues also stagnated, as its
efforts were concentrated on developing the SKY O/A (TM) product and
transitioning to an application service provider (ASP) reoccurring revenue
model. The Company also gained a significant partner to provide connectivity,
installation, first level customer support and billing to Candidsoft's customers
with China Netcom (CNC), which recently merged with China Unicom, a major
Chinese telco. CNC has also agreed to license and private-label Sky O/A under
the ICT Business brand and sell our solution to the private sector. Financially,
the years ended June 30, 2007 and 2008 in China were years of development for
25
our products, and we incurred losses while in the development stage. Our
products are currently being installed in China and we expect to begin realizing
significant sales by January 2009 and achieve profitability in China for the
year ended June 30, 2009.
In addition to our business in China, during the years ended June 30, 2007 and
2008, we have established businesses in the United States in telecommunications
services, prepaid calling card distribution, prepaid cellular products and
services distribution and advanced broadband hardware distribution. The Company
acquired and established companies operating in the broadband and VoIP hardware
and VoIP telecommunication services and calling card distribution segments to
provide infrastructure to cross market Asian products as well as to provide
profits to cover U.S. corporate overhead. Using these companies as a base, the
Company entered the telecommunications services segment and greatly expanded its
prepaid calling card and cellular distribution business. As a result, the
Company has realized substantial sales growth from the year ended June 30, 2007
to June 30, 2008. However, these businesses have low margins and they were
barely out of the start up phase by June 30, 2008, so the Company has not yet
realized an overall profit on its U.S. businesses. We anticipate that we can
increase our margins in the year ending June 30, 2009 by utilizing our
telecommunications network and platform to develop private label products for
the calling card distribution business as well as an additional cash infusion of
working capital into our U.S. businesses, and expect our U.S. business segments
to be profitable for the year ended June 30, 2009.
Because we were in the development phase of our Chinese business and have just
started our U.S. business, the Company reported substantial losses during the
years ended June 30, 2007 and 2008. We funded these losses by selling common
stock in both years, and we expect the Company will raise additional funds to
continue the execution of its business plan in China and the U.S. as it moves
toward profitability in its year ended June 30, 2009.
As noted in the reports on our 2007 and 2008 financial statements by our
registered independent public accounting firm, there is substantial doubt
regarding our inability to continue as a going concern. For the year ended June
30, 2008, we posted a net loss of $5,277,203 and negative cash flow of
$4,170,590. For the past two years or more we have operated with limited
operating capital, we continue to face immediate and substantial cash needs, and
there is a risk we may continue to require more investment capital to fund our
business plan. Our plans to become cash flow positive may not be successful, and
other actions by the Company may become necessary. We have been successful
raising capital in the past and we may need to raise additional capital in the
future or reduce the level of our operations. Cutting back our operations will
result in a material adverse effect on our business and revenue.
Comparisons by Period
Years Ended June 30, 2008 and 2007
- ----------------------------------
Revenues. Revenues for the year ended June 30, 2008 were $36,433,747, a
$34,091,524 increase as compared to $2,342,223 for the year ended June 30, 2007.
A portion of the increase in revenues for the year, $15,882,402, can be
attributed to the acquisitions made during the prior year. Those include
increases of $15,537,160 from Phone House, Inc. and $345,242 from DT Net
Technologies. The remainder of the increase, $18,209,122, is primarily
attributable to sales from newly-formed subsidiaries, StarCom Alliance and Phone
House of Florida and their exclusive supplier agreements with Prepaid Power
Distribution and Sarah Enterprises in the prepaid cellular and calling card
businesses. In addition, Phone House, Inc., located in California, secured
master distribution sales and marketing rights to various calling card products
from suppliers such as Locus Telecommunications for the Southern California
region the later part of 2007.
Gross Profit. Gross profit for the year ended June 30, 2008 was $204,723, a
decrease of $260,665 versus a gross profit of $465,388 for the year ended June
30, 2007. The decrease in gross profit is attributed to the increase in Company
revenues in lower margin businesses and start up costs.
Operating Expenses. For the year ended June 30, 2008 expenses were $5,576,434, a
$2,808,024 increase versus the $2,768,410 reported for the year ended June 30,
2007. The largest portion of this increase, $2,260,039, was caused by increases
in corporate expenses in China and the U.S. as the Company has been adding
employees and capacity to roll out its Chinese contracts. Included in these
expenses is $268,923 incurred in legal and accounting expenses relating to the
Company's audits and the filing of its Form 10. The remainder of increase in
expense, $547,985 is attributed mostly to the inclusion of business expenses
from the companies acquired during the previous year.
26
Other Income and Expenses. The Company's other income net of other expenses for
the year ended June 30, 2008 was $94,508 compared to a loss of $1,978,036 for
the year ended June 30, 2007, a net change of $2,072,544. The increase in other
income was primarily attributable to an increase in interest income of $73,033,
a gain on sale of the Company's Techview subsidiary $505,733, and a federal
telephone excise tax refund of $361,182, for a total of $939,948. The decrease
in net expense was caused by a decrease in the write down of $572,339 from
impairment of $69,240 in software development costs, $433,099 in investments in
minority interests in businesses, and $70,000 of goodwill and a decrease of
$585,128 in interest and other financial charges, for a total of $1,157,467.
Several other smaller changes produced a net decrease of $24,871 to bring the
total change to $2,072,544.
Net Loss. For the year ended June 30, 2008 the Company reported a net loss of
$5,277,203 compared to $4,746,446 for the prior year. The increase in net loss
is primarily the result of the changes in operating expense and other income
expenses.
Quarter Ended September 30, 2008 and 2007
Revenues. Revenues for the quarter ended September 30, 2008 were $15,964,352, a
162.9% increase as compared to $6,073,510 for the quarter ended September 30,
2007. The increase in revenues for the quarter can be attributed to a $9,690,082
increase in the calling card distribution segment, which accounted for 98% of
the revenue increase in the quarter ended September 30, 2008.
Gross Profit. Gross profit for the quarter ended September 30, 2008 was
$194,411, a $175,552 decrease versus a gross profit of $369,963 for the quarter
ended September 30, 2007. The decrease in gross profit is attributed to
increased costs associated with the Company's advanced broad band hardware
distribution segment and the calling card distribution segment.
Operating Expenses. For the quarter ended September 30, 2008 expenses were
$1,305,096 versus the $714,832 reported for the quarter ended September 30,
2007. The $590,264 increase in expense is attributed primarily to additional
costs incurred in preparing to roll out the Company's Chinese government
contracts, and a ramp-up in staffing to accommodate expansion of the Company's
business in China and the U.S.
Non Operating Income and Expenses. The Company's other income net of other
expenses for the quarter ended September 30, 2008 was $243,058 compared to a net
loss $141,806 for the quarter ended September 30, 2007. The decrease in net loss
was caused primarily by a federal telephone excise tax refund of $384,583, a
decrease in interest expense of $106,532, and an increased loss from disposal of
assets of $164,224.
Net Loss. For the quarter ended September 30, 2008 the Company reported a net
loss of $869,581 compared to $486,675 for the quarter ended September 30, 2007.
The increase in net loss is primarily the result of the increases in operating
expenses.
The following is a breakdown of revenues and net loss by segment:
Advanced
Communications Broadband
Year ended Software Tele-Communications Calling Card Hardware Corporate and
June 30, 2008 Development Service Distribution Distribution Eliminations Consolidated
Revenues $309,343 3,521,385 31,446,244 1,156,775 -- 36,433,747
Impairment of -- -- -- -- -- --
assets
Net income (loss) (534,786) (288,239) 324,040 (1,112,603) (3,665,615) (5,277,203)
27
Advanced
Communications Broadband
Year ended June Software Tele-Communications Calling Card Hardware Corporate and
30, 2007 Development Service Distribution Distribution Eliminations Consolidated
Revenues $184,116 626,397 719,124 811,533 1,053 2,342,223
Impairment of (69,240) (503,099) -- -- -- (572,339)
assets and
investments
Net income (loss) (60,659) (338,712) (10) (301,695) (4,045,370) (4,746,446)
Advanced
Three Months Communications Broadband
Ended Software Tele-Communications Calling Card Hardware Corporate and
September 30, 2007 Development Service Distribution Distribution Eliminations Consolidated
Revenues $136,081 581,634 5,051,339 304,456 -- 6,073,510
Net income (loss)
19,429 (83,806) 79,646 (99,205) (402,738) (486,673)
Advanced
Three Months Communications Broadband
Ended Software Tele-Communications Calling Card Hardware Corporate and
September 30, 2008 Development Service Distribution Distribution Eliminations Consolidated
Revenues $95,985 669,453 14,741,421 457,493 -- 15,964,352
Net income (loss)
(47,758) (80,815) 429,914 (162,196) (1,008,726) (869,581)
Year Ended June 30, 2008 and 2007
- ---------------------------------
The largest increase in sales, $30,727,120, occurred in the calling card
distribution segment as the Company realized a full year of revenue from its
prior year acquisitions and generated substantial additional revenue. Because of
these sales increases, the segment was also the first to become profitable,
showing a $324,040 profit as opposed to a $10 prior year loss.
The Exclusive Supplier Agreement with Prepaid Power Distribution was signed on
January 10, 2008 and business started later in the month. During the first
calendar quarter of 2008, Prepaid Power Distribution purchased $6,163,062 then
increased to $7,475,359 during the second calendar quarter. Pricing and payment
terms with Prepaid Power Distribution are determined greatly by the price and
payment terms that we receive from our suppliers. Since our agreement with
Prepaid Power Distribution provides for pricing and terms equal to or more
favorable than they would receive from their existing suppliers, we can pass on
the same or better payment terms to Prepaid Power Distribution that we receive
from our suppliers. Pricing is constantly changing with our suppliers, and we
are always looking for and sourcing the best price available for a specific
brand that we are selling. Our goal is to purchase the items ordered by Prepaid
Power Distribution at the best available price so that we make as much profit
margin as possible on products that have ordered. We expect to greatly benefit
from the Prepaid Power Distribution Exclusive Supplier Agreement as we develop
and deploy private branded products and services to replace other brands
currently bought by Prepaid Power Distribution. As noted elsewhere, this project
will require funding and is a longer term objective.
The second largest sales increase, $2,894,988 occurred in the telecommunication
service segment where the Chinese subsidiary which produced the sales reported
in the year ended June 30, 2007 was sold and the Company started its U.S. based
telecommunication services Company. The loss for the segment was reduced to
$288,239 from $338,712 in the prior year primarily because of the decrease of
the $503,099 in investments impairment loss, with the loss in the current year
reflecting the start up phase of the new U.S.
business.
The advanced hardware distribution segment showed an increase in sales of
$345,242 primarily because of the inclusion of a full year of activity in the
current year as opposed to six months of activity in the prior year. The loss
increased by $810,908 because of an increase of $337,500 in non-cash financing
charges and the lack of sales growth in this segment, which was the result of
the Company's decision to deploy capital to expand other segments.
28
The communications software development segment showed a small increase in
revenue of $125,227 because of increased activity in China. However, this
segment continues to be a development stage operation and as a result showed an
increased loss of $474,127 over the prior year.
Quarter Ended September 30, 2008 and 2007
- -----------------------------------------
The largest increase in sales, $9,690,082, occurred in the calling card
distribution segment as the Company generated substantial additional revenue.
Because of these sales increases and a federal telephone excise tax refund, the
segment profits grew to $429,914 from $79,646 in the prior period. This
segment's sales increase was due to competitor consolidation in southern
California and exclusive calling card relationships that were established with
various calling card suppliers and customers.
Our sales to Prepaid Power Distribution peaked at $8,063,332 during the first
quarter ended September 30, 2008, as compared to $7,475,359 in the prior
quarter. Such sales increase was attributed to slightly better demand during the
summer months.
A sales increase of $87,819 occurred in the telecommunication service segment
where the Chinese subsidiary which produced $281,666 of the sales reported in
the quarter ended September 30, 2007 was sold and the Company started ramping
sales up its U.S. based telecommunications services Company. The sales increase
in this segment was attributed to increased staff, network investment and
marketing as well as better availability of international routes for resale. The
loss for the segment was reduced to $80,815 from $83,806 in the prior period,
reflecting the start up phase of the new U.S. business.
The advanced hardware distribution segment showed an increase in sales of
$153,037 primarily because of increase capital deployment and management changes
in the quarter ended September 30, 2008. The loss increased by $62,991 because
of a write off of inventory and cost on sale of assets totaling $164,224. The
sales increase in this segment was due to additional marketing efforts, new
products that were brought to market.
The communications software development segment showed a small decrease in
revenue of $40,096 because of a the transition to an Application Service
Provider (ASP) reoccurring revenue model and deployment delays relating the
Beijing Summer Olympics and China Netcom-China Unicom merger. However, this
segment continues to be a development stage operation and as a result showed an
increased loss of $67,187 over the prior year.
Liquidity and Cash Resources
Year Ended June 30, 2008 and 2007
- ---------------------------------
For the year ended June 30, 2008 the Company reported a net loss of $5,277,203
compared to $4,746,446 for the prior year. The Company's cash balances at June
30, 2008 were $2,096,070.
The Company had an increase in cash of $1,829,641 for the year ended June 30,
2008, compared to an increase in cash of $140,357 for the comparable period of
2007. Cash resources of $4,170,590 were used in operations for the year ended
June 30, 2008 as compared to $1,714,219 used in operations for the same period
of 2007. Cash used in investing activities was $138,146 for the year ended June
30, 2008 as compared to $184,390 used in investing activities for the same
period of 2007. Cash provided by financing activities was $6,078,197 for the
year ended June 30, 2008 as compared to $2,026,314 for the same period in 2007.
Our principal sources of cash during the year were the proceeds from the sale of
common stock.
Quarter Ended September 30, 2008 and 2007
- -----------------------------------------
For the quarter ended September 30, 2008 the Company reported a net loss of
$869,581 compared to $486,675 for the quarter ended September 30, 2007. The
Company's cash balances at September 30, 2008 were $976,049.
The Company had a decrease in cash of $1,120,021 for the quarter ended September
30, 2008, compared to a decrease in cash of $51,091 for the comparable period of
2007. Cash resources of $796,468 were used by operations for the quarter ended
September 30, 2008 as compared to $1,297,816 used by operations for the same
period of 2007. Cash used by investing activities was $197,323 for the quarter
ended September 30, 2008 as compared to $258,317 used in investing activities
for the same period of 2007. Cash used by financing activities was $126,230 for
29
the quarter ended September 30, 2008 as compared to cash provided of $1,505,042
for the same period in 2007. Our principal sources of cash during the quarter
were the proceeds from the sale of common stock.
The Company projects that it will report sales of approximately $88 million and
a positive cash flow from operations during the year ended June 30, 2009. The
major source of the projected cash flow increases are expected to be produced by
the roll out of our existing Chinese contracts through China Unicom, which are
anticipated to generate sales of $4,563,449 and operating profits of $2,115,201
for the year ended June 30, 2009, beginning in January 2009. In China, our
projected revenues are made and adjusted based on market conditions and
assumptions from management in China as well as commitments from our customers
and suppliers. These commitments are based upon contractual arrangements to
install a configured SKY O/A Office Automatic Software Application loaded on a
user's PC and VoIP end device (IP telephone), each referred to as a "seat." We
will receive monthly revenue from each seat of between $20 to $30 per month,
depending upon the service configuration. The Company anticipates that, because
the Beijing Olympics are finished and the China Netcom-China Unicom merger is
almost complete, it will receive a much more focused deployment effort beginning
in January 2009.
The government agencies that make up most of Candidsoft's current contracts and
future expected revenue, and the agreements to acquire seats by each, are the
National Anti-Poverty Organization (NAPO)(35,000 seats), Navigation Affairs
Administration (65,000 seats), and the Guang Xi Land Transport Bureau
(GXT)(4,000 seats). Another government entity and partner, China Unicom is also
a customer for Candidsoft's new SCDMA cellular for application for SKY O/A that
enables teleconferencing and IM Chat. In addition, the Company also has a
contract with a private company called GuangXi ChaoDa Group ("ChaoDa") for 6,000
seats. ChaoDa is recognized as a member of the Chinese Service Industry 500, the
Chinese Transportation 100, the Chinese Land Transportation 100 and the GuangXi
Enterprise 50 Companies. While all contracts are cancelable, we believe that
with the continued connectivity and installment support of China Unicom, the
Company has the ability to achieve its China projections. If for any reason
China Unicom is slower than they have represented in providing connectivity and
installation services, our projections will be negatively and proportionally
impacted. We also believe that unless the Company cannot install its service or
prices fall on legacy services making new technologies not as justifiable to
deploy it is unlikely that any of the Company's current contracts will be lost.
The Company's technology, enhanced services platform, VoIP hardware provider,
customer support and installation training center are all in place to support
the Company's contracts.
In the U.S. we anticipate increased margins on the sales from private label
calling cards beginning in January 2009, with sales increasing to $79,008,324
and operating profits increasing to $962,533 for the year ended June 30, 2009.
We expect this growth to be fueled by securing additional exclusive sales
agreements with large companies in this business as well as establishing
additional exclusive sales rights to new brands in our distribution regions.
Another significant relationship was secured in September 2008 with touch-Tel
USA in which the Company became a Master Distributor in Southern California for
eleven Touch-Tel USA prepaid calling card brands. In an effort to increase sales
and profit margins, the Company continues to focus on securing other brands that
may provide regional exclusivity and master distribution pricing. During 2009,
the Company plans to develop, market and deploy private branded prepaid calling
cards utilizing the Company's Network and Enhanced Services Platform. In
preparing for private-branded cards, the Company's subsidiary, CVC
International, is securing various international VoIP termination routes to
support various ethnic groups in the United States. The Company anticipates that
it will generate additional profit margins of 3% to 5% on its private-branded
calling cards. This increase will help drive the Company to profitability.
Implementation of this project will require additional funding and is an
objective for the latter half of 2009.
We also project that the Company's advanced hardware distribution sales will
increase to $1,979,445 with an operating profit of $288,312 for the year ended
June 30, 2009 because of additional sales generated by additional working
capital beginning in quarter ended December 31, 2008, which will enable the
Company to add and inventory new high margin products In addition, the Company
believes that it will have secured some new major accounts for specialty cables
and IPTV hardware. The Company has focused on building and leveraging the
strengths, relationships, licenses and technology of Candidsoft Technologies Co
Limited of Beijing . In July 2007, CHVC formed Vastland Holdings (Beijing) Co
Ltd, a Wholly-Owned Foreign Enterprise to enable the Company to legally move
profits out of China when available. In addition, we expect our start up costs
to lessen, our research and development to be nominal, and we do not anticipate
that we will be required to make material purchases of property, plants, or
equipment.
30
However, the Company anticipates that it will continue to raise money to fund
its working capital needs and cover its operating losses during the first half
of its 2009 fiscal year as it deploys its products in China and expands its U.S.
businesses. The additional funding required is expected to be raised through
sales of common stock, although the Company may also pursue asset based
financing. During the quarter ended September 30, 2008 the Company raised equity
financing of $512,636 from stock sales. The Company projects that it will need
to raise an additional $600,000 during the first calendar quarter of 2009 to
continue operating at current levels. The Company has received commitments to
fund $250,000 through a purchase of common stock at a 30% discount to the market
price by Kendridge Holdings US, Inc. and anticipates that it will raise the
additional $350,000 through sales of equity and debt securities.
Critical Accounting Practices
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements, and revenues
and expenses during the periods reported. Actual results could differ from those
estimates. We believe the following are the critical accounting policies, which
could have the most significant effect on our reported results and require the
most difficult, subjective or complex judgments by management.
Ownership in China Operations
-----------------------------
CHVC through its subsidiaries offers network design and international
office-automation software and technology services to government agencies in the
People's Republic of China ("PRC").
To meet ownership requirements under Chinese laws that restrict a foreign
company from operating in certain industries such as value-added
telecommunication services, CHVC has entered into technology service and
ownership trust agreements with two of CHVC's affiliates that are incorporated
in China: Candidsoft Technologies Co, Ltd of Beijing ("Candidsoft") and Beijing
Techview System Engineering Co. Ltd. ("BTSE"). Management periodically evaluates
its effective legal control over its Chinese subsidiaries on an ongoing basis in
accordance with new developments in China and/or laws passed by the PRC. Based
on this review, it believes it has the ability to effectively maintain control
of the operations of the subsidiaries and consolidates them accordingly.
Capitalized Software Development Costs
--------------------------------------
The Company accounts for software and development costs under SFAS 86,
Accounting for the Costs of Software to be Sold, Leased, or Otherwise Marketed.
All of the Company's Software related costs pertained to the communications
software development segment of the business. The Company capitalized software
costs of $72,250 related to the Company's interest in Candidsoft. In 2007, the
Company performed an impairment review on its software costs and recorded an
aggregate impairment of $69,240 for the software development costs.
Business Combinations
---------------------
The Company accounts for business combinations in accordance with Statement of
Financial Accounting Standard No. 141, "Business Combinations" (SFAS No. 141).
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually by comparing carrying value to the respective fair
value in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). This
pronouncement also requires that the intangible assets with estimated useful
lives to amortized over their respective estimated useful lives.
Goodwill and Other Intangible Assets
------------------------------------
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," the Company tests its goodwill for
impairment at least annually by comparing the fair value of these assets to
31
their carrying values. As a result of such tests, the Company may be required to
record impairment charges for these assets if in the future their carrying
values decrease in their fair values.
Other intangible assets are amortized using the straight-line method over their
estimated useful period of benefit. We evaluate the recoverability of intangible
assets periodically and take into account events or circumstances that warrant
revised estimates of useful lives or that indicate that impairment exists.
Stock-Based Compensation
------------------------
The Company applies for the fair value method of Statement of Financial
Accounting Standards No. 123R, "Accounting for Stock Based Compensation" (SFAS
No. 123R) in accounting for its stock options. This standard states that
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
The fair value for each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model. The fair value of all vested
options granted has been charged to salaries, wages and benefits in accordance
with SFAS No. 123R. Common stock granted to employees, directors, and
consultants is charged to operating expense based on the fair value of the stock
at the date the stock purchase rights are granted.
Impairment of Long-Lived Assets and Other Intangible Assets
-----------------------------------------------------------
The Company reviews the carrying value of its long-lived assets, including
indefinite-lived intangible assets consisting primarily of goodwill and
telecommunications licenses in China, whenever events or changes in
circumstances indicate that the historical cost carrying value of an asset may
no longer be appropriate. The Company assesses recoverability of the carrying
value of the assets by estimating the future net cash flows expected to result
from the assets, including eventual disposition. If the future net cash flows
are less than the carrying value of the assts, an impairment loss is recorded
equal to the difference between the asset's carrying value and its fair value.
As of June 30, 2008 and 2007, management determined that no impairment was
indicated.
Revenue Recognition
-------------------
Revenue from calling cards, prepaid cellular products and broadband hardware
sales are recognized upon delivery or shipment of the hardware to broadband
service providers at which time title is passed; there are no uncertainties
regarding customer acceptance; persuasive evidence of an arrangement exists; the
sales price is fixed and determinable; and collectability is deemed probable.
The Company recognizes revenues based on gross revenues reporting pursuant to
EITF 99-19.
Revenue from telecommunications services is recognized when the services are
provided.
Revenue from installation contracts is recognized on the completed contract
method. A contract is considered complete when all costs except insignificant
items have been incurred and the installation is operating according to
specifications and has been accepted by the customer.
Revenue from software communications development is recognized upon completion
of installation and delivery to customers at which time title is passed; there
are no uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed and determinable; and
collectability is deemed probable.
Convertible Debt
----------------
Convertible debt with beneficial conversion features, whereby the conversion
feature is "in the money" are accounted for in accordance with guidance supplied
by Emerging Issues Task Force ("EITF") No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF No. 27, "Application of Issue 98-5 to Certain
Convertible Instruments".
32
For convertible debt and related warrants, the recorded debt discount is
calculated at the issuance date as the difference between the conversion price
and the relative fair value of the common stock into which the security is
convertible or exercisable.
Net Loss per Share
------------------
The Company follows the guidelines of Statement of Financial Accounting
Standards No. 128, "Earnings per share" ("SFAS No. 128") in calculating its loss
per share. SFAS No. 128 states basic and diluted earnings per share are based on
the weighted average number of common shares and equivalent common shares
outstanding during the period. Common stock equivalents for purposes of
determining diluted earnings per share include the effects of dilutive stock
options, warrants and convertible securities. The effect on the number of shares
of such potential common stock equivalents is computed using the treasury stock
method or the if-converted method, as applicable. The Company has excluded all
outstanding stock options and warrants as well as shares issued upon conversion
of debt from the calculation of diluted loss per share because these securities
are anti-dilutive.
Payments Due by Period
The future maturities of the notes payable to third parties and related parties
are as follows:
2008 $469,075
2009 50,000
2010 --
2011 --
--------
Total $519,075
========
Operating Leases
The Company's rent expense amounted to $190,016 and $77,883 for the years ended
June 30, 2008 and 2007, respectively. The Company has various long-term
non-cancelable lease commitments for its offices, warehouse and other facilities
which expire though 2011. The minimum rental commitments under non-cancelable
long-term operating leases during the next five years are as follows:
2009 113,531
2010 114,847
2011 50,215
2012 50,215
-------
Total $328,808
========
Qualitative and Quantitative Disclosure About Market Risk
In the ordinary course of our business, we could be subjected to a variety of
market risks which include, but are not limited to foreign currency fluctuations
as we have operations in China. We continuously assess these risks and have
established policies and procedures to protect against the adverse effects of
these and other potential exposures. Although we do not anticipate any material
losses in these risk areas, no assurance can be made that material losses will
not be incurred in these areas in the future.
Foreign Exchange Rate Risk
--------------------------
Our functional currency is the U.S. Dollar. The financial statements of our
Company's operating subsidiaries with a functional currency other than U.S.
dollars are translated into U.S. dollars using the current rate method.
Accordingly, assets and liabilities are translated at period-end exchange rates,
while revenues and expenses are translated at the period's average exchange
rates. Adjustments resulting from these translations are accumulated and
reported as a component of accumulated other comprehensive loss in stockholders'
equity.
33
We neither hold nor issue financial instruments for trading purposes and we do
not currently engage in any hedging activities designed to stabilize the risks
of foreign currency fluctuations. Such fluctuations could adversely affect the
value of our revenues and the results of our operations stated in U.S. Dollars.
Effects of Inflation
--------------------
The Company maintains operations in both China and the U.S. which could be
adversely effected by an increase in inflation in either country. Inflation
could cause the Company's gross profits margins to erode if the Company is not
able to raise prices to compensate for cost increases. Similarly, net profits
can be adversely impacted if gross margins cannot be increased to cover
increases in operating expenses.
We have attempted to minimize the impact of inflationary price increases by
maintaining short-term pricing commitments in our U.S. business segments. We
have reduced the inflation risk in China by contracting with third parties to
provide the majority of our operating expenses as a percentage of revenues.
However, we cannot guarantee that these measures will prove effective against
the risks of inflation.
Capital Funding Risk
--------------------
The Company has funded its capital needs since June 30, 2006 primarily through
issuance of common stock. The Company's ability to raise equity capital in the
future depends on many variables outside of the Company's control such as the
strength of the equity markets in the U.S. and worldwide, the perceived
favorability of investments in Chinese business, changes in investor preference
for equity securities, and possible changes in laws and regulations effecting
equity funding. No assurance can be given that there will not be adverse changes
in the ability of the Company to obtain capital funding by issuing equity
securities.
The Company does not engage in significant asset based borrowing at the current
time, but no assurance can be given that the Company would not borrow funds from
asset based lending or other institutional lenders if funds could not be
provided through equity issuances. However, the Company cannot give assurance
that such financing would be available if sought by the Company.
The Company does anticipate that it will continue to raise funds through sales
of common stock as it ramps up its operations in China.
ITEM 3. PROPERTIES
Our headquarters are located at 327 Plaza Real, Suite 319, Boca Raton, Florida
33432, where our executive and administrative offices are located. We also lease
offices spaces in Dallas, Texas for investor relations and some accounting
functions; in Tampa, Florida we lease offices for Cable and Voice Corporation;
in Los Angeles, California we lease offices our subsidiaries; Phone House, Inc
and Dial Tone Communications, Inc. in Singapore we lease an office for
accounting and administration of Vastland Holdings and Beijing and Nanning,
China we lease offices for Candidsoft . We do not own any real property.
We believe that our current facilities are suitable and adequate to meet our
current needs, and that suitable additional or substitute space will be
available as needed to accommodate expansion of our operations. It is possible,
however, that we will acquire additional facilities by the end of 2008. Our
growth strategy includes acquisition of additional business to complement and
strengthen our current offering of products and services. If our current or
planned efforts in this regard are successful, we may obtain additional leased
or owned property in connection with an acquisition.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information concerning beneficial ownership of our
common stock as of August 31, 2008, by:
34
o all persons (including any "group" as that term is used in section 13(d)(3)
of the Exchange Act) who are known to us to be the beneficial owner of more
than five percent of our common stock;
o each of our named executive officers;
o each of our directors; and
o all of our directors and executive officers as a group.
The following table lists the number of shares and percentage of shares
beneficially owned based on 161,098,956 shares of common stock outstanding as of
September 30, 2008.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting power and/or
investment power with respect to the securities held. Shares of common stock
subject to options and warrants currently exercisable or exercisable within 60
days of September 30, 2008, are deemed outstanding and beneficially owned by the
person holding such options or warrants for purposes of computing the number of
shares and percentage beneficially owned by such person, but are not deemed
outstanding for purposes of computing the percentage beneficially owned by any
other person. Except as indicated in the footnotes to this table, the persons or
entities named have sole voting and investment power with respect to all shares
of our common stock shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the persons below
is c/o China Voice Holding Corp., 327 Plaza Real, Suite 319, Boca Raton, Florida
33432.
35
Beneficial Ownership of Common Shares
- -------------------------------------
Name Address Shares Percentages
Hin Hiong Khoo 126A Rangoon Rd. 10,663,000 (1) 6.62
Singapore 218404
Bill Burbank 327 Plaza Real, Ste 319 5,030,856 (2) 3.12
Boca Raton, Florida 33432
D. Ronald Allen 17300 N. Dallas Parkway, Ste 2040 29,684,905 (3) 18.43
Dallas, Texas 75248
Chun Li Xing No. 40 Xue Yuan Lu 4,615,000 2.86
Datang Telecom Campus, Ste 101
Research Building 7,
Haidan District
Beijing, PR of China 100083
Jose Ferrer 327 Plaza Real, Ste 319 175,000 0.11
Boca Raton, Florida 33432
Rafael Zambrano 164 Horizon Towers 750,000 0.47
Tanjon Bungar Pk.
11200 Tanjon Bungar
Penang, Malaysia
John Iacovelli 327 Plaza real, Ste 319 210,000 0.13
Boca Raton, Florida 33432
Han Boon (Jason) Lim 126A Rangoon Rd. 500,000 0.31
Singapore 218404
Other Stockholders owning over 5% None
All Directors and Officers as a Group 51,628,761 32.05
(1) Mr. Khoo has voting control of these shares as an officer and director
of International Christian Mission, owning 900,000 shares and Nations
Corp. Ltd., owning 8,060,000 shares. In addition, 1,703,000 shares
owned by Nutripharm Ltd., owned by his wife, are attributed to him. Mr.
Khoo has no ownership interest in these entities.
(2) Mr. Burbank's shares are held by the William F. Burbank Trust.
(3) Mr. Allen has voting control of these shares as an officer and director
of Touchstone Enterprises, Inc., owning 2,009,000 shares, Associates
Funding Group Inc., Trustee, owning 212,000 shares, and Winterstone
Equities Inc., owning 27,465,905 shares. Mr. Allen disclaims ownership
of these shares.
36
Beneficial Ownership of Series A Preferred Stock
Name Address Shares Percentages
D. Ronald Allen 17300 N. Dallas Parkway 3,304 (1) 100%
Suite 2040
Dallas, Texas 75248
(1) Mr. Allen has voting control of these shares as an officer and director
of Caleb Development Corp., owning 1,670 shares, Associates Funding
Group Inc., owning 784 shares, Associates Funding Group Inc., Trustee,
owning 350 shares, and Integrated Performance Business Systems, Inc.,
owning 500 shares. Mr. Allen has an ownership interest only in
Associates Funding Group Inc. Each share of Series A Preferred Stock is
entitled to vote the equivalent of 2,500 shares of common stock, or a
total of 8,260,000 shares, representing 4.88% of all voting power
outstanding.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and certain significant employees of CHVC are
set forth below. None of such persons has been involved in any legal proceeding
enumerated in Securities and Exchange Commission Regulation S-K, Item 401,
within the time periods described in that regulation.
Executive Officers, Directors and Certain Significant Employees
The following table contains information with respect to our directors and
executive officers:
Name Age Position
Hin Hiong Khoo 68 Chairman of the Board
Bill Burbank 50 Chief Executive Officer, President and
Director
D. Ronald Allen 58 Chief Financial Officer and Director
Chun Lin Xing 46 President of China Operations
Jose Ferrer 53 Chief Operating Officer
Rafael Zambrano 45 Chief Technology Officer
John Iacovelli 53 Chief Information Officer
Han Boon (Jason) Lim 33 Chief Operating Officer, Asia Operations
Hin Hiong Khoo has served as our Chairman of the Board since April 2004. Mr.
Khoo, as an International Business Advisor and entrepreneur, has assisted many
companies in their public floatation in several exchanges around the globe
during the last 40 years. He was Chairman of VoIUM Technologies from November
2002 to April 2004. Mr. Khoo was a partner of Softgen, a telecom software
company that was purchased by a US public company in 1999, from 1997 to 2002.
Prior to Softgen, he worked as an attorney, an international business advisor,
and held a seat on Far East exchange in Hong Kong. He is currently a Board
Member of China Access 2008, an economic "legacy" initiative for the Beijing
2008 Olympics Games, backed by the Beijing Government. He is also a Board Member
of Pacific Rim Forum, a consortium of international businesses and governments
involved in Asia Pacific business and corporate strategies.
Bill Burbank has served as our Chief Executive Officer, President and a Director
since September 2006. Mr. Burbank brings more than 25 years of success in
business development and operations experience to the company. He has extensive
experience in working with both private and public emerging technology
development companies in the U.S., Canada and Asia. He was Chief Executive
Officer of DTNet Technologies from April 2006 until we acquired that company and
he became our Chief Executive Officer. Prior to that, Mr. Burbank was Chief
Operating Officer of VoIP, Inc. from December 2004 to February 2006, where he
managed the operations of multiple subsidiaries in the telecommunications market
with combined annual revenues over $40 million. Mr. Burbank was Vice President
of Business Development and Chief Marketing Officer for Pony Express U.S.A.,
Inc., a package delivery company, from October 2002 to November 2004.
37
D. Ronald Allen has served as our Chief Financial Officer and a director since
January 2004. As co-founder of our company, he has held the positions of
Chairman, CEO, President and Secretary of the Company. From 1999 to November
2004 Mr. Allen served as CEO and Chairman of Global Innovation Corp. (OTCBB
symbol: GINV), an electronics manufacturer formerly known as Performance
Systems, Inc. serving the high-speed wireless communications industry, the
digital electronics market and the broadband communications industry with
applications in both commercial and military markets. Mr. Allen was an officer
and director of a former subsidiary of GINV, Performance Interconnect Corp.
which, after several years of inactivity, petitioned for bankruptcy under
Chapter 7 of The U. S. Bankruptcy Code in October of 2006. He was a partner of
KPMG Peat Marwick from 1981 to 1984 and is a Certified Public Accountant. After
leaving public accounting in 1984, Mr. Allen has worked as a financial
consultant and manages investments in real estate and small businesses.
Chun Lin Xing has served as our President of China Operations since 01/18/2006.
Mr. Xing manages our China Operations. He has over 14 years experience in IT
businesses in China and has founded four start-up companies. He was the founder
and Chief Executive Officer of Beijing CandidSoft Beijing, China from 2002.
Prior to this, Mr. Xing was the Managing Director of IBC China Co.
(International Business Center), a venture between investors from the United
States and Singapore and China's National Information Center, from 1997 to 2000.
He is also a world renowned expert and innovator in the office automation
software industry, having won several technology prizes and Innovation Awards
granted by the State Government and the Ministry of Science and Technology of
China.
Jose Ferrer has served as our Chief Operating Officer since January 7 2008. Mr.
Ferrer has extensive international experience in leading people and project
team, implementing and overseeing technology programs and administering budgets
and operations. Mr. Ferrer served as Executive Vice President of MacroVoice
Networks from 07/2001to 12/2002 where he managed OEM relations with major
companies such as LG Electronics and Dell amongst others for the supply of
innovative voice and data platforms. During his tenure at this company, he was
instrumental in sourcing, contracting and launching a leading edge VoIP
hardware/software solution which connected to existing legacy PBX's to provide
low cost LD service to corporate clients.
Rafael Zambrano has served as our Chief Technology Officer since March, 2008.
Mr. Zambrano has as over 19 years experience in senior level international
project management, engineering, product development, and strategic business
development in the telecommunications industry. Most recently Mr. Zambrano
served as CEO of InterEdge Technologies a Company that he co-founded in
November, 2004. At InterEdge he was responsible for all aspects of the company
including the development and manufacturing of advanced Internet Telephony
products. Previously, during his tenure at several companies in the US and
Malaysia, Mr. Zambrano was responsible for overseeing the development and
deployment of VoIP services in South East Asia and China, the design and
implementation of a VoIP network to provide global telephone services,
development of analog and digital gateways, softswitches and other leading
products and services. He received a Bachelor of Science in Electrical
Engineering from The University of Alabama Birmingham in 1988.
John Iacovelli has served as our Chief Information Officer since October , 2006.
Previously, he was Director of Special Projects, for VoIP, Inc. from October
2004 to February 2006, where he was responsible for a variety of technical
initiatives. Mr. Iacovelli was Chief Information Officer of Pony Express from
July 2002 to September 2004, where he oversaw a network infrastructure spanning
nine locations in Florida, and personally developed Microsoft Windows(TM) and
Internet-based software for customers such as the State of Florida. From May
1998 to August 2001 Mr. Iacovelli worked as a marketing manager in the speech
recognition field for Registry Magic and Foresight Technologies. Mr. Iacovelli
worked at Clarion Software as its Director of Marketing from March 1994 to May
1998, where he launched the first Rapid Application Development environment to
produce compiled executables for Microsoft Windows(TM), and later the first 32
bit executables, and as Vice President of Marketing at its successor
corporation, SoftVelocity, from July 2001 to July 2002. Before that, he was
Senior Product Manager at Expert Software from January 1990 to March 1994 where
he produced many best selling software titles in the retail market such as
Expert Home Design.
Han Boon (Jason) Lim has served as our Chief Operating Officer, Asia Operations
since 03/01/2004. Prior to joining the Company, he was Chief Operating Officer
of WBC Pte Ltd, a joint venture with IBC Corp. of Dallas, Texas from 04/01/2003
to 02/28/2004, where he led operations of the DVB IP-Casting division. Mr. Lim
was Director of Product Development for VoIUM Technologies from 10/01/2001 to
02/28/2004, where he was responsible for designing and managing the development
38
of wireless products and directed the regional expansion of VoIUM's operations.
Mr. Lim served as Vice President, Information Technologies of AirGateway Pte Ltd
from 06/01/2000 to 09/30/2001, Chief Infrastructure Officer of WAPworkz
Technologies Pte Ltd. from 10/01/1999 to 05/31/2000, and as lead IT Consultant
for Webpoint Technologies from 05/01/1996 to 09/30/1999. Jason holds a Microsoft
Certified Professional Certification and a Bachelors Degree in Computer
Engineering with Specialization in Networks and Database Systems from Nanyang
Technological University. He is a commissioned officer in the Singapore Armed
Forced holding the rank of Captain.
ITEM 6. EXECUTIVE COMPENSATION
Executive Compensation in Fiscal Year 2008
The following table sets forth the compensation earned by our Chief Executive
Officer and the other executive officers who, based on their total compensation,
received more than $100,000 and were the most highly compensated in the fiscal
year ended June 30, 2008. We refer to these individuals collectively as the
named executive officers.
Summary Compensation Table
All Other
Name and Principal Stock Option Annual
Position Year Salary Bonus Awards Awards((2)) Compensation(1) Total
Hin Hiong Khoo 2008 $120,000 $-- $-- $-- $25,000 $145,000
Chairman of the Board
Bill Burbank 2008 186,000 -- -- -- 25,000 211,000
Chief Executive
Officer, President
and Director
D. Ronald Allen 2008 120,000 -- -- -- 25,000 145,000
Chief Financial
Officer and Director
Chun Lin Xing 2008 100,000 -- -- -- -- 100,000
President of China
Operations
Jose Ferrer 2008 125,000 -- 177,250(3) -- -- 302,250
Chief Operating
Officer
Rafael Zambrano 2008 150,000 -- 172,500(3) -- -- 322,500
Chief Technology
Officer
1. Consists of $25,000 to each of Messrs. Khoo, Burbank and Allen for their
service on our board of directors.
2. The Company does not issue stock options to its officers.
3. The Stock awards consist of vested shares of common stock valued at the
closing stock price on the date issued, consistent with the amounts
reported in the Company's financial statements.
The following table sets forth certain information concerning outstanding equity
awards held by our named executive officers at June 30, 2008:
39
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Number of Securities Option Option
Underlying Unexercised Exercise Expiration
Name Options Unexerciserable(1) Price per share Date
None
Employment Arrangements with Named Executive Officers
The Company's only employment contract is with its president, Bill Burbank. Such
agreement is for a term of three years beginning August 31, 2006, and will
automatically renew for subsequent six monthly periods unless terminated by
either party at least 90 days prior to end of a term. Compensation to Mr.
Burbank is $15,500 per month; in addition, he received a grant of 250,000 shares
of common stock.
Equity Compensation Plan
The Company does not currently have a formal Equity Compensation Plan or 401K
Plan but does use its restricted securities to entice key employees and to
provide additional performance based compensation. A former Equity Compensation
Plan was terminated and currently has one participant.
Director Compensation in Fiscal Year 2008
Fees Earned or Stock
Paid in Cash Awards Option Awards Total
Name ($) ($)(5) ($)(5) ($)
Hin Hiong Khoo 25,000 $25,000
Bill Burbank 25,000 $25,000
D. Ronald Allen 25,000 $25,000
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Related Party Receivables
- -------------------------
One of the Company's subsidiaries has advanced funds to certain non-officer
employees. Such advances are not interest bearing and are unsecured. Management
believes that these assets are collectible as they relate to relationships with
continuing employees.
Related Party Payables
- ----------------------
Certain companies owned or controlled by D. Ronald Allen, a major stockholder,
director and officer of CHVC, has loaned funds to the Company secured by all of
the assets of the Company. These advanced funds are due on demand and bear
interest at 18%. The balance as of June 30, 2008 and 2007 was $303,790 and
$326,786, respectively.
Certain individuals who are employees and/or directors of the Company have
advanced funds to the Company on unsecured terms bearing interest at 8%. The
balance on these advances was $13,900 and $100,685 as of June 30, 2008 and 2007.
An employee of one of the Company's China subsidiaries has advanced funds to the
Company on unsecured terms. This advance does not bear interest. The balance due
on this advance was $72,761 and $87,040 as of June 30, 2008 and 2007.
40
Related Party Notes
- -------------------
In connection with the Company's acquisition of its PhoneHouse subsidiary, the
Company is indebted to the former owner of that company, who remains an employee
of PhoneHouse. The note bears interest at 12% and mature on December 14, 2007.
The balance on that note was $-0- and $149,179 as of June 30, 2008 and 2007,
respectively.
In connection with the Company's acquisition of its DTNet subsidiary, the
Company is indebted to a Company controlled by the former owners of DTNet. One
of those owners, Bill Burbank, received 510,000 shares of CHVC common stock, and
remains a major stockholder, director, officer and employee of CHVC. The
convertible note is secured by all of the common stock of DTNet and bears
interest at 8% and matures on December 31, 2008. The balance on that note was
$310,423 and $675,000 as of June 30, 2008 and 2007, respectively.
Earn-Out Arrangement
- --------------------
Also in connection with the acquisition of DTNet, the Company agreed to issue
contingent consideration of up to 1,000,000 shares upon the attainment of
revenue targets over 42 months. Through September 30, 2008, a total of 595,360
shares have been issued, including 433,500 shares issued to our CEO, Bill
Burbank.
Joint Ventures
- --------------
The Company has entered into a joint venture with WRIO, Corp., dated May 31,
2006, wherein WRIO , Corp. and the Company, through contribution of $1,000 each,
are 50/50 partners in the exploitation of wireless broadband technology owned by
WRIO, Corp. in China. WRIO, Corp. is controlled by D. Ronald Allen, an officer
and director of the Company. No revenues were earned under this joint venture
during 2008 and 2007, accordingly, no revenues or expense have been reflected in
these financial statements.
Preferred Stock
- ---------------
All of the Company's preferred stock shares are directly or indirectly owned by
entities that are owned or controlled by D. Ronald Allen. As such, Mr. Allen has
all voting rights relating to this class of stock.
We have issued the following shares of our Series A Preferred Stock to
Affiliates of our CFO, D. Ronald Allen:
May 31, 2006 - 1,124 shares issued in exchange for the assumption of $984,300 of
debt to third parties.(1)
August 30, 2006 - 500 shares issued for net proceeds of $250,000. (1)
September 30, 2006
o 2,100 shares issued in exchange for the assumption of $200,000 debt to
affiliates of Mr. Allen and $850,000 of debt to third parties. (1)
o 500 shares issued as additional collateral for debt to third parties.
(1)
March 31, 2008
o 848 shares issued in exchange for the assumption of $424,000 of debt
to third parties. (1)
o 194 shares issued in exchange for $194,000 of accumulated preferred
dividends. (1)
June 30, 2008
o 450 shares issued in exchange for the assumption of $225,000 of debt
to third parties. (1)
o 48 shares issued in exchange for $48,000 of accumulated preferred
dividends. (1)
41
October 1, 2008
o 2,000 shares issued in exchange for the assumption of $1,000,000 debt.
(1)
We redeemed the following shares of our Series A Preferred Stock from affiliates
of our CFO D. Ronald Allen:
During the year ended June 30, 2007, the Company redeemed 500 shares of the
Company's Series A Preferred Stock for $410,300 paid to a third party. (1)
During the year ended June 30, 2007, certain common stock warrants owned by
third parties were exercised which resulted in an exchange of common stock
shares for 450 shares of preferred stock. (1)
On September 30, 2007, certain common stock warrants were exercised which
resulted in an exchange of 442,963 common stock shares to a third party for 152
shares of preferred stock. (1)
On December 31, 2007, the Company redeemed 448 shares of the Company's Series A
Preferred Stock for $822,000 cash and the issuance of 620,000 shares of common
stock to a third party. (1)
On March 31, 2008, the Company redeemed 625 shares of the Company's Series A
Preferred Stock in exchange for 3,245,000 shares of company common stock,
500,000 of which shares were issued to an affiliated entity and the balance to
third party. (1)
On June 30, 2008, the Company redeemed 425 shares of Series A Preferred stock
for $400,000 and 105,000 shares of common stock to a third party. (1)
On September 30, 2008, the Company redeemed 455 shares of Series A Preferred
Stock for $454,500 to a third party. (1)
- --------------------------
(1) The shares of Preferred Stock were held to collateralize obligations to
third parties assumed by CFO D. Ronald Allen.
Guarantees
- ----------
Certain of the Company's notes payable due to third parties have been guaranteed
by companies owned or controlled by D. Ronald Allen.
ITEM 8. LEGAL PROCEEDINGS
From time to time we are involved in various claims and other legal proceedings
which arise in the normal course of our business. Such matters are subject to
many uncertainties and outcomes that are not predictable. However, based on the
information available to us and after discussions with legal counsel, we do not
believe any such proceedings will have a material adverse effect on our
business, results of operations, financial position or liquidity. We cannot
provide assurance, however that damages that result in a material adverse effect
on our financial position or results of operations will be not be imposed in
these matters.
On July 17, 2008, the Securities and Exchange Commission issued an Order
Directing Private Investigation and Designating Officers to Take Testimony In
the matter of China Voice Holding Corp., File No. HO-10827. The investigation is
inquiring into sales of unregistered shares of stock and representations and
publications made in connection therewith. Officers of the Company have met with
the SEC to discuss the matter and the Company is cooperating fully in the
inquiry.
42
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Price
While there is no established trading market for our common stock, our common
stock is currently quoted on the Pink Sheets (www.pinksheets.com) include the
symbol CHVC.PK. The following table shows the range of high and low bid prices
for our common stock as reported by the Pink Sheets, as the case may be, for
each quarter since the beginning of fiscal year 2006. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
Quarter Ended High Low
June 30, 2005 0.95 0.95
September 30, 2005 1.10 0.45
December 31, 2005 1.10 0.44
March 31, 2006 1.13 0.75
June 30, 2006 1.08 0.95
September 30, 2006 1.15 0.85
December 31, 2006 1.16 0.85
March 31, 2007 1.54 0.74
June 30, 2007 0.91 0.34
September 30, 2007 0.60 0.36
December 31, 2007 2.56 0.51
March 31, 2008 1.21 0.86
June 30, 2008 1.16 0.46
September 30, 2008 0.54 0.35
On October 24, 2008, the bid and ask prices for our common stock as reported on
the Pink Sheets were $0.35 and $0.37 per share, respectively.
As of October 15, 2008, approximately 563,200 shares of our common stock are
subject to outstanding options or warrants to purchase, or securities
convertible into, our common shares. Approximately 82,439,473 shares of our
outstanding common stock could be sold pursuant to Rule 144 under the Securities
Act of 1933. Of the balance of our 78,658,983 shares outstanding, , 32,315,160
are free trading and remainder, 46,343,823, were issued in the previous twelve
months and will be eligible to be sold pursuant to Rule 144 after the shares
have been held for one year.
We have not agreed to register any shares of our common stock that are currently
outstanding.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not
expect to pay any cash dividends for the foreseeable future. We intend to retain
future earnings, if any, in the operation and expansion of our business. Any
future determination to pay cash dividends will be made at the discretion of our
board of directors and will depend on our financial condition, results of
operations, capital requirements and other factors that our board of directors
deems relevant. Investors should not purchase our common stock with the
expectation of receiving cash dividends.
Stockholder Matters
As of September 30, 2008, a total of 161,098,456 shares of common stock were
outstanding and held of record by 1,121 persons.
43
As of June 30, 2008, the following equity securities of our company are
authorized for issuance, aggregated as follows, pursuant to our company's Equity
Compensation Plan. Such Plan has been terminated and covers only one former
employee.
Equity Compensation Plan Information
Number of
securities to be Number of securities
issued upon remaining available for
exercise of Weighted-average future issuance under
outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan Category and rights warrants and rights reflected in column(a))
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders 48,551 $0.4892 None
Total
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by our company within the past three
years involving sales of its securities that were not registered under the
Securities Act of 1933 (the "Act"). For each transaction we relied upon the
following exemption(s) from registration under the Act, and each such issuance
is noted at the end to correspond to one of these exemptions:
(1) Exempt under Section 4(2) of the Act as a sale for cash to a small
group of accredited or otherwise sophisticated investors not involving
any public offering.
(2) Exempt under Section 4(2) of the Act as an issuance of securities as
consideration for an acquisition of a company or block of assets from
a small group of sophisticated sellers.
(3) Exempt under Regulation S promulgated under the Act as issuances of
restricted shares to non-US persons who provided subscription
representations in private transactions without any advertising or
public solicitation.
(4) Exempt under Regulation D promulgated under the Act and Rule 506
thereof as sales to all accredited investors who provided subscription
representations in offerings that were not subject to public
solicitation and in which Form D notices were filed.
(5) Exempt under Section 4(2) as issuances of stock in lieu of
compensation or consulting fees to a small member of sophisticated
persons not involving any public offering.
(6) Exempt under such 3(a)(9) of the Act as an exchange of securities for
other outstanding securities of the Registrant.
(7) Exempt under Section 4(2) of the Act as issuance of shares as
additional consideration for loans to the Registrant or in lieu of
interest on loans, to institutional and other accredited investors.
Common Stock
On April 1, 2004, we issued 50,000,000 shares of our common stock to the
stockholders of China Voice Corp. in exchange for all of the issued and
outstanding common stock of China Voice Corp. pursuant to an Agreement and Plan
of Reorganization, dated as of April 1, 2004 between China Voice Corp., certain
stockholders of China Voice Corp. and Surf Franchise, Inc. (2)
Effective June 30, 2005, we issued an aggregate of 23,582,987 shares of our
common stock.
44
o We issued 20,028,000 shares of our common stock to the stockholders of
East West Global Communications, Inc. in exchange for all of the
issued and outstanding shares of East West Global Communications,
valued at $5,007,000. (2)
o We issued 525,000 shares of our common stock to the stockholders of
Network Zone PTE Ltd. in connection with the acquisition of a 75%
equity interest in Network Zone PTE Ltd., valued at $210,000. (2)
o We issued and sold 1,846,320 shares of our common stock to 12 non-US
persons for net proceeds of $430,840. (3)
o We issued an aggregate of 1,008,667 shares of our common stock to 7
non-US persons for consulting services rendered by such individuals.
The aggregate value of such issued shares for services rendered was
$252,167. (3)
o We issued 180,000 shares of our common stock to a third-party lender
in respect of loans totaling $475,000. The aggregate value of such
issued shares for the loan costs was $45,000. (7)
On October 7, 2005, we issued 200,000 shares of our common stock for the
acquisition of all of the assets of Call Gateway Corp, valued at $100,000. (2)
From October 1, 2005 to December 31, 2005, we issued an aggregate of 244,625
shares of our common stock for net proceeds of $71,885, to four non-US persons.
(3)
From October 1, 2005 to December 31, 2005, we issued an aggregate of 954,000
shares of our common stock to three individuals pursuant to the exercise of
certain warrants that had been previously issued to 24 individuals in May and
June of 2005 in exchange for cancellation of $349,000 of our debt and accrued
interest obligations. (6)
From January 1, 2006 to March 31, 2006, we issued a total of 986,000 shares.
o We issued 670,000 shares to one non-US person and two US persons upon
the exercise of warrants issued in 2005, for consideration consisting
of the cancellation of debt and accrued interest in the amount of
$262,700. (6)
o We issued 20,000 shares to one non-US person for net proceeds of
$10,000. (3)
o We issued 296,000 shares to six non US persons and two US persons in
exchange for consulting fees valued at $310,800. (5)
From April 1, 2006 to June 30, 2006, we issued a total of 552,000 shares.
o We issued 532,000 shares upon the exercise of warrants issued August
19, 2006 by a non US person in exchange for $21,874 of debt and
accrued interest, a warrant issued May 31, 2005 by a non US person in
exchange for $112,116 debt and accrued interest, and a warrant issued
June 30, 2006 by a non US person in exchange for $77,710 debt and
accrued interest. (3)
o We issued 20,000 shares to four note holders as consideration for
extending the maturity of $325,000 of notes due May 31, 2006. (7)
From July 1, 2006 to September 30, 2006, we issued an aggregate of 260,000
shares, as follows:
o 250,000 shares were issued to two non US persons for $225,000. (3)
o 10,000 shares were issued to two non US persons for consulting
services issued at $10,000. (3)
45
On September 14, 2006, we issued 4,925,000 shares of our common stock to certain
stockholders of Candidsoft Technologies Company Ltd. of Beijing pursuant to an
Agreement between us, certain stockholders of Candidsoft, Beijing CVC
Communications Co. Ltd. (an affiliate of our company) and Candidsoft in exchange
for a sixty-five percent (65%) interest in the capital stock of Candidsoft.
(2)(3)
From October 1, 2006 to December 31, 2006, we issued an aggregate of 762,485
shares of our common stock, as follows:
o 351,500 shares were issued to eleven persons for consulting services
valued at $369,075, including 285,000 shares to our executive
officers. (5)
o We issued 314,000 shares to thirteen non-US persons for cash of
$56,893. (3)
o We issued 96,985 shares in exchange for $103,209 of interest due on
five loans aggregating $475,000. (7)
On December 31, 2006, we issued 1,000,000 shares of our common stock valued at
$1,160,000 to the stockholders of VCG Technologies, Inc. doing business as DTNet
Technologies and the members of DTNet Technologies, LLC pursuant to an Agreement
and Plan of Merger, dated as of August 25, 2006, by and among our company, DTN
Acquisition Corp. and DTNet Technologies, LLC (both wholly-owned subsidiaries of
our company), VCG Technologies, Inc. and VCG Technologies, LLC in connection
with the acquisition of VCG Technologies, Inc. and VCG Technologies, LLC. The
sellers also received a debenture convertible into 1,566,000 common shares at
$0.50 per share for two years. (2)
On December 31, 2006, we issued 2,100,000 shares of our common stock valued at
$2,310,000 to certain stockholders of Beijing Techview System Engineering Co.
Ltd. pursuant to an Agreement between us, certain stockholders of Beijing
Techview, Beijing Vastland Investment Consultancy and Management Co. Ltd. (an
affiliate of our company) and Beijing Techview in exchange for a seventy percent
(70%) interest in the capital stock of Beijing Techview. (2)
From January 1, 2007 to March 31, 2007, we issued an aggregate of 7,890,603
shares of our common stock.
o 95,000 shares were issued to two persons for consulting services
valued at $118,200. (5)
o 400,000 shares were issued to one non-US person and one US person for
$180,532 cash. (3)(1)
o 250,000 shares were issued to one US person in exchange for a $125,000
promissory note. (1)
o 2,340,603 shares were issued upon the exercise of warrants issued in
2005 by a non-US person in exchange for $585,151 of debt and accrued
interest. (3)(6)(7)
o 80,000 shares were issued as compensation to two lenders holding notes
in the principal amount of $500,000. (7)
o 4,725,000 shares were issued on March 21, 2007, for the acquisition of
StreamJet.Net, valued at $2,929,500. The sellers also received options
to purchase 16,000,000 shares for $0.30 per share for 30 days after
closing. (2)
From April 1, 2007 to June 30, 2007 we issued 11,556,013 shares, as follows:
o 2,200,000 shares were issued to one non-US person for $656,000 cash.
(3)
o 35,000 shares were issued to a former employee as compensation. (5)
o 79,500 shares were issued to one US persons in exchange for $26,500 of
debt and accrued interest. (6)
46
o 1,347,776 shares were issued to six persons in exchange for 450 shares
of Series A Preferred Stock plus $44,267 in accumulated dividends, for
a total value of $494,267. (6)
o 6,942,308 shares were issued to 155 non-US persons in a Regulation S
offering, yielding net proceeds of $947,790. (3)
o 230,000 shares were issued upon the exercise for cash of $45,000 by
three persons of options granted in the StreamJet.Net acquisition. (6)
o 71,429 shares were issued to former stockholders of DTNet pursuant to
earn-out provisions of the acquisition agreement, including 30,964
shares issued to our CEO, Bill Burbank. (2)
o On June 17, 2007, we issued 650,000 shares of our common stock to
Deepak Hiranandani, the former sole stockholder of Phone House, Inc.
pursuant to an Agreement and Plan of Merger, dated as of June 14,
2007, by and among our company, Phone House Acquisition Corp. (a
wholly owned subsidiary of our company), Mr. Hiranandani and Phone
House, Inc. in connection with the acquisition of Phone House by our
company. (2)
From July 1, 2007 to September 30, 2007, we issued an aggregate of 8,262,420
shares of our common stock.
o 71,429 shares were issued to former stockholders of DTNet pursuant to
earn-out provisions of the acquisition agreement, including 30,964
shares issued to our CEO, Bill Burbank. (2)
o 254,000 shares were issued to five persons for consulting services
valued at $139,190. (5)
o 500,000 shares were issued to a non-US person for cash of $176,000.
(3)
o 6,459,031 shares were issued to 152 non-US person in a Regulation S
offering for net cash proceeds of $812,792. (3)
o 40,000 shares were issued upon the exercise of options granted to
sellers of StreamJet.Net, for cash of $10,000. (2)(6)
o 442,960 shares were issued to three holders of Series A Preferred
Stock in exchange for such shares, valued at $152,000. (6)
o On July 19, 2007, we issued 495,000 shares of our common stock to
Abdul Kalejaiye, the former sole stockholder of Dial-Tone
Communication, Inc., a Florida corporation, pursuant to the terms of
an Agreement and Plan of Merger, dated as of July 19, 2007 between our
company, Dial-Tone Acquisition Corp. (a wholly owned subsidiary of our
company), Mr. Kalejaiye and Dial-Tone Communication, Inc. in
connection with the acquisition of Dial-Tone Communication by our
company. (2)
From October 1, 2007 to December 31, 2007, we issued 23,151,932 shares.
o 258,929 shares were issued to former stockholders of DTNet and
PhoneHouse pursuant to earn-out provisions of the acquisition
agreements, including 30,964 shares to our CEO, Bill Burbank. (2)
o 150,000 shares were issued in exchange for equipment. (2)
o 384,000 shares were issued to two non-US persons and five US persons
in exchange for consulting services valued at $375,620. (5)
o 620,000 shares were issued to one person in exchange for 115 shares of
Series A Preferred Stock valued at $115,000. (6)
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o 10,064,927 shares were issued to 417 non US persons in a Regulation S
offering, for net proceeds of $2,199,852. (3)
o 8,251,000 shares were issued to 45 former stockholders and option
holders of StreamJet.Net upon the exercise of options for $1,834,587.
(2)
o 1,423,076 shares were issued to 31 US persons in a Regulation D
offering for net proceeds of $536,500. (4)
o 2,000,000 shares were issued to three non-US persons for net proceeds
of $500,000. (3)
From January 1, 2008 to March 31, 2008, we issued 13,217,714 shares.
o 671,000 shares were issued to 10 persons for consulting services
valued at $726,530. (5)
o 381,073 shares were issued to former stockholders of DTNet pursuant to
earn-out provisions in the acquisition agreement, including 340,608
shares to our CEO Bill Burbank. (2)
o 637,356 shares were issued to Bill Burbank to settle an option to
purchase 1,566,000 shares at $0.50 per share. (1)
o 3,346,500 shares were issued to nine persons in exchange for 625
shares of Series A Preferred Stock valued at $337,875. (6)
o 3,746,536 shares were issued to 176 non-US persons in a Regulation S
offering for net proceeds of $922,383. (3)
o 215,249 shares were issued to four US persons for $135,500 net
proceeds. (4)
o 220,000 shares were issued to five former stockholders and option
holders of StreamJet.Net upon the exercise of options for $55,000. (2)
o 1,000,000 shares were issued in connection with the acquisition of the
assets of Brilliant Telecom LLC, valued at $1,150,000. On August 1,
2008, CVC International Inc. filed a lawsuit against Brilliant Telecom
LLC and an individual claiming damages arising from breaches of the
asst acquisition agreement. The lawsuit also claims rescission of the
asset purchase agreement as an alternative remedy. (2)
From April 1, 2008 to June 30, 2008 we issued 7,068,668 shares.
o 126,000 shares were issued to three persons for consulting services
valued at $96,260. (5)
o 100,000 shares were issued to one person in exchange for 25 shares of
Series A Preferred Stock valued at $25,000. (6)
o 3,546,669 shares were issued to 84 non-US persons in a Regulation S
offering for net proceeds of $710,586. (3)
o 823,999 shares were issued to 17 US persons in a Regulation D offering
for net proceeds of $215,400. (4)
o 72,000 shares were issued to one non-US person for $50,000 cash. (3)
o 2,025,000 shares were issued to one non-US person, a former
shareholder in Candidsoft, pursuant to the earnout agreement. (2)
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o 375,000 shares were issued to one US person, a former shareholder in
PhoneHouse, pursuant to the earnout agreement. (2)
From July 1, 2008 to September 30, 2008, we issued 3,189,509 shares.
o 85,000 shares were issued to two persons for consulting services
valued at $42,500. (5)
o 27,200 shares were issued to one person in exchange for cancellation
of a $5,000 Note payable and accrued interest. (7)
o 2,058,144 shares were issued to 43 non-US persons in a Regulation S
offering for net proceeds of $305,136. (3)
o 731,665 shares were issued to 10 US persons in a Regulation D offering
for net proceeds of $207,500. (4)
o 100,000 shares were issued to one non-US person for patent rights
valued at $49,000. (2)
o 187,500 shares were issued to on US person, a former shareholder in
PhoneHouse, pursuant to the earnout agreement. (2)
Preferred Stock
We have issued the following shares of our Series A Preferred Stock:
May 31, 2006 - 1,124 shares issued to an affiliate of our CFO D. Ronald Allen in
exchange for the assumption of $984,300 of debt. (1)
August 30, 2006 - 500 shares issued to one person for net proceeds of $250,000.
(1)
September 30, 2006
o 2,100 shares issued to an affiliate of our CFO D. Ronald Allen in
exchange for the assumption of $1,050,000 of debt. (1)
o 500 shares issued as additional collateral for debt. (1)
March 31, 2008
o 848 shares issued to an affiliate of our CFO D. Ronald Allen in
exchange for the assumption of $424,000 of debt. (1)
o 194 shares issued in exchange for $194,000 of accumulated preferred
dividends to two affiliates of Mr. Allen. (1)
June 30, 2008
o 450 shares issued to an affiliate of our CFO, D. Ronald Allen in
exchange for the assumption of $225,000 of debt. (1)
o 48 shares issued in exchange for $48,000 of accumulated preferred
dividends to two affiliates of our CFO, D. Ronald Allen. (1)
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Warrants
From January 2005 to January 2006, we issued warrants to purchase 10,300,400
shares of common stock for exercise prices ranging from $0.25 to $0.50, to the
holders of loans to the company aggregating $2,875,000. (7)
On May 31, 2006, we issued warrants to purchase 2,547,020 shares of common stock
to eleven persons at an exercise price of $0.40 per share, in connection with
the assumption of $984,300 company debt by an affiliate of our CFO D. Ronald
Allen. (7)
On January 23, 2008, we issued warrants to purchase 313,200 shares of common
stock to one person at an exercise price of $0.40 per share, in connection with
the assumption of $124,000 debt by an affiliate of Mr. Allen. (7)
In the case of all issuances other than pursuant to Regulation D or Regulation
S, the Company believes the investor or its purchase representative was
reasonably believed to have such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
investment, (b) the investor or its purchaser representative were provided with
required information and an opportunity to obtain additional information a
reasonable period of time prior to the transaction, (c) the investor or its
purchaser representative were advised of the limitations on resale of the Common
Stock, (d) the investor represented its intention to acquire the securities for
investment only and not with view to or for sale in connection with any
distribution thereof, and (e) appropriate legends were affixed to the
instruments issued in the transactions.
ITEM 11. DESCRIPTION OF SECURITIES
The following is a summary of certain significant provisions related to our
outstanding securities and is qualified in its entirety by reference to the
Company's Articles of Incorporation ("Articles") and its Bylaws, which are filed
as exhibits to this registration statement. The Company's authorized capital
stock consists of 400,000,000 shares of common stock, $.001 par value per share,
and 10,000,000 shares of preferred stock, $.001 par value per share. Only the
shares of Common Stock are being registered hereby.
Common Stock
As of September 30, 2008, 161,098,456 common shares of the Company's common
stock are held of record by approximately 1,121 holders. Each share of common
stock entitles the holder of record thereof to cast one vote on all matters
acted upon at the Company's stockholder meetings. Directors are elected by a
plurality vote. Because holders of common stock do not have cumulative voting
rights, holders or a single holder of more than 50% of the outstanding shares of
common stock present and voting at an annual meeting at which a quorum is
present can elect all of the Company's directors. Holders of common stock have
no preemptive rights and have no right to convert their common stock into any
other securities. All of the outstanding shares of common stock are fully paid
and non-assessable, and the shares of common stock to be issued in connection
with the exercise of options under the Option Plan will be fully paid and
non-assessable when issued.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors in its sole
discretion from funds legally available there for. In the event the Company is
liquidated, dissolved or wound up, holders of common stock are entitled to share
ratably in the assets remaining after liabilities and all accrued and unpaid
cash dividends are paid.
Preferred Stock
The Board of Directors of the Company has the authority to divide the authorized
preferred stock into series, the shares of each series to have such relative
rights and preferences as shall be fixed and determined by the Board of
Directors. The provisions of a particular series of authorized preferred stock,
as designated by the Board of Directors, may include restrictions on the payment
of dividends on common stock. Such provisions may also include restrictions on
the ability of the Company to purchase shares of common stock or to purchase or
redeem shares of a particular series of authorized preferred stock. Depending
upon the voting rights granted to any series of authorized preferred stock,
issuance thereof could result in a reduction in the voting power of the holders
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of common stock. In the event of any dissolution, liquidation or winding up of
the Company, whether voluntary or involuntary, the holders of the preferred
stock will receive, in priority over the holders of common stock, a liquidation
preference established by the Board of Directors, together with accumulated and
unpaid dividends. Depending upon the consideration paid for authorized preferred
stock, the liquidation preference of authorized preferred stock and other
matters, the issuance of authorized preferred stock could result in a reduction
in the assets available for distribution to the holders of common stock in the
event of the liquidation of the Company.
As of October 15, 2008, there were authorized 10,000,000 shares of preferred
stock, of which one series was designated, consisting of 20,000 authorized
shares of Series A Preferred Stock, of which 3,231 shares were issued and
outstanding.
The Series A Preferred Stock have the following terms:
o 12% cumulative dividends
o Each share entitles the holders vote 2,500 shares of common stock
o Issue and liquidation value of $1,000 per share
o Redeemable by Company at the liquidation value
o Not convertible
o Senior to common stock
o Company has a first right of refusal to buy any shares proposed to be
sold
Certain Rights of Holders of Common Stock
The Company is a Nevada corporation organized under Chapter 78 of the Nevada
Revised Statutes ("NRS"). Accordingly, the rights of the holders of common stock
are governed by Nevada law. Although it is impracticable to set forth all of the
material provisions of the NRS or the Company's Articles and Bylaws, the
following is a summary of certain significant provisions of the NRS and/or the
Company's Articles and Bylaws that affect the rights of securities holders.
Anti Takeover Provisions
Special Meetings of Stockholders; Director Nominees
The Company's Bylaws and Articles provide that special meetings of stockholders
may be called by stockholders only if the holders of at least 66-2/3% of the
common stock join in such action. The Bylaws and Articles of the Company also
provide that stockholders desiring to nominate a person for election to the
Board of Directors must submit their nominations to the Company at least 60 days
in advance of the date on which the last annual stockholders' meeting was held,
and provide that the number of directors to be elected (within the minimum -
maximum range of 3 to 15 set forth in the Articles and Bylaws of the Company)
shall be determined by the Board of Directors or by the holders of at least
66-2/3% of the common stock. While these provisions of the Articles and Bylaws
of the Company have been established to provide a more cost-efficient method of
calling special meetings of stockholders and a more orderly and complete
presentation and consideration of stockholder nominations, they could have the
effect of discouraging certain stockholder actions or opposition to candidates
selected by the Board of Directors and provide incumbent management a greater
opportunity to oppose stockholder nominees or hostile actions by stockholders.
The affirmative vote of holders of at least 66-2/3% of the common stock is
necessary to amend, alter or adopt any provision inconsistent with or repeal any
of these provisions.
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Removal of Directors
The Articles of the Company provide that directors may be removed from office
only for cause by the affirmative vote of holders of at least 66-2/3% of the
common stock. Cause means proof beyond the existence of a reasonable doubt that
a director has been convicted of a felony, committed gross negligence or willful
misconduct resulting in a material detriment to the Company, or committed a
material breach of such director's fiduciary duty to the Company resulting in a
material detriment to the Company. The inability to remove directors except for
cause could provide incumbent management with a greater opportunity to oppose
hostile actions by stockholders. The affirmative vote of holders of at least
66-2/3% of the common stock is necessary to amend, alter or adopt any provision
inconsistent with or repeal this provision.
Control Share Statute
Sections 78.378 - 78.3793 of the Nevada statutes constitute Nevada's control
share statute, which set forth restrictions on the acquisition of a controlling
interest in a Nevada corporation which does business in Nevada (directly or
through an affiliated corporation) and which has 200 or more stockholders, at
least 100 of whom are stockholders of record and residents of Nevada. A
controlling interest is defined as ownership of common stock sufficient to
enable a person directly or indirectly and individually or in association with
others to exercise voting power over at least 20% but less than 33.3% of the
common stock, or at least 33.3% but less than a majority of the common stock, or
a majority or more of the common stock. Generally, any person acquiring a
controlling interest must request a special meeting of stockholders to vote on
whether the shares constituting the controlling interest will be afforded full
voting rights, or something less. The affirmative vote of the holders of a
majority of the common stock, exclusive of the control shares, is binding. If
full voting rights are not granted, the control shares may be redeemed by the
Company under certain circumstances. The Company does not believe the foregoing
provisions of the Nevada statutes are presently applicable to it because it does
not presently have more than 100 stockholders of record in Nevada.
Business Combination Statute
Sections 78.411 - 78.444 of the NRS set forth restrictions and prohibitions
relating to certain business combinations and prohibitions relating to certain
business combinations with interested stockholders. These Sections generally
prohibit any business combination involving a corporation and a person that
beneficially owns 10% or more of the common stock of that company (an
"Interested Stockholder") (A) within five years after the date (the "Acquisition
Date") the Interested Stockholder became an Interested Stockholder, unless,
prior to the Acquisition Date, the corporation's board of directors had approved
the combination or the purchase of shares resulting in the Interested
Stockholder becoming an Interested Stockholder; or (B) unless five years have
elapsed since the Acquisition Date and the combination has been approved by the
holders of a majority of the common stock not owned by the Interested
Stockholder and its affiliates and associates; or (C) unless the holders of
common stock will receive in such combination, cash and/or property having a
fair market value equal to the higher of (a) the market value per share of
common stock on the date of announcement of the combination or the Acquisition
Date, whichever is higher, plus interest compounded annually through the date of
consummation of the combination less the aggregate amount of any cash dividends
and the market value of other dividends, or (b) the highest price per share paid
by the Interested Stockholder for shares of common stock acquired at a time when
he owned 5% or more of the outstanding shares of common stock and which
acquisition occurred at any time within five years before the date of
announcement of the combination or the Acquisition Date, whichever results in
the higher price, plus interest compounded annually from the earliest date on
which such highest price per share was paid less the aggregate amount of any
cash dividends and the market value of other dividends. For purposes of these
provisions, a "business combination" is generally defined to include (A) any
merger or consolidation of a corporation or a subsidiary with or into an
Interested Stockholder or an affiliate or associate; (B) the sale, lease or
other disposition by a corporation to an Interested Stockholder or an affiliate
or associate of assets of that corporation representing 5% or more of the value
of its assets on a consolidated basis or 10% or more of its earning power or net
income; (C) the issuance by a corporation of any of its securities to an
Interested Stockholder or an affiliate or associate having an aggregate market
value equal to 5% or more of the aggregate market value of all outstanding
shares of that corporation; (D) the adoption of any plan to liquidate or
dissolve a corporation proposed by or under an agreement with the Interested
Stockholder or an affiliate or associate; (E) any receipt by the Interested
Stockholder or an affiliate, except proportionately as a stockholder, of any
loan, advance, guarantee, pledge or other financial assistance or tax credit or
52
other tax advantage; and (F) any recapitalization or reclassification of
securities or other transaction that would increase the proportionate shares of
outstanding securities owned by the Interested Stockholder or an affiliate.
Sections 78.411-78.444 of the Nevada statutes are presently applicable to the
Company.
Special Meetings
The Company's Bylaws and Articles provide that special meetings of the
stockholders of the Company may be called by the Chairman of the Board, the
Board of Directors or upon written request of stockholders holding not less than
66 2/3% of the common stock.
Mergers, Consolidations and Sales of Assets
Nevada law provides that an agreement of merger or consolidation, or the sale or
other disposition of all or substantially all of a corporation's assets, must be
approved by the affirmative vote of the holders of a majority of the voting
power of a corporation (except that no vote of the stockholders of the surviving
corporation is required to approve a merger if certain conditions are met,
unless the articles of incorporation of that corporation states otherwise, and
except that no vote of stockholders is required for certain mergers between a
corporation and a subsidiary), but does not require the separate vote of each
class of stock unless the corporation's articles of incorporation provides
otherwise (except that class voting is required in a merger if shares of the
class are being exchanged or if certain other rights of the class are affected).
The Company's Articles do not alter these provisions of Nevada law.
Directors; Removal of Directors
Under Nevada law, the number of directors may be fixed by, or determined in the
manner provided in the articles of incorporation or bylaws of a corporation, and
the board of directors may be divided into classes as long as at least 25% in
number of the directors are elected annually. Nevada law further requires that a
corporation have at least one director. Directors may be removed under Nevada
law with or without cause by the holders of not less than a majority of the
voting power of the corporation, unless a greater percentage is set forth in the
articles of incorporation. The Articles of the Company provide that directors
may be removed only for cause by a two-thirds majority of stockholders.
Amendments to Bylaws
The Company's Bylaws may be amended by the Board of Directors or stockholders,
provided, however that certain provisions can only be amended by the affirmative
vote of holders of at least 66 2/3% of the common stock. These provisions relate
to special meetings of stockholders, actions by written consent of stockholders,
nomination of directors by stockholders, proceedings for the conduct of
stockholder's meetings and the procedures for fixing the number of and electing
directors.
Limitation on Liability of Directors
Section 78.037 of the NRS provides that a Nevada corporation may limit the
personal liability of a director or officer to a corporation or its stockholders
for breaches of fiduciary duty, except that such provision may not limit
liability for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or payment of dividends or other distributions in
violation of the Nevada statutes. The Company's Articles provide that no
director shall be personally liable to the Company or its stockholders for
monetary damages or breach of fiduciary duty as a director, except for liability
(A) for any breach of the director's duty of loyalty to the Company or its
stockholders, (B) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (C) liability under the
Nevada statutes, or (D) for any transaction from which the director derived an
improper personal benefit.
In the opinion of the Securities and Exchange Commission, the indemnification
and limitation of liability provisions described above would not eliminate or
limit the liability of directors and officers under the federal securities laws.
53
Appraisal Rights
The Nevada statutes provide dissenting or objecting security holders with the
right to receive the fair value of their securities in connection with certain
extraordinary corporate transactions. These appraisal rights are available with
respect to certain mergers and share exchanges and in connection with the
granting of full voting rights to control shares acquired by an interested
stockholder. However, unless the transaction is subject to the control share
provisions of the Nevada statutes, a stockholder of a Nevada corporation may not
assert dissenters' rights, in most cases, if the stock is listed on a national
securities exchange or held by at least 2,000 stockholders of record (unless the
articles of incorporation of the corporation expressly provide otherwise or the
security holders are required to exchange their shares for anything other than
shares of the surviving corporation or another publicly held corporation that is
listed on a national securities exchange or held of record by more than 2,000
stockholders). The Company's Articles do not alter these provisions of Nevada
law.
Distributions
Dividends and other distributions to security holders are permitted under the
Nevada statutes as authorized by a corporation's articles of incorporation and
its board of directors if, after giving effect to the distribution, the
corporation would be able to pay its debts as they become due in the usual
course of business and the corporation's total assets would exceed the sum of
its total liabilities plus (unless the articles of incorporation provide
otherwise) the amount needed to satisfy the preferential rights on dissolution
of holders of stock whose preferential rights are superior to those of the
shares receiving the distribution.
Preemptive Rights
Under the Nevada statutes, stockholders of Nevada corporations organized prior
to October 1, 1991 have preemptive rights unless the articles of incorporation
expressly deny those rights or the stock issuance is among those described in
Section 78.265. A stockholder who has preemptive rights is entitled, on terms
and conditions prescribed by the board of directors, to acquire proportional
amounts of the corporation's unissued or treasury shares in most instances in
which the board has decided to issue them. The Company's Articles expressly deny
the availability of preemptive rights to the Company's stockholders.
Cumulative Voting
Under the Nevada statutes, the articles of incorporation of a corporation may
provide for cumulative voting, which means that the stockholders are entitled to
multiply the number of votes they are entitled to cast by the number of
directors for whom they are entitled to vote and then cast the product for a
single candidate or distribute the product among two or more candidates.
Cumulative voting is not available to stockholders of a Nevada corporation,
unless its articles of incorporation expressly provide for that voting right.
The Company's Articles do not contain a provision permitting stockholders to
cumulate their votes when electing directors.
Transfer Agent and Registrar
Signature Stock Transfer, Inc. of Plano, Texas is the transfer agent and
registrar for our common stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eleven of the Company's Articles of Incorporation limits the liability
of the Company's directors. It provides that no director of the Company shall be
personally liable to the Company or its stockholders for damages for breach of
fiduciary duty as a director, except for liability for any breach of the duty of
loyalty, for acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, or for any transaction from which he
derived an improper personal benefit.
In addition, Section 7.8 of the Company's Bylaws provides that the Company
shall, to the maximum extent permitted by law, indemnify each officer and
director against expenses, judgments, fines, settlements and other amount
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person in connection with any proceeding arising by
54
reason of the fact that such person has served as an officer, agent or director
of the Company, and may so indemnify any person in connection with any
proceeding arising by reason of the fact that such person has served as an
officer or director of the Company.
Section 78.138(7) of the Nevada Revised Statutes (the "NRS") provides,
with limited exceptions, that:
a director or officer is not individually liable to the corporation or
its stockholders for any damages as a result of any act or failure to act in his
capacity as a director or officer unless it is proven that:
(a) His act or failure to act constituted a breach of his fiduciary
duties as a director or officer; and
(b) His breach of those duties involved intentional misconduct, fraud or
a knowing violation of law.
Section 78.7502 of the NRS permits the Company to indemnify its
directors and officers as follows:
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action suit or proceeding if he:
(a) Is not liable pursuant to NRS 78.138; or
(b) Acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent, does
not, of itself, create a presumption that the person is liable pursuant to NRS
78.138 or did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, or that, with
respect to any criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he:
(a) Is not liable pursuant to NRS 78.138; or
(b) Acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which such
person has been adjudged by a court of competent jurisdiction, after exhaustion
of all appeals therefrom, to be liable to the corporation or for amounts paid in
settlement to the corporation, unless and only to the extent that the court in
which the action or suit was brought or other court of competent jurisdiction
determines upon application that in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses as
the court deems proper.
55
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
In addition, Section 78.751 of the NRS permits the Company to indemnify
its directors and officers as follows:
1. Any discretionary indemnification pursuant to NRS 78.7502, unless
ordered by a court or advanced pursuant to subsection 2, may be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding so orders, by independent legal
counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent legal counsel in a
written opinion.
2. The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding must be paid by the
corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
3. The indemnification pursuant to NRS 78.7502 and advancement of
expenses authorized in or ordered by a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the articles of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, for either an action in his official capacity or an
action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the
advancement of expenses made pursuant to subsection 2, may not be made to or on
behalf of any director or officer if a final adjudication establishes that his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
The Company has purchased director and officer liability insurance, as permitted
by the NRS.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
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ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) With respect to the former accountant, Cornwell Jackson, the Company
makes the following disclosures:
(1) The former accountant was dismissed on September 26, 2008.
(2) The accountants report for the prior two fiscal years ended June
30, 2006 and 2007 did not contain an adverse opinion or a
disclaimer of opinion. The accountants report contained a
paragraph discussing uncertainties relating to the Company's
ability to remain as a going concern, but was not otherwise
modified as to uncertainty, audit scope, or accounting
principles.
(3) The decision to change auditors was approved by the Board of
Directors.
(4) There were no reportable disagreements or other reportable
matters with respect to the former accountants.
(b) The new accountants are Cheung and Co., CPA's, members of Kreston
International. There are no reportable matters with respect to the new
accountants.
57
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
Exhibit
Numbers
Exhibits
2.1 Agreement dated February 27, 2004 for the acquisition of Voium
Technologies, Ltd.
2.2 Agreement and Plan of Reorganization dated April 2004 for the
acquisition of China Voice Corp by Surf Franchise, Inc.,
predecessor to Registrant
2.3.1 Agreement dated January 18, 2006 for the acquisition of Candidsoft
Technologies Co. LTD of Beijing, and Post-Closing Agreement
2.3.2 Technology Agreement regarding Candidsoft
2.3.3 Trust Agreement with Chun Li Xing regarding Candidsoft
2.4 Agreement and Plan of Merger and Reorganization dated August 25,
2006 for the acquisition of VCG Technologies, Inc. d/b/a DTNet
Technologies
2.5 Agreement and Plan of Merger and Reorganization dated June 14, 2007
for the acquisition of Phone House, Inc.
2.6 Agreement and Plan of Merger and Reorganization dated July 19, 2007
for the acquisition of Dial-Tone Communications, Inc.
2.7 Agreement and Plan of Merger and Reorganization dated March 15,
2007 for the acquisition of Stream Jet.Net, Inc.
3.1.1 Articles of Incorporation of the Registrant
3.1.2 Articles of Merger
3.2 Bylaws of the Registrant
4.1 Specimen Certificate for Common Stock of the Registrant
10.1 Employment Agreement dated August 31, 2006 with Bill Burbank
10.2 List of licenses issued by Telecommunication Administrative Bureau
of Beijing
10.3 Joint Venture Agreement dated May 31, 2006 between WRIO Corporation
and Voium Technologies Ltd.
10.4 Promissory Note dated December 1, 2004 to Associates Funding Group
Inc. in the principal amount of $400,000, with Security Agreement
10.5 Loan Agreement dated February 13, 2008 between Essential Security
Software Inc. and Stream Jet.Net, Inc., Promissory Note and
Security Agreement
10.6 Exclusive Supplier Agreement dated January 10, 2008 between StarCom
Alliance, Inc. and Power Prepaid Phone Card Distribution
10.7 Agreement dated June 6, 2007 between Registrant and InterEdge
Technologies, LLC to Supply Intelligent Telephone Adaptors
10.8 Collaboration Agreement
21 Subsidiaries of the Registrant
- ------------------
* All exhibits were previously filed with the initial Form 10 filing
on August 6, 2008 or later filings on October 29, November 26, 2008
and December 12, 2008, and are incorporated herein by reference.
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at June 30, 2008 and 2007 F-2
Consolidated Statements of Operations for the years
ended June 30, 2008 and 2007 F-3
Consolidated Statements of Equity for the years
ended June 30, 2008 and 2007 F-4
Consolidated Statements of Cash Flows for the years
ended June 30, 2008 and 2007 F-6
Notes to Consolidated Financial Statements F-8
Consolidated Balance Sheets at September 30, 2008 and 2007 F-40
Consolidated Statements of Operations for the three months
ended September 30, 2008 and 2007 F-41
Consolidated Statements of Equity for the three months
ended September 30, 2008 and 2007 F-42
Consolidated Statements of Cash Flows for the three months
ended September 30, 2008 and 2007 F-44
Notes to Consolidated Financial Statements F-45
59
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 31, 2008 CHINA VOICE HOLDING CORP.
By: /s/ Bill Burbank
----------------
Bill Burbank, Chief Executive Officer
and President
60
Jimmy C.H. Cheung & Co
Certified Public Accountants
(A member ofKreston International)
Registered with the Public Company
Accounting Oversight Board
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
China Voice Holding Corp.
We have audited the consolidated balance sheets of China Voice Hoiding Corp. and
subsidiaries as of June 30, 2008 and 2007 and the related consolidated
statements of operations, equity and cash fiows for the years ended June 30,
2008 and 2007. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financiai statements based on our audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits of the financial statements provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financiai position of China Voice Holding
Corp. and subsidiaries as of June 30, 2008 and 2007 and the results of its
operations and its cash fiows for the years ended June 30, 2008 and 2007, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred net iosses of
approximately $5,277,203 and $4,746,446 for the years ended June 30, 2008 and
2007, respectively. Additionally, during the years ended June 30, 2008 and 2007,
the Company has used cash fiow in operations of approximately $3,874,482 and
$1,714,219 in 2008 and 2007, respectively. Accumuiated deficit amounted to
$22,483,047 and $16,450,154 as of June 30, 2008 and 2007, respectively. These
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
2. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
JIMMY C.H. CHEUNG & CO
Certified Public Accountants
Hong Kong
Date: October 27,2008
1607 Dominion Centre, 43 Queen's Road East, Wanchal, Hong Kong
Telephone: (852) 25295500 Fax: (852) 28651067
Email :jirnmycheung@jlmmycheungco.com
Website : http://www.jirnmycheungco.com
Kreston Intemational
A global association
of independellt accountants
and business advisors
F-1
CHINA VOICE HOLDING CORP.
Consolidated Balance Sheets
As of June 30, 2008 and 2007
A S S E T S 2008 2007
------------ ------------
Current assets:
Cash and cash equivalents $ 2,096,070 $ 266,429
Accounts receivable, net 1,746,595 590,186
Inventories 445,163 554,772
Prepaid expenses and other current assets 97,873 82,109
Related party receivables 92,300 70,717
Deposits 61,532 --
------------ ------------
Total current assets 4,539,533 1,564,213
------------ ------------
Long-term assets
Note receivable 1,500,000 --
Property and equipment, net 588,954 326,559
Goodwill 10,450,466 9,932,614
Other intangible assets, net 6,964,318 4,339,400
------------ ------------
Total assets $ 24,043,271 $ 16,162,786
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,204,689 $ 1,969,419
Related party payables 390,451 514,511
Current portion of long term debt, net of debt discount 158,652 995,489
Current portion of related party notes 310,423 149,179
Other current liabilities 28,188 --
------------
Total current liabilities 3,092,403 3,628,598
------------ ------------
Long-term liabilities:
Long-term debt, net of current portion 50,000 50,000
Long-term portion of related party notes, net of current portion -- 168,750
Long-term contingent liabilities 1,500,000 --
------------ ------------
Total long-term liabilities 1,550,000 218,750
------------ ------------
Total liabilities 4,642,403 3,847,348
------------ ------------
Equity
Common stock - par value $.001, 400,000,000 shares authorized,
157,909,447 and 111,608,713 shares issued at June 30, 2008
and 2007, respectively 157,910 111,609
Series A preferred stock - par value $.001, 20,000 shares
authorized, 3,304 and 3,274 shares issued at June 30, 2008
and 2007, respectively (liquidation value of $3,304,000 and 3 3
$ 3,274,000)
Additional paid-in capital 41,730,913 28,647,794
Accumulated deficit (22,483,047) (16,450,154)
Cumulative currency translation adjustment (4,911) 6,186
------------ ------------
Total equity 19,400,868 12,315,438
------------ ------------
Total liabilities and equity $ 24,043,271 $ 16,162,786
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-2
CHINA VOICE HOLDING CORP.
Consolidated Statements of Operations
For the Years Ended June 30, 2008 and 2007
2008 2007
------------- -------------
Revenues $ 36,433,747 $ 2,342,223
Cost of revenues 36,229,024 1,876,835
------------- -------------
Gross profit 204,723 465,388
Operating expenses:
Selling, general and administrative expenses 5,485,016 3,207,824
Depreciation 91,418 25,974
------------- -------------
Total operating expenses 5,576,434 3,233,798
Loss from operations (5,371,711) (2,768,410)
Other income (expense):
Gain from sale of subsidiary 505,733 --
Refund on federal excise tax 361,182 --
Interest income 73,681 648
Interest expense (297,101) (184,891)
Impairment of assets and investments -- 572,339)
Loss on discontinuing segments (5,716) --
Loss from disposal of fixed assets (44,434) --
Other financing charges (506,250) (1,203,588)
Other income (expenses) 7,413 (17,866)
------------- -------------
Total other income (expense), net 94,508 (1,978,036)
------------- -------------
Net loss (5,277,203) (4,746,446)
Preferred dividend (755,690) (145,767)
------------- -------------
Net loss attributable to common stockholders $ (6,032,893) $ (4,892,213)
============= =============
Net loss per share - basic and diluted $ (.04) $ (.05)
============= =============
Common shares used in calculation per share data -
basic and diluted 133,838,870 89,933,010
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-3
CHINA VOICE HOLDING CORP.
Consolidated Statements of Equity
For the Years Ended June 30, 2008 and 2007
Preferred Stock- Preferred Additional
Common Stock Common Series A Stock- Paid-in
Shares Stock Shares Series A Capital
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2006 88,039,612 $ 88,040 1,124 $ 1 $ 19,955,423
Issuance of common stock 23,569,101 23,569 -- -- 7,574,191
Issuance of preferred stock -- -- 3,100 3 1,549,996
Value of warrants and conversion -- -- -- -- 706,992
features ofdebts
Stock option expense -- -- -- -- 11,802
Redemption of preferred stock -- -- (950) (1) (860,299)
Translation adjustment -- -- -- -- --
Stock subscriptions receivable -- -- -- -- (290,311)
Preferred dividends -- -- -- -- --
Net loss for year ended June 30, 2007 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2007 111,608,713 $ 111,609 3,274 $ 3 $ 28,647,794
============ ============ ============ ============ ============
Retained Earnings Cumulative currency
(Accumulated translation Total
Deficit) adjustment Equity
------------ ------------ ------------
Balance at June 30, 2006 $(11,576,625) $ 17,742 $ 8,484,581
Issuance of common stock -- -- 7,597,760
Issuance of preferred stock -- -- 1,549,999
Value of warrants and conversion -- -- 706,992
features ofdebts
Stock option expense -- -- 11,802
Redemption of preferred stock -- -- (860,300)
Translation adjustment 18,684 (11,556) 7,128
Stock subscriptions receivable -- -- (290,311)
Preferred dividends (145,767) -- (145,767)
Net loss for year ended June 30, 2007 (4,746,446) -- (4,746,446)
------------ ------------ ------------
Balance at June 30, 2007 $(16,450,154) $ 6,186 $ 12,315,438
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-4
CHINA VOICE HOLDING CORP.
Consolidated Statements of Equity (Continued)
For the Years Ended June 30, 2008 and 2007
Preferred Stock- Preferred Additional
Common Stock Common Series A Stock- Paid-in
Shares Stock Shares Series A Capital
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2007 111,608,713 $ 111,609 3,274 $ 3 $ 28,647,794
Issuance of common stock 48,400,734 48,401 -- -- 16,260,938
Issuance of preferred stock -- -- 1,298 1 648,999
Sale of subsidiaries
(2,100,000) (2,100) -- -- (2,412,900)
Dividends declared on preferred stock
-- -- -- -- --
Redemption of preferred stock -- -- (1,650) (1) (1,826,499)
Translation adjustment -- -- -- -- --
Stock subscriptions receivable -- -- -- -- 30,581
Preferred dividends conversion to -- -- 382 -- 382,000
preferred stock
Net loss for year ended June 30, 2008 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2008 157,909,447 $ 157,910 3,304 $ 3 $ 41,730,913
============ ============ ============ ============ ============
Retained Earnings Cumulative currency
(Accumulated translation Total
Deficit) adjustment Equity
------------ ------------ ------------
Balance at June 30, 2007 $(16,450,154) $ 6,186 $ 12,315,438
Issuance of common stock -- -- 16,309,339
Issuance of preferred stock -- -- 649,000
Sale of subsidiaries
-- -- (2,415,000)
Dividends declared on preferred stock
(755,690) -- (755,690)
Redemption of preferred stock -- -- (1,826,500)
Translation adjustment -- (11,097) (11,097)
Stock subscriptions receivable -- -- 30,581
Preferred dividends conversion to -- -- 382,000
preferred stock
Net loss for year ended June 30, 2008 (5,277,203) -- (5,277,203)
------------ ------------ ------------
Balance at June 30, 2008 $(22,483,047 $ (4,911) $ 19,400,868
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-5
CHINA VOICE HOLDING CORP.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2008 and 2007
2008 2007
----------- -----------
Operating activities:
Net loss $(5,277,203) $(4,746,446)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 566,042 359,774
Allowance for doubtful debts 52,915 53,017
Stock option expense -- 11,802
Common shares issued for services 1,337,600 983,407
Common shares issued for loan costs -- 179,109
Preferred shares issued for loan costs -- 249,999
Beneficial conversion features 506,250 168,750
Non-cash financing costs -warrant issued with debt 12,942 605,730
Impairment of assets and investments -- 572,339
Gain from sale of subsidiary (505,733) --
Loss on discontinuing segment 5,716 --
Loss from disposal of property and equipment 44,434 --
Changes in assets and liabilities:
Accounts receivable (1,209,324) (268,194)
Inventories 109,609 (398,129)
Prepaid expenses and other current assets (15,764) 17,325
Other long-term assets (61,532) 59,024
Accounts payable and accrued expenses 235,270 438,274
Other current liabilities 28,188 --
----------- -----------
Total adjustments 1,106,613 3,302,227
----------- -----------
Net cash used in operating activities (4,170,590) (1,714,219)
----------- -----------
Investing activities:
Purchases of property and equipment (110,645) (84,390)
Purchase of assets in business combination (27,501) (100,000)
----------- -----------
Net cash used in investing activities (138,146) (184,390)
----------- -----------
Financing activities:
Borrowings under long-term debt arrangements (675,000) 215,418
Repayments of long-term debt (611,837) (10,768)
Payment received from subscribed stock 290,311 --
Repayment to related parties 15,602 336,548
Proceeds from issuance of preferred stock, net
of issuance costs -- 250,000
Redemption of preferred stock to related parties (1,222,000) (410,300)
Proceeds from issuance of common stock, net of
issuance costs 8,158,600 1,791,183
Payment of preferred dividends 122,521 (145,767)
----------- -----------
Net cash provided by financing activities 6,078,197 2,026,314
----------- -----------
Effect of exchange rate on changes in cash 60,180 12,652
Net increase in cash and cash equivalents 1,829,641 140,357
Cash and cash equivalents -beginning of year 266,429 126,072
----------- -----------
Cash and cash equivalents - end of year $ 2,096,070 $ 266,429
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-6
CHINA VOICE HOLDING CORP.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended June 30, 2008 and 2007
2008 2007
----------------- ----------
Supplemental Disclosure of Non-Cash Information:
Warrants issued in conjunction with debt $ 12,942 $ 605,730
================= ==========
Assets acquired under capital lease $ -- $ 85,839
================= ==========
Common stock tendered in payment of services $ 1,337,600 $ 983,407
================= ==========
Preferred stock issued in conjunction with debt $ -- $ 249,999
================= ==========
Common stock issued in conjunction with debt $ -- $ 179,109
================= ==========
Net assets acquired in exchange for common stock $ 81,000 $ --
================= ==========
Conversion of preferred stock to common stock $ 629,875 $ 494,267
================= ==========
Beneficial conversion feature $ 506,250 $ 168,750
================= ==========
Common stock options $ -- $ 11,802
================= ==========
Stock tendered for acquisitions $ 5,811,316 $3,413,143
================= ==========
Conversion and cancellation of debt $ 649,000 $1,786,647
================= ==========
F-7
CHINA VOICE HOLDING CORP.
Notes to Consolidated Financial Statements
Years Ended June 30, 2008 and 2007
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business - China Voice Holding Corp. (the
"Company" or "CHVC"), a Nevada corporation formed on August 7,
2003, is a diversified telecommunications company headquartered
in Boca Raton, Florida. The Company operates in two countries,
the United States, and China. In the United States, the Company
has offices and operations located in Los Angeles, California;
Boca Raton and Tampa, Florida; and in Dallas, Texas. In China,
the Company operates in Beijing and Nanning. The Company operates
in four reportable business segments as follows:
Communications Software Development - In China, the Company has
developed patented Office Automation and Internet Telephony
technology platforms for large enterprise and government
applications. The web-based technology was designed around the
specific needs of the Chinese Government and allows multiple
workers to collaborate on a single project and enables management
to effectively monitor virtually every aspect of the workers
on-line and telephony experience.
Telecommunications Services - The Company provides VoIP
telecommunications services to communication Service Providers.
The Company's Network Operations Center (NOC) is based in Florida
and utilizes a next generation Enhanced Services platform that is
manned 24 hours per day.
Calling Card Distribution - The Company's calling card
distribution business sells prepaid telephone and cellular
calling cards purchased from various telecommunications carriers
through a network of private distributors located primarily in
southern California.
Advanced Broadband Hardware Distribution - The hardware
distribution line supplies broadband, Wi-Fi, and VoIP components
and hardware to broadband service providers.
Ownership in China Operations - CHVC through its subsidiaries
offers network design and international office-automation
software and technology services to third party customers and
government agencies in the People's Republic of China ("PRC"). To
meet ownership requirements under Chinese laws, CHVC has entered
into technology service, asset ownership, and ownership trust
agreements with two of CHVC's affiliates that are incorporated in
China: Candidsoft Technologies Co, Ltd of Beijing ("Candidsoft")
and Beijing Techview System Engineering Co. Ltd. ("BTSE"). Based
on these agreements the Company owns 65% of Candidsoft and 70% of
BTSE, representing a controlling interest in its Chinese
operations, and consolidated them into its financial statements
pursuant to ARB 51 and FAS 94. Management periodically evaluates
its effective legal control over its Chinese subsidiaries on an
ongoing basis in accordance with new developments in China and/or
laws passed by the PRC. Based on this review, it believes it has
the ability to effectively maintain control of the operations of
the subsidiaries and consolidate them accordingly. BTSE was sold
on January 1, 2008.
F-8
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recapitalization and Reorganization - On April 1, 2004, Surf
Franchise, Inc. ("Surf"), incorporated in the State of New York
on August 7, 2003, entered into a stock exchange agreement with
China Voice Corporation ("CVC"), incorporated in the State of
Nevada on January 15, 2004, and certain shareholders. CVC was
formed to effectuate an exchange of shares between VoIUM
Technologies, Ltd. ("VoIUM") and certain shareholders. The
shareholders of VoIUM exchanged ownership interest in CVC to
certain shareholders in exchange for an agreement to assign their
exclusive interest in value-added telecommunication licenses
issued by the PRC to CVC. Upon the exchange, VoIUM became a
wholly-owned subsidiary of CVC.
Pursuant to the stock exchange agreement, Surf cancelled
43,012,500 shares of its previously issued and outstanding
49,602,500 common shares and issued 50,000,000 Rule 144
restricted Surf common shares to CVC shareholders in exchange for
a 100% equity interest in CVC, making CVC a wholly-owned
subsidiary of Surf.
Surf was a subsidiary of a public Company through April 2004, and
it operated as a shell corporation and had no business
operations, assets or liabilities.
The above stock exchange transaction between Surf and CVC
resulted in those shareholders of CVC obtaining a majority voting
interest in Surf. Accounting principles generally accepted in the
United States of America require that the company whose
shareholders retain the majority interest in a combined business
be treated as the acquirer for accounting purposes. Consequently,
the stock exchange transaction has been accounted for as a
recapitalization of CVC as CVC acquired a controlling equity
interest in Surf, as of April 1, 2004. The reverse acquisition
process utilizes the capital structure of Surf and the assets and
liabilities of CVC recorded at historical cost.
Subsequent to the stock exchange, a restructuring resulted in CVC
leaving the group with VoIUM, remaining as the continuing
operating entity for financial reporting purposes. Although VoIUM
is deemed to be the acquiring corporation for financial
accounting and reporting purposes, the legal status of Surf as
the surviving corporation did not change. On April 22, 2004, Surf
changed its name to China Voice Holding Corp. On June 10, 2008,
the Company reorganized from a New York Corporation to a Nevada
Corporation.
Basis of Consolidation - The consolidated financial statements
include 100% of the assets, liabilities, revenues, expenses and
cash flows of China Voice Holding Corp ("CHVC"), VoIUM
Technologies, LTD ("VoIUM"), Sino-Connection Corp.
("Sino-Connection"), Voium USA Inc. ("Voium USA"), China Voice
Communications Corp ("CVCC"), Communications Business Services
Corp ("CBSC"), East West Global Communications, Inc. ("EWGC"),
VCG Technologies, Inc. d/b/a DTNet Technologies, Inc. ("DTNet"),
CVC International, Inc. ("CVC International") and Phone House,
Inc. ("PhoneHouse"). The Company additionally consolidated the
financial statements Candidsoft for which the Company owned a 65%
interest for the years ended June 30, 2008 and 2007 and BTSE, for
which the Company owned a 70% interest for the year ended June
30, 2007 and a portion of the year end June 30, 2008. The Company
also consolidated 100% of Cable and Voice Corporation ("Cable and
Voice"), StarCom Alliance, Inc. ("Star Com"), StreamJet.Net, Inc.
("StreamJet"), Dial-Tone Communications, Inc. ("Dial Tone") and
Vastland Holding Beijing Company Limited ("Vastland") which were
acquired or set up in 2008. All intercompany accounts and
transactions have been eliminated in consolidation.
F-9
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates - The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and footnotes thereto. Actual results could
differ from those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include accounting
for depreciation and amortization, valuation of goodwill and other
intangibles, business combinations, equity transactions, and
contingencies.
Recent Accounting Pronouncements
--------------------------------
Accounting for Uncertainty in Income Taxes - In June 2006, the
Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes
- an interpretation of Statement of Financial Accounting Standard
("SFAS" No. 109 ("FIN 48"), which clarifies the accounting for
uncertainty in income tax positions. This Interpretation requires
that the Company recognize in the consolidated financial
statements the tax benefits related to tax positions that are more
likely than not to be sustained upon examination based on the
technical merits of the position. The provisions of FIN 48 became
effective for CHVC as of the beginning of the Company's 2007
fiscal year. The adoption of this Interpretation did not have a
material impact on the Company's consolidated financial
statements.
Fair Value Option for Financial Assets and Financial Liabilities -
In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities ("SFAS
159"). SFAS 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain
other items at fair value, that are not currently required to be
measured at fair value. The Company has no assets covered by SFAS
159 and has not determined if it will adopt the fair value option
provided for in this standard. SFAS 159 is effective for the
Company as of January 1, 2008.
Business Combinations - On December 4, 2007, the Financial
Accounting Standards Board issued SFAS No. 141 (Revised 2007),
Business Combinations ("SFAS 141"). SFAS 141R, changes the
accounting for business combinations. Under Statement 141R, an
acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. Statement
141R will change the accounting treatment for certain specific
items, including but not limited to: acquisition costs,
non-controlling interests, acquired contingent liabilities,
in-process research and development and restructuring costs.
Statement 141 applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The impact of adoption is not expected to be material.
F-10
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
Non-Controlling Interests in Consolidated Financial Statements -
On December 4, 2007, the Financial Accounting Standards Board
issued SFAS No. 160, Non-Controlling Interests in Consolidated
Financial Statements - An Amendment of ARB No. 51 ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary in certain circumstances.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's
equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net
income on the face of the income statement. SFAS No. 160 is
effective for fiscal years, and interim periods within these
fiscal years, beginning on or after December 15, 2008. The impact
of adoption is not expected to be material.
In March 2008, the FASB issued SFAS No. 161 "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced
disclosures of an entity's derivative instruments and hedging
activities and their effects on the entity's financial position,
financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) as
well as related hedged items, bifurcated derivatives, and
nonderivative instruments that are designated and qualify as
hedging instruments. Entities with instruments subject to SFAS 161
must provide more robust qualitative disclosures and expanded
quantitative disclosures. SFAS 161 is effective prospectively for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
permitted. The Company is currently assessing the impact of
adopting SFAS 161 on its financial statements and related
disclosures.
In May 2008, the FASB issued SFAS 162 "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 identifies the sources
of accounting principles and the framework for selecting the
accounting principles to be used. Any effect of applying the
provisions of this statement will be reported as a change in
accounting principle in accordance with SFAS No. 154 "Accounting
Changes and Error Corrections". SFAS No. 162 is effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company is currently
evaluating the impact the adoption of this statement could have on
its financial condition, results of operations and cash flows.
In May 2008, the FASB issued SFAS No. 163, "Accounting for
Financial Guarantee Insurance Contracts, an interpretation of FASB
Statement No. 60." The scope of this Statement is limited to
financial guarantee insurance (and reinsurance) contracts, as
described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises
excluded from the scope of Statement 60 or to some insurance
contracts that seem similar to financial guarantee insurance
contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance
contracts that are derivative instruments included within the
scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement will not have
any impact on the Company's consolidated financial statements.
F-12
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In May 2008, the FASB issued Staff Position No. APB 14-1
"Accounting for Convertible Debt Instruments that May be Settled
in Cash Upon Conversion". APB 14-1 requires that the liability and
equity components of convertible debt instruments that may be
settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects
an issuer's nonconvertible debt borrowing rate. The resulting debt
discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest
expense. APB 14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Retrospective application to
all periods presented is required except for instruments that were
not outstanding during any of the periods that will be presented
in the annual financial statements for the period of adoption but
were outstanding during an earlier period. The Company is
currently evaluating the impact of the adoption of this position
could have on its financial condition, results of operations and
cash flows.
In June 2008, the FASB issued Emerging Issues Task Force Issue
07-5 "Determining whether an Instrument (or Embedded Feature) is
indexed to an Entity's Own Stock" ("EITF No. 07-5"). This Issue is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. Paragraph
11(a) of Statement of Financial Accounting Standard No 133
"Accounting for Derivatives and Hedging Activities" ("SFAS 133")
specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock
and (b) classified in stockholders' equity in the statement of
financial position would not be considered a derivative financial
instrument. EITF No.07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer's own stock and thus able
to qualify for the SFAS 133 paragraph 11(a) scope exception. The
Company is currently evaluating the impact of adoption of EITF No.
07-5 on its financial statements and related disclosures.
In June 2008, FASB issued EITF Issue No. 08-4, "Transition
Guidance for Conforming Changes to Issue No. 98-5 ("EITF No.
08-4")". The objective of EITF No.08-4 is to provide transition
guidance for conforming changes made to EITF No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", that result from EITF
No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments", and SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity".
This Issue is effective for financial statements issued for fiscal
years ending after December 15, 2008. Early application is
permitted. The Company is currently evaluating the impact of
adoption of EITF No. 08-4 on the accounting for the convertible
notes and related warrants transactions.
F-13
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies
------------------------------------------
Cash and Cash Equivalents
The Company considers all highly liquid accounts with an original
maturity date of three months or less to be cash equivalents. The
Company maintains bank accounts in US banks, which at times, may
exceed federally insured limits. The Company has not experienced
any losses on such accounts and believes it is not exposed to any
significant risk on bank deposit accounts.
Cash accounts of foreign subsidiaries are maintained on deposit in
established financial institutions in their respective
jurisdiction. Although these deposits are not subject to FDIC
insurance coverage provided in the United States, the Company has
not experienced any losses and believes that exposure to such risk
is minimized by the quality of the institutions being utilized.
Accounts Receivable
Accounts receivable represent amounts currently due to the Company
under contractual obligations for services performed, or products
sold. When necessary, the Company evaluates and maintains an
allowance for these accounts to reduce such balances to the amount
deemed collectible. The allowance for doubtful accounts is based
on the Company's assessment of collectability of customer
accounts. The Company regularly reviews the allowance by
considering factors such as historical experience, credit quality,
age of the accounts receivable balances, and current economic
conditions that may affect a customer's ability to pay.
Inventories
Inventory consists of finished goods and is valued at the lower of
cost or market using the first-in, first-out method.
Investments
The Company values the equity investments in private companies and
restricted stock of public companies using the cost method of
accounting. The Company monitors these investments for factors
indicating a permanent impairment of value. The Company recognized
an impairment loss on investments of $0 and $503,099, for the
years ended June 30, 2008 and 2007, respectively. Such impairment
losses are reflected in other income and expense on the financial
statements.
F-14
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and any impairment loss where the recoverable amount
of the asset is estimated to be lower than its carrying amount.
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to working condition for
its intended use. Expenditures for additions, improvements and
renewals are capitalized and normal expenditures for maintenance
and repairs are charged to the income statement whereas
significant improvements which materially increase values or
extend useful lives are capitalized and depreciated over the
remaining estimated useful lives of the related assets. When
assets are sold or retired, their cost and accumulated
depreciation are removed from the financial statements and any
gain or loss resulting from their disposal is included in the
income statement. Depreciation is provided using the straight line
method over the estimated useful lives of the related assets,
ranging from 3 - 5 years, or over the lesser of the term of the
lease or the estimated useful life of the assets under lease.
Capitalized Software Development Costs
The Company accounts for software development costs under SFAS 86,
Accounting for the Costs of Software to be Sold, Leased, or
Otherwise Marketed. All of the Company's Software related costs
pertained to the communications software development segment of
the business. The Company capitalized software costs of $72,250
related to the Company's interest in Candidsoft. In 2007, the
Company performed an impairment review on its software costs and
recorded an aggregate impairment loss of $69,240 for the software
development costs.
Business Combinations
The Company accounts for business combinations in accordance with
Statement of Financial Accounting Standard No. 141, "Business
Combinations" (SFAS No. 141). SFAS No. 141 requires that the
purchase method of accounting be used for all business
combinations. SFAS No. 141 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually by comparing
carrying value to the respective fair value in accordance with the
provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). This
pronouncement also requires that the intangible assets with
estimated useful lives be amortized over their respective
estimated useful lives.
Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," the Company tests its
goodwill for impairment at least annually by comparing the fair
value of these assets to their carrying values. As a result of
such tests, the Company may be required to record impairment
charges for these assets if in the future their carrying values
exceed their fair values.
Other intangible assets are amortized using the straight-line
method over their estimated useful period of 10 to 15 years. We
evaluate the recoverability of intangible assets periodically and
take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists.
F-15
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock Based Compensation
The Company applies the fair value method of Statement of
Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensation" (SFAS No. 123R) in accounting for its stock
options. This standard states that compensation cost is measured
at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. The fair value for each option granted is estimated on the
date of the grant using the Black-Scholes option pricing model.
The fair value of all vested options granted has been charged to
salaries, wages and benefits in accordance with SFAS No. 123R.
Common stock granted to employees, directors, and consultants is
charged to operating expense based on the fair value of the stock
at the date the stock purchase rights are granted. In accordance
with EITF 96-18, the non-employee stock options or warrants are
measured at their fair value by using the Black-Scholes option
pricing model as of the earlier of the date at which a commitment
for performance to earn the equity instruments is reached
("performance commitment date") or the date at which performance
is complete ("performance completion date"). The stock-based
compensation expenses are recognized on a straight-line basis over
the shorter of the period over which services are to be received
or the vesting period. Accounting for non-employee stock options
or warrants which involve only performance conditions when no
performance commitment date or performance completion date has
occurred as of reporting date requires measurement at the equity
instruments then-current fair value. Any subsequent changes in the
market value of the underlying common stock are reflected in the
expense recorded in the subsequent period in which that change
occurs.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a
local currency environment are translated to U.S. dollars at
exchange rates in effect at the balance sheet date; with the
resulting translation adjustments directly recorded to cumulative
currency translation adjustment. Income and expense accounts are
translated at average exchange rates during the year. Where the
U.S. dollar is the functional currency, translation adjustments
are recorded in other income (loss), net.
Impairment of Long-Lived Assets and Other Intangible Assets
The Company reviews the carrying value of its long-lived assets,
including indefinite-lived intangible assets consisting primarily
of goodwill and telecommunications licenses in China, whenever
events or changes in circumstances indicate that the historical
cost carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of the
assets by estimating the future net cash flows expected to result
from the assets, including eventual disposition. If the future net
cash flows are less than the carrying value of the assets, an
impairment loss is recorded equal to the difference between the
asset's carrying value and its fair value. As of June 30, 2008 and
2007, management determined that no impairment was indicated.
F-16
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Leases
The Company leases its office space, warehouses and store
locations. Certain leases contain scheduled rent increases, and
may include an initial period of free or reduced rent as an
inducement to enter into the lease agreement ("rent holidays").
The company recognizes rental expense for rent increases and rent
holidays on a straight-line basis over the terms of the underlying
leases, without regard to when rent payments are made. The
calculation of straight-line rent is based on the "reasonably
assured" lease term as defined in SFAS No. 98, Accounting for
Leases: Sale-Leaseback Transactions Involving Real Estate, Sales
Type Leases of Real Estate, Definition of the Lease Term, and
Initial Direct Costs of Direct Financing Leases - an amendment of
FASB Statements No. 13, 66 and 91 and a rescission of SFAS
Statement No. 26 and Technical Bulletin No. 79-11. This amended
definition of the lease term may exceed the initial non-cancelable
lease term.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable
and notes payable, as applicable, approximates fair value due to
the short term nature of these items and/or the current interest
rates payable in relation to current market conditions.
Revenue Recognition
Revenue from calling cards, prepaid cellular products and
broadband hardware sales are recognized upon delivery or shipment
of the hardware to broadband service providers at which time title
is passed; there are no uncertainties regarding customer
acceptance; persuasive evidence of an arrangement exits; the sales
price is fixed and determinable; and collectability is deemed
probable. The Company recognizes revenues based on Gross Revenues
Reporting pursuant to EITF 99-19.
Revenue from telecommunications services is recognized when the
services are provided.
Revenue from installation contracts is recognized on the completed
contract method. A contract is considered complete when all costs
except insignificant items have been incurred and the installation
is operating according to specifications and has been accepted by
the customer.
Revenue from software communications development is recognized
upon completion of installation and delivery to customers at which
time title is passed; there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement exits;
the sales price is fixed and determinable; and collectability is
deemed probable.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues.
Shipping and handling costs invoiced to customers, if any, are
included in revenues.
F-17
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Convertible Debt
Convertible debt with beneficial conversion features, whereby the
conversion feature is "in the money" are accounted for in
accordance with guidance supplied by Emerging Issues Task Force
("EITF") No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF No. 27, "Application of Issue 98-5 to
Certain Convertible Instruments".
For convertible debt and related warrants, the recorded debt
discount is calculated at the issuance date as the difference
between the conversion price and the relative fair value of the
common stock into which the security is convertible or
exercisable. The fair value of the financial instruments related
to warrants associated with convertible promissory notes was
determined utilizing the Black-Scholes option pricing model and
the respective allocated proceeds to warrants is recorded in
additional paid-in capital.
Debt discount resulting from allocation of proceeds to the
beneficial conversion feature, it is amortized to other financing
charges over the term of the notes from the respective dates of
issuance, using the effective yield method. The relative fair
value of the beneficial conversion feature of $675,000 has been
amortized to other financing charges over the term of the notes
from the date of issuance related to the convertible debenture
issued for purchase of DTNet.
Net Loss per Share
The Company follows the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings per share" ("SFAS No.
128") in calculating its loss per share. SFAS No. 128 states basic
and diluted earnings per share are based on the weighted average
number of common shares and equivalent common shares outstanding
during the period. Common stock equivalents for purposes of
determining diluted earnings per share include the effects of
dilutive stock options, warrants and convertible securities. The
effect on the number of shares of such potential common stock
equivalents is computed using the treasury stock method or the
if-converted method, as applicable. The Company has excluded all
outstanding stock options and warrants as well as shares issued
upon conversion of debt from the calculation of diluted loss per
share because these securities are anti-dilutive.
The following table sets forth potential shares of common stock
that are not included in the diluted net loss per share
calculation because to do so would be anti-dilutive for the
periods indicated:
2008 2007
--------- ---------
Warrants issued in conjunction with financing 563,200 2,948,000
========= =========
Contingent shares potentially issuable for acquisitions
1,137,500 8,428,571
========= =========
Common stock options 48,513 48,513
========= =========
F-18
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Income Taxes
The Company recognizes deferred tax assets and liabilities for the
future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date. If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Segmental Reporting
SFAS No. 131,"Disclosures about Segments of an Enterprise and
Related Information" establishes standards for reporting
information about operating segments on a basis consistent with
the Company's internal organization structure as well as
information about geographical areas, business segments and major
customers in financial statements. The Company has four reportable
segments: communications software development, telecommunications
services, calling card distribution, and advanced broadband
hardware distribution.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. During the years
ended June 30, 2008 and 2007, the Company had significant
operating losses which raise substantial doubt about the Company's
ability to continue as a going concern. The Company's plans
regarding those concerns are addressed in the following paragraph.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As shown in the accompanying financial statements, the Company has
incurred net losses of approximately $5,277,203 and $4,746,446 for
the years ended June 30, 2008 and 2007, respectively.
Additionally, during the years ended June 30, 2008 and 2007, the
Company has used cash flow in operations of approximately
$4,170,590 and $1,714,219 in 2008 and 2007, respectively.
Accumulated deficit amounted to $22,483,047 and $16,450,154 as of
June 30, 2008 and 2007, respectively.
Currently, the operations of the Company are funded through the
issuance of debt and equity instruments as well as borrowings from
related parties. Management's plans to generate cash flow include
expanding the Company's existing operations as well as through
additional acquisitions. Additionally, the Company may raise
additional funds by raising additional capital through debt or
equity offerings in an effort to fund the Company's anticipated
expansion. There is no assurance additional capital will be
available to the Company on acceptable terms.
F-19
NOTE 3 - BUSINESS COMBINATIONS
The Company has entered into an agreement with a licensed Chinese
Telecommunications Company which will permit CHVC to offer
advanced communications services along with domestic and
international long distance service into and out of China.
Effective June 30, 2005, CHVC had issued 20,028,000 common shares
valued at $5,007,000 to acquire all of the stock of East West
Global Communications Inc., the Corporation which had obtained the
Chinese licenses. The telecommunications licenses associated with
this acquisition were valued at $5,007,000. The Company has
acquired rights to these licenses which are owned by Chinese
nationals and controlled by the Company. The licenses are required
to be utilized by entities authorized to operate in China.
Currently, one entity controlled by the Company uses the licenses.
The allocation of the purchase price was to the estimated value of
six licenses issued by the Telecommunication Bureau of Beijing.
The licenses permit mobile network telecommunication value-added
service, fax storage and forwarding services, certain internet
content service, electronic bulletin board service, internet
connection service, and call center service. The licenses expire
in 2010. The Company has assigned a 15 year life to the licenses
as it believes these will be renewed for as long as the licenses
are required to support the Company's services.
Effective January 18, 2006, the Company acquired a 65% interest in
the operations of Candid Soft Technologies Co. Ltd of Beijing
("Candidsoft"), an international office-automation software and
technology company headquartered in Beijing, China. The purchase
price was $5,171,250 in current consideration paid by issuance of
4,925,000 shares of the Company's common stock. The shares were
issued in September 2006. As the effective date of the agreement
was January 18, 2006 and management of the Company assumed control
of its operations at that time. The Company treated the stock
issuance as being effective on the effective date of the
acquisition. In addition, the total purchase price also included
contingent consideration of 2,000,000 shares of the Company's
common stock which were issued on June 30, 2008 at a value of
$1,033,000. The Company has valued the equity of Candidsoft at
$6,204,250 and $5,171,250 at June 30, 2008 and June 30, 2007,
respectively.
The following table presents the allocation of the acquisition
cost of Candidsoft, including the assets acquired and liabilities
assumed, based on their fair value:
6/30/2008 6/30/2007
--------- ---------
Goodwill $ 6,056,654 $ 5,023,654
Capitalized software 69,240 69,240
Other assets 118,927 118,927
----------- -----------
Total assets acquired 6,244,821 5,211,821
Minority interest (40,571) (40,571)
----------- -----------
Net assets acquired $ 6,204,250 $ 5,171,250
=========== ===========
Effective August 1, 2006, the Company acquired a 70% interest in
the operations of Beijing Techview System Engineering Co. Ltd.
("BTSE"), a network design and installation company headquartered
in Beijing, China. The purchase price was $1,920,000 in current
consideration paid by issuance of 2,100,000 shares of the
Company's common stock. In addition, the total purchase price also
includes contingent consideration of 4,000,000 shares of the
Company's common stock issuable upon the attainment of certain
performance milestones, expiring December 31, 2009. The Company
has valued the equity of Techview at $1,920,000.
F- 20
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of BTSE, including the assets acquired and liabilities
assumed, based on fair value:
Goodwill $ 2,087,852
Minority interest 61,278
----------------
Total assets acquired 2,149,130
Liabilities assumed (229,130)
----------------
Net assets acquired $ 1,920,000
================
Effective on January 1, 2008, the Company sold its Techview
subsidiary for 2,100,000 shares of Company common stock valued at
$2,415,000. As a result of this transaction a gain of $505,733 was
recognized.
Effective December 31, 2006, the Company acquired 100% of the
common stock of VCG Technologies Inc. d/b/a DTNet Technologies
("DTNet"), a value added distributor of advanced broadband
products and services company headquartered in Florida. The
purchase price was $2,150,000 in current consideration paid by
issuance of 1,000,000 shares of the Company's common stock and
notes payable for $1,000,000. In addition, the total purchase
price also includes contingent consideration of 1,000,000 shares
of the Company's common stock issuable upon the attainment of
certain performance milestones, of which 595,360 were issued in
satisfaction of the contingent consideration. The Company has
valued the equity of DTNet at $2,150,000 upon acquisition plus
$509,521 (595,360 common shares) of contingent consideration for a
total of $2,659,521.
The following table presents the allocation of the acquisition
cost of DTNet, including the assets acquired and liabilities
assumed, based on their fair value:
Goodwill $ 2,811,028
Liabilities assumed (151,507)
----------------
Net assets acquired $ 2,659,521
================
On March 23, 2007, the Company entered into an agreement to
acquire 100% of the common stock of StreamJet.Net, Inc.
("StreamJet"), a broadband data streaming company. The Company
issued 4,725,000 shares of common stock to shareholders of
StreamJet in escrow pending closing of a subsidiary merger
agreement. The Company had not completed the merger at March 31,
2007 because certain deliverables of StreamJet had not been
received. The shares are shown as outstanding at June 30, 2007,
but no asset value has been placed on the Company's books. On
October 22, 2007, the Company completed the merger and valued the
equity of StreamJet at $2,882,250.
F-21
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of StreamJet, including the assets acquired and liabilities
assumed, based on their fair value:
Software License $ 2,974,293
Liabilities assumed (92,043)
---------------
Net assets acquired $ 2,882,250
================
On June 14, 2007, the Company closed a subsidiary merger agreement
to acquire Phone House, Inc. ("Phone House") a leading distributor
of prepaid phone cards. The Company paid cash of $100,000, issued
a six month note for $159,179 and issued 650,000 shares of common
stock at closing. In addition, the total purchase price also
includes contingent consideration of up to 1,500,000 shares of the
Company's common stock issuable upon the attainment of certain
performance milestones, expiring June 30, 2010. The Company has
valued the equity of Phone House at $545,179 on acquisition plus
$292,500 (562,500 common shares) of contingent consideration for a
total $837,679.
The following table presents the allocation of the acquisition
cost of PhoneHouse, including the assets acquired and liabilities
assumed, based on their fair value:
Accounts receivable $ 421,519
Inventory 156,545
Property and equipment 9,900
Goodwill 754,958
----------------
Total assets acquired 1,342,922
Accounts payable and accrued expenses (498,884)
Other liabilities (6,359)
----------------
Total liabilities assumed (505,243)
----------------
Net assets acquired $ 837,679
================
On July 19, 2007, the Company closed a subsidiary merger agreement
to acquire Dial Tone Communications, Inc. ("Dial Tone") a leading
distributor of prepaid phone cards. The Company paid cash of
$27,501, issued a three month note for $20,000 and issued 450,000
shares of common stock at closing. In addition, the total purchase
price also includes contingent consideration of up to 200,000
shares of the Company's common stock issuable upon the attainment
of certain performance milestones, expiring July 31, 2010. On June
13, 2008, the Company renegotiated the terms of acquisition and
canceled 300,000 of total 450,000 shares previously issued. The
Company has valued the equity of Dial Tone at $157,759 and
$310,759 at June 30, 2008 and 2007, respectively.
F-22
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of Dial Tone, including the assets acquired and liabilities
assumed, based on their fair value:
6/30/2008 6/30/2007
--------- ---------
Accounts receivable $ 45,933 $ 45,933
Goodwill 111,826 264,826
-------- --------
Total assets acquired 157,759 310,759
Total liabilities assumed None None
-------- --------
Net assets acquired $157,759 $310,759
======== ========
On March 31, 2008, CVC International, a subsidiary of the Company
acquired all of the assets of Brilliant Telecom Group, LLC
("Brilliant Assets") a termination service provider. The Company
issued 1,000,000 shares of common stock at closing. The Company
has valued the Brilliant Assets at $1,040,000.
The following table presents the allocation of the acquisition
cost of the Brilliant Assets, including the assets acquired and
liabilities assumed, based on their fair value:
Software $ 125,000
Property and equipment 151,750
Goodwill 763,250
----------------
Total assets acquired 1,040,000
Total liabilities assumed None
----------------
Net assets acquired $ 1,040,000
================
The following unaudited pro forma information reflects the net
revenues, net income, and per share amounts for the years June 30,
2008 and 2007 as if all acquisition by CHVC had been completed on
July 1, 2007.
2008 2007
---- ----
Pro forma net revenues $ 36,433,747 $ 20,459,835
Pro forma net income $ (4,719,342) $ (5,719,062)
Pro forma basic and diluted net income per share $ (0.03) $ (0.06)
Pro forma weighted average shares - basic and
diluted 137,525,123 98,536,083
F-23
NOTE 4 - BUSINESS SEGMENT INFORMATION
The Company has four reportable segments: communications software
development, telecommunications services, calling card
distribution, and advanced broadband hardware distribution. Each
of the segments is described in full in Note 1 to these financial
statements.
The accounting polices for the segments are the same as those
described in the summary of significant accounting polices.
Information about operations by business segment, as of and for
the years ended June 30, 2008 and 2007, is as follows:
Advanced
Communications Tele- Broadband
Software communications Calling Card Hardware Corporate and
2008 Development Services Distribution Distribution Eliminations Consolidated
---- ----------- -------- ------------ ------------ ------------ ------------
Revenues $ 309,343 $ 3,521,385 $ 31,446,244 $ 1,156,775 -- $ 36,433,747
Interest Expense -- -- -- -- (297,101) (297,101)
Depreciation and
amortization (153,948) (349,002) -- (24,061) (39,031) (566,042)
Impairment of
assets -- -- -- -- -- --
Net income (loss) (534,786) (288,239) 324,040 (1,112,603) (3,665,615) (5,277,203)
Capital
expenditures -- -- -- -- -- --
Identifiable assets 1,845,230 490,119 2,346,557 99,138 1,847,443 6,628,487
Goodwill 6,009,404 763,250 866,784 2,811,028 -- 10,450,466
Other intangible
assets, net 2,836,594 4,127,475 -- -- 249 6,964,318
Advanced
Communications Tele- Broadband
Software communications Calling Card Hardware Corporate and
2007 Development Services Distribution Distribution Eliminations Consolidated
- --------- ----------- -------- ------------ ------------ ------------ ------------
Revenues $ 184,116 $ 626,397 $ 719,124 $ 811,533 $ 1,053 $ 2,342,223
Interest Expense -- -- -- -- (184,891) (184,891)
Depreciation and
amortization (6,001) (333,800) -- (13,610) (6,363) (359,774)
Impairment of
assets (69,240) (503,099) -- -- -- (572,339)
Net income (loss) (60,659) (338,712) (10) (301,695) (4,045,370) (4,746,446)
Capital
expenditures -- -- -- -- -- --
Identifiable assets 217,670 201,598 760,196 347,971 363,337 1,890,772
Goodwill 5,023,654 2,087,852 462,458 2,358,650 -- 9,932,614
Other intangible
assets, net -- 4,339,400 -- -- -- 4,339,400
F-24
NOTE 5 - PROPERTY AND EQUIPMENT
Major categories of property and equipment at June 30, 2008 and
2007 were as follows:
2008 2007
--------- ---------
Computer equipment $ 428,682 $ 105,796
Furniture, fixtures and equipment 297,896 285,045
Motor vehicles 15,338 --
Construction in progress -- 2,630
Less: accumulated depreciation
and amortization (152,962) (66,912)
--------- ---------
Total property and equipment $ 588,954 $ 326,559
========= =========
Depreciation expense totaled $91,418 and $25,974 for the years
ended June 30, 2008 and 2007, respectively.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with Statement of Financial Accounting Standards No.
142 (SFAS No. 142), the Company performs an evaluation of the fair
values of its operating segments annually, and more frequently if
an event occurs or circumstances change that may indicate that the
fair value of a reporting unit is less than the carrying amount.
The Company's balance sheet reflects goodwill of $10,450,466 and
$9,932,614 as of June 30, 2008 and 2007, respectively.
During the years ended June 30, 2008 and 2007, the Company did not
capitalize any costs related to internal software development. The
Company recorded amortization expense related to the internal
software development costs placed in service as of January 18,
2006, the acquisition date of Candidsoft.
Other identifiable intangible assets consist of the acquired
licenses to provide telecom services in certain districts within
China and capitalized software. Other intangible assets as of June
30, 2008 and 2007 are as follows:
Lives 2008 2007
----------------- ---------------- ----------------
Telecom licenses 15 Years $ 5,007,000 $ 5,007,000
Software licenses 15 Years 2,974,293 -
Computer software 10 Years 125,249 -
---------------- ----------------
Total 8,106,542 5,007,000
Less accumulated amortization (1,142,224) (667,600)
----------------- ----------------
$ 6,964,318 $ 4,339,400
================= ================
Amortization expense totaled $474,624 and $333,800 for the years
ended June 30, 2008 and 2007, respectively. Amortization expense
of $474,624 will be recorded each year until fully amortized.
F-25
NOTE 7 -NOTES PAYABLE
The Company's notes payable to financial institutions and third
parties consist of the following as of June 30:
2008 2007
-------- ---------
Note payable to a third party with interest at 12% and collateralized by
certain assets held by a related party. The note matures on July15,
2008. Additionally, this note included detachable warrants to
purchase 560,000 shares of the Company's common stock, which
expired May 31, 2006. $ 50,112 $ 200,000
Note payable to an individual, due on demand. Interest accrues at 12%
and is payable monthly. The note is collateralized by certain
assets held by a related party and has detachable warrants to
purchase 22,400 shares of CHVC's common stock. 5,000 5,000
Note payable to a third party with interest at 12%, and collateralized
by certain assets held by a related party. The note matures June
30, 2008. Additionally, this note included warrants to purchase
280,000 shares of the Company's common stock, which expired May 31,
2006. - 100,000
Note payable to an individual due November 2, 2007 with interest at 36%
and collateralized by certain assets
held by a related party. - 100,000
Note payable to an individual, interest accrues at 24% and is payable
monthly. The note is collateralized by certain assets held by a
related party, and matures December 8, 2008. 50,000 50,000
Note payable to an individual with interest at 8% and collateralized by
certain assets held by a related party. The note has detachable
warrants to purchase 232,000 shares of CHVC's common stock and
matures on January 23, 2008.
- 100,000
Note payable to a third party due March 7, 2008 with interest at 18%.
The note is secured by the inventory and receivables of DTNet
Technologies.
- 300,000
F-26
NOTE 7 -NOTES PAYABLE (Continued)
2008 2007
---- ----
Note payable to a financial institution due October 22, 2007, at 9.25%
interest. The note is unsecured.
- 35,724
Note payable to an individual due December 31, 2007 at 7% interest
secured by certain stock held by DTNet
Technologies. - 21,689
Note payable to an equipment vendor due May 1, 2011 at 12% interest
secured by computer equipment of DTNet Technologies. The Company
anticipates early payoff of this debt and accordingly has
classified it as a current liability.
53,540 83,076
Note payable to an individual due October 5, 2009 with interest at 18%
and collateralized by certain assets
held by a related party. 50,000 50,000
---------- ----------
Subtotal 208,652 1,045,489
Less discounts - -
---------- ----------
208,652 1,045,489
Less current portion (158,652) (995,489)
---------- ----------
$ 50,000 $ 50,000
========== ===========
The Company's notes payable to related parties consist of the
following as of June 30:
2008 2007
------------ ----------
Note payable to a related party due December 14, 2007 with
interest at 12%. The note is collateralized by stock of
the Company. $ - $ 149,179
Convertible debenture payable to a related party due December 31, 2008
with interest at 8%. The note is secured by all of the common stock
of the Company's DTNet subsidiary and is convertible into 1,566,000
shares of the Company's common stock at a conversion price of
$0.50. The option to convert this note was exchanged for 637,536
shares of common stock on March 6, 2008.
- 168,750
Company's VCG Technologies, Inc., d/b/a DTNet Technologies
subsidiary payable to a related party due December 31,
2008 with interest at 8%. The note is secured by all of 310,423 -
the common stock of the Company's DTNet subsidiary.
F-27
NOTE 7 -NOTES PAYABLE (Continued)
2008 2007
------------- ----------
310,423 317,929
Less current portion (310,423) (149,179)
------------- ----------
$ - $ 168,750
============= ==========
The future maturities of the notes payable to third parties and
related parties are as follows:
2008 $ 469,075
2009 50,000
2010 -
2011 -
----------------
Total $ 519,075
================
Prior to June 30, 2006, the Company incurred debt issuance costs of
$288,000 in cash to third parties for services associated with debt
acquisition. Amortization of these costs was $0 and $47,583 for the
years ended June 30, 2008 and 2007.
F- 28
NOTE 8 -EQUITY
Preferred Stock
All of the Company's preferred stock shares are directly or
indirectly owned by entities that are owned or controlled by an
officer and director of the Company. As such, this officer has all
voting rights relating to this class of stock.
During the year ended June 30, 2006, the Company's board of
directors authorized the issuance of up to 20,000 shares of $0.001
par value Series A Preferred Stock. The Series A Preferred Stock
is preferred as to dividends and liquidation over common stock,
has a liquidation value of $1,000 per share, and has a dividend
rate of 12% of liquidation value per year.
Preferred shares issued during the year ended June 30, 2008 and
2007 are as follows:
2008 2007
------------------- -----------------
Number of Number of
Category Shares Value Shares Value
-------- ------ ----- ------ -----
Issuance in exchange for 382 $ 382,000 -- $ --
preferred dividends
500 250,000
Cash invested -- --
Additional collateral to a
creditor -- -- 500 249,999
For conversion of $1,050,000 in
debt in 2007 and $649,000 in
2008
1,298 648,999 2,100 1,050,000
---------- ---------- ---------- ----------
Total 1,680 $1,030,999 3,100 $1,549,999
========== ========== ========== ==========
On August 30, 2006 an affiliated entity of the Company purchased
500 shares of the Company's Series A Preferred Stock for $250,000.
On September 30, 2006, a third party assumed certain debts of the
Company totaling $500,000 in exchange for 1,000 shares of Series A
Preferred Stock in the Company.
On September 30, 2006, and affiliated entity of the Company
assumed certain debts of the Company totaling $550,000 in exchange
for 1,100 shares of Series A Preferred Stock in the Company.
On September 30, 2006, and affiliated entity of the Company
received 500 shares of the company's Series A Preferred Stock in
exchange for providing funding. The Company recorded interest
expense of $250,000 to reflect the fair value of the shares
issued.
During 2007, certain common stock warrants were exercised which
resulted in an exchange of common stock shares for 450 shares of
preferred stock.
F-29
NOTE 8 -EQUITY (Continued)
Preferred Stock (Continued)
---------------------------
During 2007, the Company redeemed 500 shares of the Company's
Series A Preferred Stock for $410,300 from an affiliated entity.
On March 31, 2008 and June 30, 2008, an affiliated entity of the
Company assumed certain debts of the Company totaling $424,000 and
$225,000 in exchange for 848 shares and 450 shares of Series A
Preferred Stock in the Company.
During the year ended June 30, 2008, the Company issued 382 shares
of Series A Preferred Stock for accrued dividends to related
parties.
On September 30, 2007, certain common stock warrants were
exercised which resulted in an exchange of 442,963 common stock
shares for 152 shares of preferred stock.
On December 31, 2007, the Company redeemed 448 shares of the
Company's Series A Preferred Stock for $822,000 cash and the
issuance of 620,000 shares of common stock from an affiliated
entity.
On March 31, 2008 the company redeemed 625 shares of the Company's
Series A Preferred Stock in exchange for 3,245,000 shares of
company common stock, 500,000 of which shares were issued to an
affiliated entity.
On June 30, 2008, the Company redeemed 425 shares of Series A
Preferred stock for $400,000 and 105,000 shares of common stock
from an affiliated entity.
Common Stock
During the years ended June 30, 2008 and 2007, the Company issued
common stock as follows:
2008 2007
-------------------------- --------------------------
Number of Number of
Category Shares Value Shares Value
-------- ------ ----- ------ -----
Services 1,435,000 $ 1,337,600 1,170,500 $ 983,407
Net cash invested 37,362,487 8,448,911 9,657,308 1,791,183
Assets exchanged 150,000 81,000 - -
In connection with acquisitions
4,306,431 5,811,316 8,546,429 3,413,143
Cancellation f debt of $736,651
(including accrued interest of
$86,651) in 2007 and
cancellation of debt
conversion feature
637,356 637 2,670,103 736,651
- - 176,985 179,109
As additional loan costs
In exchange for shares of series
A preferred stock plus $50,375
of accrued dividends.
4,509,460 629,875 1,347,776 494,267
------------ -------------- ------------ ------------
Total 48,400,734 $16,309,339 23,569,101 $7,597,760
============ =========== ============ ==========
F-30
NOTE 8 -EQUITY (Continued)
Common Stock (Continued)
------------------------
During the year ended June 30, 2007, the Company issued 6,942,308
common shares pursuant to a stock offering under SEC Regulation S.
The Company hereby discloses that the shares would have had a
value of approximately $3,159,300 had the shares been sold on the
OTC (Pink Sheets) market, that discounts and commissions would
total $2,211,510, and net proceeds received by the Company were
$947,790.
During the year ended June 30, 2008, the Company issued 23,649,663
common shares pursuant to a stock offering under SEC Regulation S.
The Company hereby discloses that the shares would have had a
value of approximately $15,420,870 had the shares been sold on the
OTC (Pink Sheets) market, that discounts and commissions would
total $10,794,609, and net proceeds received by the Company were
$4,626,261.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
On August 31, 2006, the Company entered into an employment
agreement with Bill Burbank, the Company's Chief Executive
Officer. The employment agreement is for an initial term of three
years with automatic renewals on six month intervals thereafter;
and provides entitlement to a base salary equal to $15,500 per
month with discretionary cash or stock option bonuses based on
performance.
Litigation
----------
The Company is involved in various claims and legal proceedings in
the ordinary course of its business activities. In addition, the
Company has been notified that it is under review by the SEC to
examine its history of financings, stock issuances and press
releases chronicling the Company's development. The company had
fully cooperated with the SEC and has provided all requested data.
The Company believes that any potential liability associated with
the ultimate outcome of these matters will not have a material
adverse effect on its financial position or results of operations.
Long Term Contingent Liability
During the quarter ended March 31, 2008 the Company issued
3,000,000 shares of common stock to its subsidiary Streamjet. The
shares were pledged as collateral to a third party on the debt of
an unrelated borrower which is the licensor of a software license
owned by Streamjet. Streamjet received a $1,500,000 note from the
borrower which bears interest at 12% plus 25,000 shares of the
borrower's common stock per month, and is secured by all of the
assets of the borrower. The note may be repaid by delivery of the
3,000,000 Company shares back to Streamjet, and because of this
redemption feature the $1,500,000 value of the stock is shown as a
long term contingent liability by the Company. Subsequent to the
June 30, 2008 year end the 3,000,000 shares of common stock were
returned to StreamJet, the $1,500,000 note receivable was repaid
and the $1,500,000 long term contingent liability was eliminated.
F-31
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases
The Company's rent expense amounted to $190,016 and $77,883 for
the years ended June 30, 2008 and 2007, respectively. The Company
has various long-term non-cancelable lease commitments for its
offices, warehouse and other facilities which expire through 2011.
The minimum rental commitments under non-cancelable long-term
operating leases during the next five years are as follows:
2009 113,531
2010 114,847
2011 50,215
2012 50,215
----------------
Total $ 328,808
================
NOTE 10 - RELATED PARTY TRANSACTIONS
Related Party Receivables
One of the Company's subsidiaries has advanced funds to certain
employees. Such advances are not interest bearing and are
unsecured. Management believes that these assets are collectible
as they relate to relationships with continuing employees.
Related Party Payables
Certain companies owned or controlled by a major shareholder,
director and officer of CHVC, and other related parties has loaned
funds to the Company secured by all of the assets of the Company.
These advanced funds are due on demand and bear interest at 18%.
The balance as of June 30, 2008 and 2007 was $303,790 and
$326,786, respectively.
Certain individuals who are employees and or directors of the
Company have advanced funds to the Company on unsecured terms
bearing interest at 8%. The balance on these advances was $13,900
and $100,685 as of June 30, 2008 and 2007, respectively.
An employee of one of the Company's China subsidiaries has
advanced funds to the Company on unsecured terms. This advance
does not bear interest. The balance due on this advance was
$72,761 and $87,040 as of June 30, 2008 and 2007.
Related Party Notes
As disclosed in Notes 7, in connection with the Company's
acquisition of its PhoneHouse subsidiary, the Company is indebted
to the former owner of that company, who remain an employee of
PhoneHouse. The note bears interest at 12% and matures on December
14, 2007. The balance on that notes was $0 and $149,179 as of June
30, 2008 and 2007, respectively.
As disclosed in Note 7, in connection with the Company's
acquisition of its DTNet subsidiary, the Company is indebted to a
Company controlled by the former owners of DTNet. One of those
owners remains a major shareholder, director, officer and employee
of CHVC. The note is secured by all of the common stock of DTNet
and bears interest at 8% and matures on December 31, 2008. The
balance on that note was $675,000 as of June 30, 2007 and it was
replaced by one note with balance of $310,423 as of June 30, 2008.
F-32
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
Interest paid under these notes was $81,000 and $13,770 for the
years ended June 30, 2008 and 2007.
Joint Ventures
The Company has entered into a joint venture with WRIO, Corp.,
dated May 31, 2006, wherein WRIO, Corp. and the Company, through
contribution of $1,000 each, are 50/50 partners in the
exploitation of wireless broadband technology owned by WRIO, Corp.
in China. WRIO, Corp is controlled by an officer and director of
the Corporation. No revenues were earned under this joint venture
during 2008 and 2007, accordingly, no revenues or expense have
been reflected in these financial statements.
Preferred Stock
As disclosed Note 8, all of the Company's preferred stock shares
are directly or indirectly owned by entities that are owned or
controlled by an officer and director of the Company. As such,
this officer has all voting rights relating to this class of
stock.
Guarantees
As disclosed in Note 7, certain of the Company's notes payable due
to third parties have been guaranteed by companies owned or
controlled by an officer and director of the Company.
NOTE 11 - CONCENTRATION OF RISK
The Company relied on one customer for approximately $13,640,000
of revenue, representing approximately 37% of total revenues for
the year ended June 30, 2008. At June 30, 2008, accounts
receivable from this customer was $324,293. The Company did not
have any individual customers or group of customers from which
revenues exceeded 10% of total revenues for the year ended June
30, 2007.
Assets in Foreign Country - The Company has assets related to its
China operations which are located in the Peoples Republic of
China. Assets held outside of the United States were as follows:
June 30, 2008 June 30, 2007
---------------- ------------------
Tangible assets $ 345,230 $ 419,268
Goodwill and other identifiable intangible assets 12,851,598 11,451,306
---------------- ----------------
Total assets $ 13,196,828 $ 11,870,574
=============== ===============
F-33
NOTE 12 - INCOME TAXES
China Taxation - Prior to January 1, 2008, the Company's
subsidiaries were governed by the previous Income Tax Law (the
"Previous IT Law") of China. Under the Previous IT Law, the
Company's subsidiaries were generally subjected to enterprise
income taxes at a statutory rate of 33% (30% state income tax plus
3% local income tax) or 15% for qualified new and high technology
enterprises. Effective January 1, 2008, the new Enterprise Income
Tax Law (the "EIT Law") in China supersedes the Previous IT Law
and unifies the enterprise income tax rate for FIEs at 25%. New
and high technology enterprises will continue to enjoy a
preferential tax rate of 15% but must meet the new set of criteria
defined under the EIT Law and related regulations. The EIT Law
provides a five-year transitional period for certain entities that
enjoyed a favorable income tax rate of less than 25% under the
Previous IT Law and were established before March 16, 2007, to
gradually increase their rates to 25%. The EIT Law also imposes a
withholding income tax of 10% on dividends distributed by a
Foreign-Invested Enterprises ("FIE") to its immediate holding
company outside of China, if such immediate holding company is
considered as a no-resident enterprise without any establishment
or place within China or if the received dividends have no
connection with the establishment or place of such immediate
holding company within China, unless such immediate holding
company's jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement. Such
withholding income tax was exempted under the Previous IT Law. In
accordance with APB Option No. 23, "accounting for Income Taxes -
Special Area," all undistributed earnings are presumed to be
transferred to the parent company and are subject to the
withholding taxes. The withholding tax imposed on the dividend
income will reduce the Company's net income. If a withholding tax
were imposed to retained earnings prior to January, 2008, the
Company would elect to reinvest these retained earnings in PRC.
Accordingly, the Company has not recorded any withholding tax on
the retained earnings of its FIEs in China.
The EIT Law also provides that an enterprise established under the
laws of foreign countries or regions but whose "de facto
management body" is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the
PRC income tax at the rate of 25% for its global income. The
Implementing Rules of the EIT Law merely defines the location of
the "de facto management body" as "the place where the exercising,
in substance, of the overall management and control of the
production and business operation, personnel, accounting,
properties, etc., of a non-PRC company is located." The
determination of tax residency requires a review of surrounding
facts and circumstances of each case. If the Company is treated as
a resident enterprise for PRC tax purposes, the Company will be
subject to PRC tax on worldwide income at a uniform tax rate of
25% starting from January 1, 2008.
Like its predecessor, the EIT Law mainly provides a framework for
general income tax provisions. There are currently divergent views
on ho the EIT Law will be implemented. Details on the definition
of numerous terms as well as the interpretation and specific
application of various provisions are left to the detailed
implementing regulations and supplementary tax circulars, which
are still being issued. The Company's ultimate effective tax rate
will depend on many factors, including but not limited to, whether
certain of the Company's subsidiaries in China will receive the
new and high technology enterprise status under the new criteria.
The current and deferred portion of income tax expenses of the
Company's China subsidiaries, which were included in the
consolidated statements for the periods presented have no
significant deferred tax assets or liabilities and the statutory
rate and effective rate for China operations approximates 30%.
F-34
NOTE 12 - INCOME TAXES (Continued)
The following table represents the effective tax rate of the
Company:
June 30, 2008 June 30, 2007
------------- -------------
Loss from operations $ 5,277,203 $ 4,746,446
Tax benefit:
Federal current - -
Federal deferred - -
U.S. State - -
Foreign - -
--------------- ----------------
Total tax benefit $ - $ -
=============== ================
Effective tax benefit rate 0.0% 0.0%
================ ================
The difference between the tax benefit rate and the statutory
benefit rate is as follows:
June 30, 2008 June 30, 2006
------------- -------------
Statutory benefit rate 34.0% 34.0%
Inability to utilize operating loss carry forwards (34.0%) (34.0%)
Other
----------------
Effective tax benefit rate 0.0% 0.0%
================ ================
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are as follows:
June 30, 2008 June 30, 2007
------------- -------------
Deductible temporary differences:
U.S. federal deferred operating loss $ 3,608,074 $ 2,294,509
State deferred operating loss 350,300 337,428
Foreign deferred operating loss 106,923 15,059
---------------- ----------------
Less: valuation allowance (4,065,297) (2,646,996)
---------------- ----------------
Total tax assets $ - $ -
================ ================
At June 30, 2008, the Company had carry forward losses for income
tax purposes of approximately $10,611,983 that may be offset
against future taxable income. Due to the uncertainty regarding
the success of future operations, management has recorded a
valuation allowance equal to 100% of the resultant deferred tax
asset.
F-35
NOTE 12 - INCOME TAXES (Continued)
The carry forward losses expire in future years through 2028 as
follows:
Expiration Year Amount
------
2025 $ 457,895
2026 1,499,867
2027 4,790,794
2028
3,863,427
NOTE 13 - STOCK BASED COMPENSATION
The Company has granted stock options through certain informal
stock option plans to directors, officers and employees. These
options vest monthly as earned with no expiration date.
Prior to July 1, 2005, the Company accounted for these plans under
the recognition measurement provisions of APB No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"), and related
interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123").
Effective with its fiscal year beginning July 1, 2005, the Company
adopted the fair value recognition provisions of SFAS No. 123R,
Share-Based Payment ("SFAS No. 123R"), using the
modified-prospective-transition method. Under that transition
method, compensation cost is recognized in the periods after
adoption for (i) all stock option awards granted or modified after
December 31, 2005 based on the grant-date fair value estimated in
accordance with the
provisions of SFAS 123R and (ii) all stock options granted prior
to but not yet vested as of July 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of
SFAS 123. The results for prior periods were not restated.
Stock-based compensation cost of $0 and $11,802 for the years
ended June 30, 2008 and 2007, respectively. Related deferred
income tax asset was $0 as of June 30, 2008 and 2007.
The following table summarizes the allocation of stock-based
compensation expense under SFAS 123R:
June 30, 2008 June 30, 2007
------------- -------------
Selling, general and administrative $ 0 $ 11,802
--------------- ----------------
Total stock-based compensation expense included in
operating expenses $ 0 $ 11,802
--------------- ----------------
Total stock-based compensation expense $ 0 $ 11,802
=============== ================
F-36
NOTE 13 - STOCK BASED COMPENSATION (Continued)
The fair value of stock option awards granted on or after July 1,
2005 was determined using a Black-Scholes-Merton option-pricing
model utilizing a range of assumptions related to dividend yield,
volatility, risk-free interest rate, and employee exercise
behavior. Dividend yield was determined to be $0 as these have not
been historically paid. Expected volatility is based on the
historical volatility calculated from the historical values of the
Company's stock prices. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of the grant.
The Company estimates forfeitures based on historical data.
On November 10, 2005, the FASB issued FASB Staff Position No.
123R-3, Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. The Company has elected to adopt
the shortcut method provided by the FASB Staff Position for
determining the initial pool of excess tax benefits available to
absorb tax deficiencies related to stock-based compensation
subsequent to the adoption of SFAS 123R. The shortcut method
includes simplified procedures to establish the beginning balance
of the pool of excess tax benefits (the "APIC Tax Pool") and to
determine the subsequent effect on the APIC Tax Pool and Cash Flow
Statements of the tax effects of employee stock-based compensation
awards.
Prior to adoption of SFAS 123R, all tax benefits from deductions
resulting from the exercise of stock options were presented as
operating cash flows in the Cash Flow Statement. SFAS 123R
requires the cash flow tax benefits resulting from tax deductions
in excess of the compensation cost recognized (excess tax
benefits) to be classified as financing cash flows. Excess tax
benefits aggregating $0 were reported in Financing Activities for
the years ended June 30, 2008 and 2007.
A summary of options granted and outstanding is presented below:
2007
----
Number of options Weighted average
exercise price
--------------
Outstanding at beginning of period 92,493 $ 0.48
Granted 23,095 0.50
Exercised - -
Forfeited (67,075) 0.46
---------------- ----------------
Outstanding at end of period 48,513 $ 0.50
---------------- ----------------
Exercisable at end of period 48,513 $ 0.50
================ ================
2008
----
Weighted average
Number of options exercise price
----------------- --------------
Outstanding at beginning of period
Granted 48,513 $ 0.50
Exercised - -
Forfeited - -
Outstanding at end of period 48,513 $ 0.50
---------------- ----------------
Exercisable at end of period 48,513 $ 0.50
================ ================
The weighted average fair value of shares granted was $0.50 for
2008 and 2007 and due April 2009.
F-37
NOTE 14 - WARRANTS
The Company has issued warrants to purchase its common stock in
connection with financing transactions. As of June 30, 2008, the
warrants are exercisable and have terms as follows:
In connection In connection
Exercise Price Termination Date with financing with the DTNet
per Share transactions acquisition Shares
$0.40 July 2008 350,000 - 350,000
$0.40 January 2009 213,200 213,200
Total 563,200 563,200
======= =======
As of June 30, 2007, the warrants are exercisable and have terms
as follows:
In connection
with
financing In connection
Exercise Price Termination Date transactions with the DTNet
per Share acquisition Shares
$0.40 July 2008 350,000 - 350,000
$0.50 January 2008 632,000 - 632,000
$1.00 January 2008 400,000 - 400,000
$0.50 December 2008 - 1,566,000 1,566,000
--------- --------- --------
Total 1,382,000 1,566,000 2,948,000
========= ========= =========
The Company issued warrants to purchase an aggregate of 9,161,420
shares of the Company's common stock at prices ranging from $0.40
to $1.00 per share in connection with financing transactions. The
warrants vested immediately and had expiration dates ranging from
1 to 2 years from the date of issuance. The fair value of the
warrants at each reporting or measurement date was determined
based on the Black-Scholes option pricing model. The fair value of
the warrants was calculated with the following weighted average
assumptions: no dividend yield; expected volatility of 42%; risk
free rates ranging from 3.26% to 5.18% and an expected life equal
to the vesting period of 1 month.
The aggregate fair value of the warrants was $1,407,497. For the
years ended June 30, 2008 and 2007, $17,256 and $605,729,
respectively was charged to other financing charges with the
offset to additional paid-in capital. Of these warrants, 800,000
expired unexercised in January 2008.
F-38
NOTE 15 - LOSS ON IMPAIRMENT OF ASSETS AND INVESTMENTS
As a result of the Company's evaluation of assets and investments,
the Company recorded impairment losses as follows for the years
ended June 30, 2008 and 2007:
2008 2007
----------------- ----------------
Advanced Broadband Distribution $ - $ 70,000
Telecommunications services segment - 433,099
Software development costs - 69,240
---------------- ----------------
Total $ - $ 572,339
================ ================
The impairments recorded by the Company reflect the write offs of
$70,000 goodwill in On Line Solutions, an investment in the
advanced broadband distribution segment because the investment
lost its potential to produce cash flow, $433,099 of investments
in minority interests in businesses in the telecommunications
services segment because these businesses were operating at a loss
and had no equity or market value, and $69,240 of software
development in the communications software development segment
because the software became obsolete.
NOTE 16 - SUBSEQUENT EVENTS
During 2008 the Company issued 3,000,000 shares of common stock to
its subsidiary StreamJet which were pledged as a part of a
financing transaction of an unrelated borrower which is a licensor
of a software license owned by StreamJet. The Company recorded a
$1,500,000 note receivable and a $1,500,000 long term contingent
liability because the $1,500,000 note receivable can be repaid by
return of the 3,000,000 shares of pledged stock. Subsequent to the
June 30, 2008 year end the 3,000,000 shares of common stock were
returned to StreamJet, the $1,500,000 note receivable was repaid
and the $1,500,000 long term contingent liability was eliminated.
F-39
CHINA VOICE HOLDING CORP.
Consolidated Balance Sheets
As of September 30 and June 30, 2008
A S S E T S September 30, June 30,
2008 2008
------------ ------------
Current assets:
Cash and cash equivalents $ 976,049 $ 2,096,070
Accounts receivable, net 2,260,784 1,746,595
Inventories 329,480 445,163
Prepaid expenses and other current assets 137,280 97,873
Related party receivables 92,300 92,300
Deposits and other assets 88,273 61,532
------------ ------------
Total current assets 3,884,166 4,539,533
------------ ------------
Long-term assets
Note receivable -- 1,500,000
Property and equipment, net 620,099 588,954
Investments 15,000
Goodwill 10,591,466 10,450,466
Other intangible assets, net 6,877,171 6,964,318
------------ ------------
Total assets $ 21,987,902 $ 24,043,271
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,390,513 $ 2,204,689
Related party payables 430,541 390,451
Current portion of long term debt, net of debt discount 123,586 158,652
Current portion of related party notes 310,423 310,423
Other current liabilities 52,466 28,188
------------ ------------
Total current liabilities 3,307,529 3,092,403
------------ ------------
Long-term liabilities:
Long-term debt, net of current portion 50,000 50,000
Long-term portion of related party notes, net of current portion -- --
Long-term contingent liabilities -- 1,500,000
------------ ------------
Total long-term liabilities 50,000 1,550,000
------------ ------------
Total liabilities 3,357,529 4,642,403
------------ ------------
Equity
Common stock - par value $.001, 400,000,000 shares authorized,
161,098,956 and 157,909,447 shares issued at September 30
and June 30, 2008 respectively 161,099 157,910
Series A preferred stock - par value $.001, 20,000 shares
authorized, 4,849 and 3,304 shares issued at September 30
and June 30, 2008, respectively (liquidation value of
$4,849,000 and $3,304,000 on September 30 and June 30, 2008) 5 3
Additional paid-in capital 41,976,108 41,730,913
Accumulated deficit (23,501,928) (22,483,047)
Cumulative currency translation adjustment (4,911) (4,911)
------------ ------------
Total equity 18,630,373 19,400,868
------------ ------------
Total liabilities and equity $ 21,987,902 $ 24,043,271
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-40
CHINA VOICE HOLDING CORP.
Consolidated Statements of Operations
For the Three Months Ended September 30, 2008 and 2007
2008 2007
------------- -------------
Revenues $ 15,964,352 $ 6,073,510
Cost of revenues 15,769,941 5,703,547
------------- -------------
Gross profit 194,411 369,963
Operating expenses:
Selling, general and administrative expenses 1,268,999 693,788
Depreciation 36,097 21,044
------------- -------------
Total operating expenses 1,305,096 714,832
Loss from operations (1,110,685) (344,869)
Other income (expense):
Refund on federal excise tax 384,583 --
Interest income 7,140 --
Interest expense (25,080) (117,486)
Minority interest (977) (10,010)
Loss from disposal of fixed assets (164,224) --
Other financing charges -- (14,126)
Other income (expenses) 39,662 (184)
------------- -------------
Total other income (expense), net 243,058 (141,806)
------------- -------------
Net loss (869,581) (486,675)
Preferred dividend (149,300) (50,250)
-------------
Net loss attributable to common stockholders $ (1,016,927) $ (536,925)
============= =============
Net loss per share - basic and diluted $ (006) $ (005)
============= =============
Common shares used in calculation per share data -
basic and diluted 159,504,202 98,195,430
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-41
CHINA VOICE HOLDING CORP.
Consolidated Statements of Equity
For the Three Months Ended September 30, 2008
Retained Cumulative
Preferred Stock- Preferred Additional
Common Stock Common Series A Stock- Paid-in
Shares Stock Shares Series A Capital
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2008 157,909,447 $ 157,910 3,304 $ 3 $ 41,730,913
============ ============ ============ ============ ============
Issuance of common stock 3,189,509 3,189 -- -- 699,697
Issuance of preferred stock -- -- 2,000 2 (2)
Dividends declared on preferred stock -- -- -- -- --
Redemption of preferred stock -- -- (455) -- (454,500)
Net loss for three months ended
September 30, 2008 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2008 161,098,956 $ 161,099 4,849 $ 5 $ 41,976,108
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-42
CHINA VOICE HOLDING CORP.
Consolidated Statements of Equity
For the Three Months Ended September 30, 2008
Earnings currency
(Accumulated translation Total
Deficit) adjustment Equity
------------ ------------ ------------
Balance at June 30, 2008 $(22,483,047 $ (4,911) $ 19,400,868
============ ============ ============
Issuance of common stock -- -- 702,886
Issuance of preferred stock -- -- --
Dividends declared on preferred stock (149,300) -- (149,300)
Redemption of preferred stock -- -- (454,500)
Net loss for three months ended
September 30, 2008 (869,581) -- (869,581)
------------ ------------ ------------
Balance at September 30, 2008 $(23,501,928) $ (4,911) $ 18,630,373
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-43
CHINA VOICE HOLDING CORP.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2008 and 2007
2008 2007
----------- -----------
Operating activities:
Net loss $ (869,581) $ (486,673)
Net income (loss) minority interest 977 10,010
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 169,244 87,044
Stock option expense -- --
Common shares issued for services 42,500 139,190
Common shares issued for loan costs -- --
Preferred shares issued for loan costs -- --
Beneficial conversion features -- --
Non-cash financing costs -warrant issued with debt -- --
Impairment of assets and investments -- --
Gain from sale of subsidiary -- --
Loss on discontinuing segment -- --
Loss from disposal of property and equipment 164,224 --
Changes in assets and liabilities:
Accounts receivable (514,189) (230,391)
Inventories 115,683 30,326
Prepaid expenses and other current assets (39,407) (155,660)
Other assets (26,741) (65,951)
Related party receivables -- 70,717
Accounts payable and accrued expenses 169,214 169,653
Related party payable (32,671) (514,511)
Other current liabilities 24,278 (351,570)
----------- -----------
Total adjustments 72,136 (821,153)
----------- -----------
Net cash used in operating activities (796,468) (1,297,816)
----------- -----------
Investing activities:
Purchases of property and equipment (197,323) (258,317)
Purchase of assets in business combination -- --
----------- -----------
Net cash used in investing activities (197,323) (258,317)
----------- -----------
Financing activities:
Borrowings under long-term debt arrangements -- 675,000
Repayments of long-term debt (35,066) (10,768)
Payment received from subscribed stock -- --
Repayment to related parties -- (168,750)
Proceeds from issuance of preferred stock, net
of issuance costs -- --
Redemption of preferred stock to related parties (454,500) --
Proceeds from issuance of common stock, net
of issuance costs 512,636 998,792
Payment of preferred dividends (149,300) --
----------- -----------
Net cash provided by financing activities (126,230) 1,505,042
----------- -----------
Net increase in cash and cash equivalents (1,120,021) (51,091)
Cash and cash equivalents -beginning of year 2,096,070 266,429
----------- -----------
Cash and cash equivalents - end of year $ 976,049 $ 215,338
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-44
CHINA VOICE HOLDING CORP.
Notes to Consolidated Financial Statements
Three Months Ended September 30, 2008 and 2007
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business - China Voice Holding Corp. (the "Company"
or "CHVC"), a Nevada corporation formed on August 7, 2003, is a
diversified telecommunications company headquartered in Boca
Raton, Florida. The Company operates in three countries, the
United States, and China. In the United States, the Company has
offices and operations located in Los Angeles, California; Boca
Raton and Tampa, Florida; and in Dallas, Texas. In China, the
Company operates in Beijing and Nanning. The Company operates in
four reportable business segments as follows:
Communications Software Development - In China, the Company has
developed patented Office Automation and Internet Telephony
technology platforms for large enterprise and government
applications. The web-based technology was designed around the
specific needs of the Chinese Government and allows multiple
workers to collaborate on a single project and enables management
to effectively monitor virtually every aspect of the workers
on-line and telephony experience.
Telecommunications Services - The Company provides VoIP
telecommunications services to communication Service Providers.
The Company's Network Operations Center (NOC) is based in Florida
and utilizes a next generation Enhanced Services platform that is
manned 24 hours per day.
Calling Card Distribution - The Company's calling card
distribution business sells prepaid telephone and cellular calling
cards purchased from various telecommunications carriers through a
network of private distributors located primarily in southern
California.
Advanced Broadband Hardware Distribution - The hardware
distribution line supplies broadband, Wi-Fi, and VoIP components
and hardware to broadband service providers.
Ownership in China Operations - CHVC through its subsidiaries
offers network design and international office-automation software
and technology services to third party customers and government
agencies in the People's Republic of China ("PRC"). To meet
ownership requirements under Chinese laws, CHVC has entered into
technology service, asset ownership, and ownership trust
agreements with two of CHVC's affiliates that are incorporated in
China: Candidsoft Technologies Co, Ltd of Beijing ("Candidsoft")
and Beijing Techview System Engineering Co. Ltd. ("BTSE"). Based
on these agreements the Company owns 65% of Candidsoft and 70% of
BTSE, representing a controlling interest in its Chinese
operations, and consolidated them into its financial statements
pursuant to ARB 51 and FAS 94. Management periodically evaluates
its effective legal control over its Chinese subsidiaries on an
ongoing basis in accordance with new developments in China and/or
laws passed by the PRC. Based on this review, it believes it has
the ability to effectively maintain control of the operations of
the subsidiaries and consolidate them accordingly. BTSE was sold
on January 1, 2008.
F-45
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recapitalization and Reorganization - On April 1, 2004, Surf
Franchise, Inc. ("Surf"), incorporated in the State of New York on
August 7, 2003, entered into a stock exchange agreement with China
Voice Corporation ("CVC"), incorporated in the State of Nevada on
January 15, 2004, and certain shareholders. CVC was formed to
effectuate an exchange of shares between VoIUM Technologies, Ltd.
("VoIUM") and certain shareholders. The shareholders of VoIUM
exchanged ownership interest in CVC to certain shareholders in
exchange for an agreement to assign their exclusive interest in
value-added telecommunication licenses issued by the PRC to CVC.
Upon the exchange, VoIUM became a wholly-owned subsidiary of CVC.
Pursuant to the stock exchange agreement, Surf cancelled
43,012,500 shares of its previously issued and outstanding
49,602,500 common shares and issued 50,000,000 Rule 144 restricted
Surf common shares to CVC shareholders in exchange for a 100%
equity interest in CVC, making CVC a wholly-owned subsidiary of
Surf.
Surf was a subsidiary of a public Company through April 2004, and
it operated as a shell corporation and had no business operations,
assets or liabilities.
The above stock exchange transaction between Surf and CVC resulted
in those shareholders of CVC obtaining a majority voting interest
in Surf. Accounting principles generally accepted in the United
States of America require that the company whose shareholders
retain the majority interest in a combined business be treated as
the acquirer for accounting purposes. Consequently, the stock
exchange transaction has been accounted for as a recapitalization
of CVC as CVC acquired a controlling equity interest in Surf, as
of April 1, 2004. The reverse acquisition process utilizes the
capital structure of Surf and the assets and liabilities of CVC
recorded at historical cost.
Subsequent to the stock exchange, a restructuring resulted in CVC
leaving the group with VoIUM, remaining as the continuing
operating entity for financial reporting purposes. Although VoIUM
is deemed to be the acquiring corporation for financial accounting
and reporting purposes, the legal status of Surf as the surviving
corporation did not change. On April 22, 2004, Surf changed its
name to China Voice Holding Corp. On June 10, 2008, the Company
reorganized from a New York Corporation to a Nevada Corporation.
Basis of Consolidation - The consolidated financial statements
include 100% of the assets, liabilities, revenues, expenses and
cash flows of China Voice Holding Corp ("CHVC"), VoIUM
Technologies, LTD ("VoIUM"), Sino-Connection Corp.
("Sino-Connection"), Voium USA Inc. ("Voium USA"), China Voice
Communications Corp ("CVCC"), Communications Business Services
Corp ("CBSC"), East West Global Communications, Inc. ("EWGC"), VCG
Technologies, Inc. d/b/a DTNet Technologies, Inc. ("DTNet"), CVC
International, Inc. ("CVC International") and Phone House, Inc.
("PhoneHouse"). The Company additionally consolidated the
financial statements Candidsoft for which the Company owned a 65%
interest for the years ended June 30, 2008 and 2007 and BTSE, for
which the Company owned a 70% interest for the year ended June 30,
2007 and a portion of the year end June 30, 2008. The Company also
consolidated 100% of Cable and Voice Corporation ("Cable and
Voice"), StarCom Alliance, Inc. ("Star Com"), StreamJet.Net, Inc.
("StreamJet"), Dial-Tone Communications, Inc. ("Dial Tone") and
Vastland Holding Beijing Company Limited ("Vastland") which were
acquired or set up in 2008. All intercompany accounts and
transactions have been eliminated in consolidation.
F-46
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates - The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and footnotes thereto. Actual results could
differ from those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include accounting
for depreciation and amortization, valuation of goodwill and other
intangibles, business combinations, equity transactions, and
contingencies.
Recent Accounting Pronouncements
--------------------------------
Accounting for Uncertainty in Income Taxes - In June 2006, the
Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes
- an interpretation of Statement of Financial Accounting Standard
("SFAS" No. 109 ("FIN 48"), which clarifies the accounting for
uncertainty in income tax positions. This Interpretation requires
that the Company recognize in the consolidated financial
statements the tax benefits related to tax positions that are more
likely than not to be sustained upon examination based on the
technical merits of the position. The provisions of FIN 48 became
effective for CHVC as of the beginning of the Company's 2007
fiscal year. The adoption of this Interpretation did not have a
material impact on the Company's consolidated financial
statements.
Fair Value Option for Financial Assets and Financial Liabilities -
In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities ("SFAS
159"). SFAS 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain
other items at fair value, that are not currently required to be
measured at fair value. The Company has no assets covered by SFAS
159 and has not determined if it will adopt the fair value option
provided for in this standard. SFAS 159 is effective for the
Company as of January 1, 2008.
Business Combinations - On December 4, 2007, the Financial
Accounting Standards Board issued SFAS No. 141 (Revised 2007),
Business Combinations ("SFAS 141"). SFAS 141R, changes the
accounting for business combinations. Under Statement 141R, an
acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. Statement
141R will change the accounting treatment for certain specific
items, including but not limited to: acquisition costs,
non-controlling interests, acquired contingent liabilities,
in-process research and development and restructuring costs.
Statement 141 applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The impact of adoption is not expected to be material.
F-47
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
Non-Controlling Interests in Consolidated Financial Statements -
On December 4, 2007, the Financial Accounting Standards Board
issued SFAS No. 160, Non-Controlling Interests in Consolidated
Financial Statements - An Amendment of ARB No. 51 ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for
the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary in certain circumstances.
Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's
equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net
income on the face of the income statement. SFAS No. 160 is
effective for fiscal years, and interim periods within these
fiscal years, beginning on or after December 15, 2008. The impact
of adoption is not expected to be material.
In March 2008, the FASB issued SFAS No. 161 "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS 161). This statement is intended to
improve transparency in financial reporting by requiring enhanced
disclosures of an entity's derivative instruments and hedging
activities and their effects on the entity's financial position,
financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) as
well as related hedged items, bifurcated derivatives, and
non-derivative instruments that are designated and qualify as
hedging instruments. Entities with instruments subject to SFAS 161
must provide more robust qualitative disclosures and expanded
quantitative disclosures. SFAS 161 is effective prospectively for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
permitted. The Company is currently assessing the impact of
adopting SFAS 161 on its financial statements and related
disclosures.
In May 2008, the FASB issued SFAS 162 "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 identifies the sources
of accounting principles and the framework for selecting the
accounting principles to be used. Any effect of applying the
provisions of this statement will be reported as a change in
accounting principle in accordance with SFAS No. 154 "Accounting
Changes and Error Corrections". SFAS No. 162 is effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company is currently
evaluating the impact the adoption of this statement could have on
its financial condition, results of operations and cash flows.
In May 2008, the FASB issued SFAS No. 163, "Accounting for
Financial Guarantee Insurance Contracts, an interpretation of FASB
Statement No. 60." The scope of this Statement is limited to
financial guarantee insurance (and reinsurance) contracts, as
described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises
excluded from the scope of Statement 60 or to some insurance
contracts that seem similar to financial guarantee insurance
contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance
contracts that are derivative instruments included within the
scope of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement will not have
any impact on the Company's consolidated financial statements.
F-48
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In May 2008, the FASB issued Staff Position No. APB 14-1
"Accounting for Convertible Debt Instruments that May be Settled
in Cash Upon Conversion". APB 14-1 requires that the liability and
equity components of convertible debt instruments that may be
settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects
an issuer's nonconvertible debt borrowing rate. The resulting debt
discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest
expense. APB 14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Retrospective application to
all periods presented is required except for instruments that were
not outstanding during any of the periods that will be presented
in the annual financial statements for the period of adoption but
were outstanding during an earlier period. The Company is
currently evaluating the impact of the adoption of this position
could have on its financial condition, results of operations and
cash flows.
In June 2008, the FASB issued Emerging Issues Task Force Issue
07-5 "Determining whether an Instrument (or Embedded Feature) is
indexed to an Entity's Own Stock" ("EITF No. 07-5"). This Issue is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. Paragraph
11(a) of Statement of Financial Accounting Standard No 133
"Accounting for Derivatives and Hedging Activities" ("SFAS 133")
specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock
and (b) classified in stockholders' equity in the statement of
financial position would not be considered a derivative financial
instrument. EITF No.07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer's own stock and thus able
to qualify for the SFAS 133 paragraph 11(a) scope exception. The
Company is currently evaluating the impact of adoption of EITF No.
07-5 on its financial statements and related disclosures.
In June 2008, FASB issued EITF Issue No. 08-4, "Transition
Guidance for Conforming Changes to Issue No. 98-5 ("EITF No.
08-4")". The objective of EITF No.08-4 is to provide transition
guidance for conforming changes made to EITF No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", that result from EITF
No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments", and SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity".
This Issue is effective for financial statements issued for fiscal
years ending after December 15, 2008. Early application is
permitted. The Company is currently evaluating the impact of
adoption of EITF No. 08-4 on the accounting for the convertible
notes and related warrants transactions.
F-49
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies
------------------------------------------
Cash and Cash Equivalents
The Company considers all highly liquid accounts with an original
maturity date of three months or less to be cash equivalents. The
Company maintains bank accounts in US banks, which at times, may
exceed federally insured limits. The Company has not experienced
any losses on such accounts and believes it is not exposed to any
significant risk on bank deposit accounts.
Cash accounts of foreign subsidiaries are maintained on deposit in
established financial institutions in their respective
jurisdiction. Although these deposits are not subject to FDIC
insurance coverage provided in the United States, the Company has
not experienced any losses and believes that exposure to such risk
is minimized by the quality of the institutions being utilized.
Accounts Receivable
Accounts receivable represent amounts currently due to the Company
under contractual obligations for services performed, or products
sold. When necessary, the Company evaluates and maintains an
allowance for these accounts to reduce such balances to the amount
deemed collectible. The allowance for doubtful accounts is based
on the Company's assessment of collectability of customer
accounts. The Company regularly reviews the allowance by
considering factors such as historical experience, credit quality,
age of the accounts receivable balances, and current economic
conditions that may affect a customer's ability to pay.
Inventories
Inventory consists of finished goods and is valued at the lower of
cost or market using the first-in, first-out method.
Investments
The Company values the equity investments in private companies and
restricted stock of public companies using the cost method of
accounting. The Company monitors these investments for factors
indicating a permanent impairment of value. The Company recognized
no impairment loss for the quarters ended September 30, 2008 and
2007, respectively.
F-50
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and any impairment loss where the recoverable amount
of the asset is estimated to be lower than its carrying amount.
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to working condition for
its intended use. Expenditures for additions, improvements and
renewals are capitalized and normal expenditures for maintenance
and repairs are charged to the income statement whereas
significant improvements which materially increase values or
extend useful lives are capitalized and depreciated over the
remaining estimated useful lives of the related assets. When
assets are sold or retired, their cost and accumulated
depreciation are removed from the financial statements and any
gain or loss resulting from their disposal is included in the
income statement. Depreciation is provided using the straight line
method over the estimated useful lives of the related assets,
ranging from 3 - 5 years, or over the lesser of the term of the
lease or the estimated useful life of the assets under lease.
Capitalized Software Development Costs
The Company accounts for software development costs under SFAS 86,
Accounting for the Costs of Software to be Sold, Leased, or
Otherwise Marketed. All of the Company's Software related costs
pertained to the communications software development segment of
the business. The Company capitalized software costs of $72,250
related to the Company's interest in Candidsoft. In 2007, the
Company performed an impairment review on its software costs and
recorded an aggregate impairment loss of $69,240 for the software
development costs.
Business Combinations
The Company accounts for business combinations in accordance with
Statement of Financial Accounting Standard No. 141, "Business
Combinations" (SFAS No. 141). SFAS No. 141 requires that the
purchase method of accounting be used for all business
combinations. SFAS No. 141 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually by comparing
carrying value to the respective fair value in accordance with the
provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). This
pronouncement also requires that the intangible assets with
estimated useful lives be amortized over their respective
estimated useful lives.
Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," the Company tests its
goodwill for impairment at least annually by comparing the fair
value of these assets to their carrying values. As a result of
such tests, the Company may be required to record impairment
charges for these assets if in the future their carrying values
exceed their fair values.
Other intangible assets are amortized using the straight-line
method over their estimated useful period of 10 to 15 years. We
evaluate the recoverability of intangible assets periodically and
take into account events or circumstances that warrant revised
estimates of useful lives or that indicate that impairment exists.
F-51
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock Based Compensation
The Company applies the fair value method of Statement of
Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensation" (SFAS No. 123R) in accounting for its stock
options. This standard states that compensation cost is measured
at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. The fair value for each option granted is estimated on the
date of the grant using the Black-Scholes option pricing model.
The fair value of all vested options granted has been charged to
salaries, wages and benefits in accordance with SFAS No. 123R.
Common stock granted to employees, directors, and consultants is
charged to operating expense based on the fair value of the stock
at the date the stock purchase rights are granted. In accordance
with EITF 96-18, the non-employee stock options or warrants are
measured at their fair value by using the Black-Scholes option
pricing model as of the earlier of the date at which a commitment
for performance to earn the equity instruments is reached
("performance commitment date") or the date at which performance
is complete ("performance completion date"). The stock-based
compensation expenses are recognized on a straight-line basis over
the shorter of the period over which services are to be received
or the vesting period. Accounting for non-employee stock options
or warrants which involve only performance conditions when no
performance commitment date or performance completion date has
occurred as of reporting date requires measurement at the equity
instruments then-current fair value. Any subsequent changes in the
market value of the underlying common stock are reflected in the
expense recorded in the subsequent period in which that change
occurs.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a
local currency environment are translated to U.S. dollars at
exchange rates in effect at the balance sheet date; with the
resulting translation adjustments directly recorded to cumulative
currency translation adjustment. Income and expense accounts are
translated at average exchange rates during the year. Where the
U.S. dollar is the functional currency, translation adjustments
are recorded in other income (loss), net.
Impairment of Long-Lived Assets and Other Intangible Assets
The Company reviews the carrying value of its long-lived assets,
including indefinite-lived intangible assets consisting primarily
of goodwill and telecommunications licenses in China, whenever
events or changes in circumstances indicate that the historical
cost carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of the
assets by estimating the future net cash flows expected to result
from the assets, including eventual disposition. If the future net
cash flows are less than the carrying value of the assets, an
impairment loss is recorded equal to the difference between the
asset's carrying value and its fair value. As of September 30,
2008 and 2007, management determined that no impairment was
indicated.
F-52
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Leases
The Company leases its office space, warehouses and store
locations. Certain leases contain scheduled rent increases, and
may include an initial period of free or reduced rent as an
inducement to enter into the lease agreement ("rent holidays").
The company recognizes rental expense for rent increases and rent
holidays on a straight-line basis over the terms of the underlying
leases, without regard to when rent payments are made. The
calculation of straight-line rent is based on the "reasonably
assured" lease term as defined in SFAS No. 98, Accounting for
Leases: Sale-Leaseback Transactions Involving Real Estate, Sales
Type Leases of Real Estate, Definition of the Lease Term, and
Initial Direct Costs of Direct Financing Leases - an amendment of
FASB Statements No. 13, 66 and 91 and a rescission of SFAS
Statement No. 26 and Technical Bulletin No. 79-11. This amended
definition of the lease term may exceed the initial non-cancelable
lease term.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable
and notes payable, as applicable, approximates fair value due to
the short term nature of these items and/or the current interest
rates payable in relation to current market conditions.
Revenue Recognition
Revenue from calling cards, prepaid cellular products and
broadband hardware sales are recognized upon delivery or shipment
of the hardware to broadband service providers at which time title
is passed; there are no uncertainties regarding customer
acceptance; persuasive evidence of an arrangement exits; the sales
price is fixed and determinable; and collectability is deemed
probable. The Company recognizes revenues based on Gross Revenues
Reporting pursuant to EITF 99-19.
Revenue from telecommunications services is recognized when the
services are provided.
Revenue from installation contracts is recognized on the completed
contract method. A contract is considered complete when all costs
except insignificant items have been incurred and the installation
is operating according to specifications and has been accepted by
the customer.
Revenue from software communications development is recognized
upon completion of installation and delivery to customers at which
time title is passed; there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement exits;
the sales price is fixed and determinable; and collectability is
deemed probable.
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues.
Shipping and handling costs invoiced to customers, if any, are
included in revenues.
F-53
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------
Convertible Debt
Convertible debt with beneficial conversion features, whereby the
conversion feature is "in the money" are accounted for in
accordance with guidance supplied by Emerging Issues Task Force
("EITF") No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF No. 27, "Application of Issue 98-5 to
Certain Convertible Instruments".
For convertible debt and related warrants, the recorded debt
discount is calculated at the issuance date as the difference
between the conversion price and the relative fair value of the
common stock into which the security is convertible or
exercisable. The fair value of the financial instruments related
to warrants associated with convertible promissory notes was
determined utilizing the Black-Scholes option pricing model and
the respective allocated proceeds to warrants is recorded in
additional paid-in capital.
Debt discount resulting from allocation of proceeds to the
beneficial conversion feature, it is amortized to other financing
charges over the term of the notes from the respective dates of
issuance, using the effective yield method. The relative fair
value of the beneficial conversion feature of $675,000 has been
amortized to other financing charges over the term of the notes
from the date of issuance related to the convertible debenture
issued for purchase of DTNet.
Net Loss per Share
The Company follows the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings per share" ("SFAS No.
128") in calculating its loss per share. SFAS No. 128 states basic
and diluted earnings per share are based on the weighted average
number of common shares and equivalent common shares outstanding
during the period. Common stock equivalents for purposes of
determining diluted earnings per share include the effects of
dilutive stock options, warrants and convertible securities. The
effect on the number of shares of such potential common stock
equivalents is computed using the treasury stock method or the
if-converted method, as applicable. The Company has excluded all
outstanding stock options and warrants as well as shares issued
upon conversion of debt from the calculation of diluted loss per
share because these securities are anti-dilutive.
The following table sets forth potential shares of common stock
that are not included in the diluted net loss per share
calculation because to do so would be anti-dilutive for the
periods indicated:
2008 2007
--------- ---------
Warrants issued in conjunction with financing 563,200 2,948,000
========= =========
Contingent shares potentially issuable for
acquisitions 950,000 8,241,071
========= =========
Common stock options 48,513 48,513
========= =========
F-54
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Summary of Significant Accounting Policies (Continued)
------------------------------------------
Income Taxes
The Company recognizes deferred tax assets and liabilities for the
future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes
the enactment date. If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Segmental Reporting
SFAS No. 131,"Disclosures about Segments of an Enterprise and
Related Information" establishes standards for reporting
information about operating segments on a basis consistent with
the Company's internal organization structure as well as
information about geographical areas, business segments and major
customers in financial statements. The Company has four reportable
segments: communications software development, telecommunications
services, calling card distribution, and advanced broadband
hardware distribution.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. During the quarters
ended September 30, 2008 and 2007, the Company had significant
operating losses which raise substantial doubt about the Company's
ability to continue as a going concern. The Company's plans
regarding those concerns are addressed in the following paragraph.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As shown in the accompanying financial statements, the Company has
incurred net losses of approximately $869,581 and $486,675 for the
quarters ended September 30, 2008 and 2007, respectively.
Additionally, during the quarters ended September 30, 2008 and
2007, the Company has used cash flow in operations of
approximately $796,468 and $1,297,816 in 2008 and 2007,
respectively. Accumulated deficit amounted to $23,501,928 and
$22,483,047 as of September 30 and June 30, 2008, respectively.
Currently, the operations of the Company are funded through the
issuance of debt and equity instruments as well as borrowings from
related parties. Management's plans to generate cash flow include
expanding the Company's existing operations as well as through
additional acquisitions. Additionally, the Company may raise
additional funds by raising additional capital through debt or
equity offerings in an effort to fund the Company's anticipated
expansion. There is no assurance additional capital will be
available to the Company on acceptable terms.
F-55
NOTE 3 - BUSINESS COMBINATIONS
The Company has entered into an agreement with a licensed Chinese
Telecommunications Company which will permit CHVC to offer
advanced communications services along with domestic and
international long distance service into and out of China.
Effective June 30, 2005, CHVC had issued 20,028,000 common shares
valued at $5,007,000 to acquire all of the stock of East West
Global Communications Inc., the Corporation which had obtained the
Chinese licenses. The telecommunications licenses associated with
this acquisition were valued at $5,007,000. The Company has
acquired rights to these licenses which are owned by Chinese
nationals and controlled by the Company. The licenses are required
to be utilized by entities authorized to operate in China.
Currently, one entity controlled by the Company uses the licenses.
The allocation of the purchase price was to the estimated value of
six licenses issued by the Telecommunication Bureau of Beijing.
The licenses permit mobile network telecommunication value-added
service, fax storage and forwarding services, certain internet
content service, electronic bulletin board service, internet
connection service, and call center service. The licenses expire
in 2010. The Company has assigned a 15 year life to the licenses
as it believes these will be renewed for as long as the licenses
are required to support the Company's services.
Effective January 18, 2006, the Company acquired a 65% interest in
the operations of Candid Soft Technologies Co. Ltd of Beijing
("Candidsoft"), an international office-automation software and
technology company headquartered in Beijing, China. The purchase
price was $5,171,250 in current consideration paid by issuance of
4,925,000 shares of the Company's common stock. The shares were
issued in September 2006. As the effective date of the agreement
was January 18, 2006 and management of the Company assumed control
of its operations at that time. The Company treated the stock
issuance as being effective on the effective date of the
acquisition. In addition, the total purchase price also included
contingent consideration of 2,000,000 shares of the Company's
common stock which were issued on June 30, 2008 at a value of
$1,033,000. The Company has valued the equity of Candidsoft at
$6,204,250 and $5,171,250 at September 30, 2008 and September 30,
2007, respectively.
The following table presents the allocation of the acquisition
cost of Candidsoft, including the assets acquired and liabilities
assumed, based on their fair value:
9/30/2008 9/30/2007
----------- -----------
Goodwill $ 6,056,654 $ 5,023,654
Capitalized software 69,240 69,240
Other assets 118,927 118,927
----------- -----------
Total assets acquired 6,244,821 5,211,821
Minority interest (40,571) (40,571)
----------- -----------
Net assets acquired $ 6,204,250 $ 5,171,250
=========== ===========
Effective August 1, 2006, the Company acquired a 70% interest in
the operations of Beijing Techview System Engineering Co. Ltd.
("BTSE"), a network design and installation company headquartered
in Beijing, China. The purchase price was $1,920,000 in current
consideration paid by issuance of 2,100,000 shares of the
Company's common stock. In addition, the total purchase price also
includes contingent consideration of 4,000,000 shares of the
Company's common stock issuable upon the attainment of certain
performance milestones, expiring December 31, 2009. The Company
has valued the equity of Techview at $1,920,000.
F-56
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of BTSE, including the assets acquired and liabilities
assumed, based on fair value:
Goodwill $ 2,087,852
Minority interest 61,278
-----------
Total assets acquired 2,149,130
Liabilities assumed (229,130)
-----------
Net assets acquired $ 1,920,000
===========
Effective on January 1, 2008, the Company sold its Techview
subsidiary for 2,100,000 shares of Company common stock valued at
$2,415,000. As a result of this transaction a gain of $505,733 was
recognized.
Effective December 31, 2006, the Company acquired 100% of the
common stock of VCG Technologies Inc. d/b/a DTNet Technologies
("DTNet"), a value added distributor of advanced broadband
products and services company headquartered in Florida. The
purchase price was $2,150,000 in current consideration paid by
issuance of 1,000,000 shares of the Company's common stock and
notes payable for $1,000,000. In addition, the total purchase
price also includes contingent consideration of 1,000,000 shares
of the Company's common stock issuable upon the attainment of
certain performance milestones, of which 595,360 were issued in
satisfaction of the contingent consideration. The Company has
valued the equity of DTNet at $2,150,000 upon acquisition plus
$509,521 (595,360 common shares) of contingent consideration for a
total of $2,659,521.
The following table presents the allocation of the acquisition
cost of DTNet, including the assets acquired and liabilities
assumed, based on their fair value:
Goodwill $ 2,811,028
Liabilities assumed (151,507)
-----------
Net assets acquired $ 2,659,521
===========
On March 23, 2007, the Company entered into an agreement to
acquire 100% of the common stock of StreamJet.Net, Inc.
("StreamJet"), a broadband data streaming company. The Company
issued 4,725,000 shares of common stock to shareholders of
StreamJet in escrow pending closing of a subsidiary merger
agreement. The Company had not completed the merger at March 31,
2007 because certain deliverables of StreamJet had not been
received. The shares are shown as outstanding at June 30, 2007,
but no asset value has been placed on the Company's books. On
October 22, 2007, the Company completed the merger and valued the
equity of StreamJet at $2,882,250.
F-57
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of StreamJet, including the assets acquired and liabilities
assumed, based on their fair value:
Software License $ 2,974,293
Liabilities assumed (92,043)
----------
Net assets acquired $ 2,882,250
===========
On June 14, 2007, the Company closed a subsidiary merger agreement
to acquire Phone House, Inc. ("Phone House") a leading distributor
of prepaid phone cards. The Company paid cash of $100,000, issued
a six month note for $159,179 and issued 650,000 shares of common
stock at closing. In addition, the total purchase price also
includes contingent consideration of up to 1,500,000 shares of the
Company's common stock issuable upon the attainment of certain
performance milestones, expiring June 30, 2010. The Company has
valued the equity of Phone House at $545,179 on acquisition plus
$292,500 (562,500 common shares) of contingent consideration for a
total $837,679.
The following table presents the allocation of the acquisition
cost of PhoneHouse, including the assets acquired and liabilities
assumed, based on their fair value:
Accounts receivable $ 421,519
Inventory 156,545
Property and equipment 9,900
Goodwill 754,958
------------
Total assets acquired 1,342,922
Accounts payable and accrued expenses (498,884)
Other liabilities (6,359)
------------
Total liabilities assumed (505,243)
------------
Net assets acquired $ 837,679
============
On July 19, 2007, the Company closed a subsidiary merger agreement
to acquire Dial Tone Communications, Inc. ("Dial Tone") a leading
distributor of prepaid phone cards. The Company paid cash of
$27,501, issued a three month note for $20,000 and issued 450,000
shares of common stock at closing. In addition, the total purchase
price also includes contingent consideration of up to 200,000
shares of the Company's common stock issuable upon the attainment
of certain performance milestones, expiring July 31, 2010. On June
13, 2008, the Company renegotiated the terms of acquisition and
canceled 300,000 of total 450,000 shares previously issued. The
Company has valued the equity of Dial Tone at $157,759 and
$310,759 at June 30, 2008 and 2007, respectively.
F-58
NOTE 3 - BUSINESS COMBINATIONS (Continued)
The following table presents the allocation of the acquisition
cost of Dial Tone, including the assets acquired and liabilities
assumed, based on their fair value:
9/30/2008 9/30/2007
---------- ----------
Accounts receivable $ 45,933 $ 45,933
Goodwill 111,826 264,826
---------- ----------
Total assets acquired 157,759 310,759
Total liabilities assumed None None
---------- ----------
Net assets acquired $ 157,759 $ 310,759
========== ==========
On March 31, 2008, CVC International, a subsidiary of the Company
acquired all of the assets of Brilliant Telecom Group, LLC
("Brilliant Assets") a VoIP service provider. The Company issued
1,000,000 shares of common stock at closing. The Company has
valued the Brilliant Assets at $1,040,000.
The following table presents the allocation of the acquisition
cost of the Brilliant Assets, including the assets acquired and
liabilities assumed, based on their fair value:
Software $ 125,000
Property and equipment 151,750
Goodwill 763,250
-----------
Total assets acquired 1,040,000
Total liabilities assumed None
-----------
Net assets acquired $ 1,040,000
============
F-59
NOTE 4 - BUSINESS SEGMENT INFORMATION
The Company has four reportable segments: communications software
development, telecommunications services, calling card
distribution, and advanced broadband hardware distribution. Each
of the segments is described in full in Note 1 to these financial
statements.
The accounting polices for the segments are the same as those
described in the summary of significant accounting polices.
Information about operations by business segment, as of and for
the three months ended September 30, 2008 and 2007, is as follows:
Advanced
Communications Tele- Broadband
Software communications Calling Card Hardware Corporate and
2008 Development Services Distribution Distribution Eliminations Consolidated
---- ----------- -------- ------------ ------------ ------------ ------------
Revenues $ 95,985 $ 669,453 $ 14,741,421 $ 457,493 -- $ 15,964,352
Interest Expense -- -- -- -- (25,080) (25,080)
Depreciation and
amortization (54,484) (101,309) -- (3,504) (9,947) (169,244)
Impairment of
assets -- -- -- -- -- --
Net income (loss) (47,758) (80,815) 429,914 (162,196) (1,008,726) (869,581)
Capital
expenditures -- -- -- -- -- --
Identifiable assets 303,612 497,014 2,509,941 343,399 865,299 4,519,265
Goodwill 6,056,654 763,250 960,534 2,811,028 -- 10,591,466
Other intangible
assets, net 2,787,022 4,040,900 -- -- 49,249 6,877,171
Advanced
Communications Tele- Broadband
Software communications Calling Card Hardware Corporate and
2007 Development Services Distribution Distribution Eliminations Consolidated
---- ----------- -------- ------------ ------------ ------------ ------------
Revenues $ 136,081 $ 581,634 $ 5,051,339 $ 304,456 $ -- $ 6,073,510
Interest Expense -- -- -- -- (131,611) (131,611)
Depreciation and
amortization (4,912) (101,309) -- (3,504) 5,231 (104,494)
Impairment of
assets -- -- -- -- -- --
Net income (loss) 19,429 (83,806) 79,646 (99,205) (402,738) (486,673)
Capital
expenditures -- -- -- -- -- --
Identifiable assets 157,783 331,429 822,585 326,385 786,230 2,424,412
Goodwill 5,023,654 2,087,852 739,284 2,397,579 -- 10,248,369
Other intangible
assets, net -- 4,255,950 -- -- 68,586 4,324,536
F-60
NOTE 5 - PROPERTY AND EQUIPMENT
Major categories of property and equipment at September 30 and
June 30, 2008 were as follows:
September 30, June 30,
2008 2008
--------- ---------
Computer equipment $ 430,162 $ 428,682
Furniture, fixtures and equipment 342,988 297,896
Motor vehicles 15,338 15,338
Less: accumulated depreciation
and amortization (168,390) (152,962)
--------- ---------
Total property and equipment $ 620,098 $ 588,954
========= =========
Depreciation expense totaled $36,097 and $21,044 for three months
ended September 30, 2008 and 2007, respectively.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with Statement of Financial Accounting Standards No.
142 (SFAS No. 142), the Company performs an evaluation of the fair
values of its operating segments annually, and more frequently if
an event occurs or circumstances change that may indicate that the
fair value of a reporting unit is less than the carrying amount.
The Company's balance sheet reflects goodwill of $10,591,466 and
$10,450,466 as of September 30, 2008 and June 30, 2008,
respectively.
During the three months ended September 30, 2008 and 2007, the
Company did not capitalize any costs related to internal software
development. The Company recorded amortization expense related to
the internal software development costs placed in service as of
January 18, 2006, the acquisition date of Candidsoft.
Other identifiable intangible assets consist of the acquired
licenses to provide telecom services in certain districts within
China and capitalized software. Other intangible assets as of
September 30, 2008 and 2007 are as follows:
Lives 2008 2007
----------- ----------- -----------
Telecom licenses 15 Years $ 5,007,000 $ 5,007,000
Software licenses 15 Years 2,974,293 --
Computer software 10 Years 125,249 --
Patent - software 10 Years 49,000 --
----------- -----------
Total 8,155,542 5,007,000
Less accumulated amortization (1,278,371) (751,050)
----------- -----------
$ 6,877,171 $ 4,255,950
=========== ===========
Amortization expense totaled $133,147 and $83,450 for the three
months ended September 30, 2008 and 2007, respectively.
F-61
NOTE 7 -NOTES PAYABLE
The Company's notes payable to financial institutions and third
parties consist of the following as of June 30:
2008 2007
------------ ------------
Note payable to a third party with interest at 12% and collateralized by certain
assets held by a related party. The note is due on demand. Additionally,
this note included detachable warrants to purchase 560,000 shares of the
Company's common stock, which expired May 31, 2006.
$ 25,614 $ 200,000
Note payable to an individual, due on demand. Interest accrues at 12% and is
payable monthly. The note is collateralized by certain assets held by a
related party and has detachable warrants to purchase 22,400 shares of
CHVC's common stock.
-- 5,000
Note payable to a third party with interest at 12%, and collateralized by
certain assets held by a related party. The note matures June 30, 2008.
Additionally, this note included warrants to purchase 280,000 shares of the
Company's common stock, which expired May 31, 2006.
-- 100,000
Note payable to an individual due November 2, 2007 with interest at 36% and
collateralized by certain assets
held by a related party. -- 100,000
Note payable to an individual, interest accrues at 24% and is payable monthly.
The note is collateralized by certain assets held by a related party, and
matures December 8,
2008. 50,000 50,000
Note payable to an individual with interest at 8% and collateralized by certain
assets held by a related party. The note has detachable warrants to
purchase 232,000 shares of CHVC's common stock and matures on January 23,
2008.
-- 100,000
Note payable to a third party due March 7, 2008 with interest at 18%. The note
is secured by the inventory and receivables of DTNet Technologies.
F-62
NOTE 7 -NOTES PAYABLE (Continued) 2008 2007
------------ ------------
Note payable to a financial institution due October 22, 2007, at 9.25% interest.
The note is unsecured.
-- 9,724
Note payable to an individual due December 31, 2007 at 7% interest secured by
certain stock held by DTNet
Technologies. -- 10,093
Note payable to an equipment vendor due May 1, 2011 at 12% interest secured by
computer equipment of DTNet Technologies. The Company anticipates early
payoff of this debt and accordingly has classified it as a current
liability.
47,972 74,786
Note payable to an individual due October 5, 2009 with interest at 18% and
collateralized by certain assets
held by a related party. 50,000 50,000
------------ ------------
Subtotal 173,586 989,879
Less discounts -- --
------------ ------------
173,586 989,879
Less current portion (123,586) (939,879)
------------ ------------
$ 50,000 $ 50,000
============ ============
The Company's notes payable to related parties consist of the
following as of June 30:
2008 2007
------------ ------------
Note payable to a related party due December 14, 2007 with
interest at 12%. The note is collateralized by stock of
the Company. $ -- $ 149,179
Convertible debenture payable to a related party due December 31, 2008 with
interest at 8%. The note is secured by all of the common stock of the
Company's DTNet subsidiary and is convertible into 1,566,000 shares of the
Company's common stock at a conversion price of $0.50. The option to
convert this note was exchanged for 637,536 shares of common stock on March
6, 2008.
-- 168,750
Company's VCG Technologies, Inc., d/b/a DTNet Technologies
subsidiary payable to a related party due December 31,
2008 with interest at 8%. The note is secured by all of
the common stock of the Company's DTNet subsidiary. 310,423 --
F-63
NOTE 7 -NOTES PAYABLE (Continued)
2008 2007
------------ ------------
310,423 317,929
Less current portion (310,423) (149,179)
------------ ------------
$ -- $ 168,750
============ ============
The future maturities of the notes payable to third parties and
related parties are as follows:
2008 $ 434,009
2009 50,000
2010 --
2011 --
------------
Total $ 484,000
============
F-64
NOTE 8 -EQUITY
Preferred Stock
All of the Company's preferred stock shares are directly or
indirectly owned by entities that are owned or controlled by an
officer and director of the Company. As such, this officer has all
voting rights relating to this class of stock.
During the year ended June 30, 2006, the Company's board of
directors authorized the issuance of up to 20,000 shares of $0.001
par value Series A Preferred Stock. The Series A Preferred Stock
is preferred as to dividends and liquidation over common stock,
has a liquidation value of $1,000 per share, and has a dividend
rate of 12% of liquidation value per year.
Preferred shares issued during the three months ended September
30, 2008 are as follows:
Number of
Category Shares Value
-------- ------ -----
Issuance in exchange for common 2,000 $ 800,000
stock
On September 30, 2008, the Company redeemed 455 shares of Series A
Preferred stock for $454,500 from an affiliated entity.
Common Stock
------------
During the three months ended September 30, 2008, the Company
issued common stock as follows:
Number of
Category Shares Value
-------- ------ -----
Services 85,000 $ 42,500
Net cash invested 2,789,809 512,636
Assets exchanged
In connection with acquisitions 287,500 142,750
Cancellation of debt of $736,651
(including accrued interest of
$86,651) in 2007 and
cancellation of debt
conversion feature
Conversions
27,200 5,000
In exchange for shares of series
A preferred stock.
Total 3,189,509 $ 702,886
========= =========
F-65
Common Stock (Continued)
------------------------
During the quarter ended September 30, 2008, the Company issued
2,058,144 common shares pursuant to a stock offering under SEC
Regulation S. The Company hereby discloses that the shares would
have had a value of approximately $1,017,120 had the shares been
sold on the OTC (Pink Sheets) market, that discounts and
commissions would total $711,984, and net proceeds received by the
Company were $305,136.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
---------------------
On August 31, 2006, the Company entered into an employment
agreement with Bill Burbank, the Company's Chief Executive
Officer. The employment agreement is for an initial term of three
years with automatic renewals on six month intervals thereafter;
and provides entitlement to a base salary equal to $15,500 per
month with discretionary cash or stock option bonuses based on
performance.
Litigation
----------
The Company is involved in various claims and legal proceedings in
the ordinary course of its business activities. In addition, the
Company has been notified that it is under review by the SEC to
examine its history of financings, stock issuances and press
releases chronicling the Company's development. The company had
fully cooperated with the SEC and has provided all requested data.
The Company believes that any potential liability associated with
the ultimate outcome of these matters will not have a material
adverse effect on its financial position or results of operations.
Long Term Contingent Liability
------------------------------
During the quarter ended March 31, 2008 the Company issued
3,000,000 shares of common stock to its subsidiary Streamjet. The
shares were pledged as collateral to a third party on the debt of
an unrelated borrower which is the licensor of a software license
owned by Streamjet. Streamjet received a $1,500,000 note from the
borrower which bears interest at 12% plus 25,000 shares of the
borrower's common stock per month, and is secured by all of the
assets of the borrower. The note may be repaid by delivery of the
3,000,000 Company shares back to Streamjet, and because of this
redemption feature the $1,500,000 value of the stock is shown as a
long term contingent liability by the Company.
Subsequent to the June 30, 2008 year end the 3,000,000 shares of
common stock were returned to StreamJet, the $1,500,000 note
receivable was repaid and the $1,500,000 long term contingent
liability was eliminated.
F-66
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases
----------------
The Company's rent expense amounted to $39,441 and $40,382 for the
three months ended September 30, 2008 and 2007, respectively. The
Company has various long-term non-cancelable lease commitments for
its offices, warehouse and other facilities which expire through
2011. The minimum rental commitments under non-cancelable
long-term operating leases during the next five years are as
follows:
2009 113,531
2010 114,847
2011 50,215
2012 50,215
----------
Total $ 328,808
==========
NOTE 10 - RELATED PARTY TRANSACTIONS
Related Party Receivables
-------------------------
One of the Company's subsidiaries has advanced funds to certain
employees. Such advances are not interest bearing and are
unsecured. Management believes that these assets are collectible
as they relate to relationships with continuing employees.
Related Party Payables
----------------------
Certain companies owned or controlled by a major shareholder,
director and officer of CHVC, and other related parties has loaned
funds to the Company secured by all of the assets of the Company.
These advanced funds are due on demand and bear interest at 18%.
The balance as of September 30 and June 30, 2008 was $343,790 and
$303,790, respectively.
Certain individuals who are employees and or directors of the
Company have advanced funds to the Company on unsecured terms
bearing interest at 8%. The balance on these advances was $13,990
and $13,990 as of September 30 and June 30, 2008, respectively.
An employee of one of the Company's China subsidiaries has
advanced funds to the Company on unsecured terms. This advance
does not bear interest. The balance due on this advance was
$72,761 and $87,040 as of September 30 and June 30, 2008.
Related Party Notes
-------------------
As disclosed in Note 7, in connection with the Company's
acquisition of its DTNet subsidiary, the Company is indebted to a
Company controlled by the former owners of DTNet. One of those
owners remains a major shareholder, director, officer and employee
of CHVC. The note is secured by all of the common stock of DTNet
and bears interest at 8% and matures on December 31, 2008. The
balance on that note was $675,000 as of September 30, 2007 and it
was replaced by one note with balance of $310,423 as of September
30 and June 30, 2008.
F-67
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
Interest paid under these notes was $4,630 and none for the
quarters ended September 30, 2008 and 2007.
Joint Ventures
--------------
The Company has entered into a joint venture with WRIO, Corp.,
dated May 31, 2006, wherein WRIO, Corp. and the Company, through
contribution of $1,000 each, are 50/50 partners in the
exploitation of wireless broadband technology owned by WRIO, Corp.
in China. WRIO, Corp is controlled by an officer and director of
the Corporation. No revenues were earned under this joint venture
during 2008 and 2007, accordingly, no revenues or expense have
been reflected in these financial statements.
Preferred Stock
---------------
As disclosed Note 8, all of the Company's preferred stock shares
are directly or indirectly owned by entities that are owned or
controlled by an officer and director of the Company. As such,
this officer has all voting rights relating to this class of
stock.
Guarantees
----------
As disclosed in Note 7, certain of the Company's notes payable due
to third parties have been guaranteed by companies owned or
controlled by an officer and director of the Company.
NOTE 11 - CONCENTRATION OF RISK
The Company relied on one customer for approximately $8,063,332 of
revenue, representing approximately 50% of total revenues for the
quarter ended September 30, 2008. At September 30, 2008, accounts
receivable from this customer was $199, 912. The Company did not
have any individual customers or group of customers from which
revenues exceeded 10% of total revenues for the quarter ended
September 30, 2007.
Assets in Foreign Country - The Company has assets related to its
China operations which are located in the Peoples Republic of
China. Assets held outside of the United States were as follows:
September 30, June 30,
2008 2008
------------ ------------
Tangible assets $ 303,612 $ 345,230
Goodwill and other identifiable
intangible assets 12,765,826 12,851,598
------------ ------------
Total assets $ 13,069,438 $ 13,196,828
============ ============
F-68
NOTE 12 - INCOME TAXES
China Taxation - Prior to January 1, 2008, the Company's
subsidiaries were governed by the previous Income Tax Law (the
"Previous IT Law") of China. Under the Previous IT Law, the
Company's subsidiaries were generally subjected to enterprise
income taxes at a statutory rate of 33% (30% state income tax plus
3% local income tax) or 15% for qualified new and high technology
enterprises. Effective January 1, 2008, the new Enterprise Income
Tax Law (the "EIT Law") in China supersedes the Previous IT Law
and unifies the enterprise income tax rate for FIEs at 25%. New
and high technology enterprises will continue to enjoy a
preferential tax rate of 15% but must meet the new set of criteria
defined under the EIT Law and related regulations. The EIT Law
provides a five-year transitional period for certain entities that
enjoyed a favorable income tax rate of less than 25% under the
Previous IT Law and were established before March 16, 2007, to
gradually increase their rates to 25%. The EIT Law also imposes a
withholding income tax of 10% on dividends distributed by a
Foreign-Invested Enterprises ("FIE") to its immediate holding
company outside of China, if such immediate holding company is
considered as a no-resident enterprise without any establishment
or place within China or if the received dividends have no
connection with the establishment or place of such immediate
holding company within China, unless such immediate holding
company's jurisdiction of incorporation has a tax treaty with
China that provides for a different withholding arrangement. Such
withholding income tax was exempted under the Previous IT Law. In
accordance with APB Option No. 23, "accounting for Income Taxes -
Special Area," all undistributed earnings are presumed to be
transferred to the parent company and are subject to the
withholding taxes. The withholding tax imposed on the dividend
income will reduce the Company's net income. If a withholding tax
were imposed to retained earnings prior to January, 2008, the
Company would elect to reinvest these retained earnings in PRC.
Accordingly, the Company has not recorded any withholding tax on
the retained earnings of its FIEs in China.
The EIT Law also provides that an enterprise established under the
laws of foreign countries or regions but whose "de facto
management body" is located in the PRC be treated as a resident
enterprise for PRC tax purposes and consequently be subject to the
PRC income tax at the rate of 25% for its global income. The
Implementing Rules of the EIT Law merely defines the location of
the "de facto management body" as "the place where the exercising,
in substance, of the overall management and control of the
production and business operation, personnel, accounting,
properties, etc., of a non-PRC company is located." The
determination of tax residency requires a review of surrounding
facts and circumstances of each case. If the Company is treated as
a resident enterprise for PRC tax purposes, the Company will be
subject to PRC tax on worldwide income at a uniform tax rate of
25% starting from January 1, 2008.
Like its predecessor, the EIT Law mainly provides a framework for
general income tax provisions. There are currently divergent views
on ho the EIT Law will be implemented. Details on the definition
of numerous terms as well as the interpretation and specific
application of various provisions are left to the detailed
implementing regulations and supplementary tax circulars, which
are still being issued. The Company's ultimate effective tax rate
will depend on many factors, including but not limited to, whether
certain of the Company's subsidiaries in China will receive the
new and high technology enterprise status under the new criteria.
The current and deferred portion of income tax expenses of the
Company's China subsidiaries, which were included in the
consolidated statements for the periods presented have no
significant deferred tax assets or liabilities and the statutory
rate and effective rate for China operations approximates 30%.
F-69
NOTE 12 - INCOME TAXES (Continued)
The following table represents the effective tax rate of the Company:
September 30, September 30,
2008 2007
-------- --------
Loss from operations $869,581 $486,675
Tax benefit:
Federal current -- --
Federal deferred -- --
U.S. State -- --
Foreign -- --
-------- --------
Total tax benefit $ -- $ --
======== ========
Effective tax benefit rate 0.0% 0.0%
======== ========
The difference between the tax benefit rate and the statutory
benefit rate is as follows:
September 30, September 30,
2008 2007
-------- --------
Statutory benefit rate 34.0% 34.0%
Inability to utilize operating
loss carry forwards (34.0%) (34.0%)
Other
-------- --------
Effective tax benefit rate 0.0% 0.0%
======== ========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets are as follows:
September 30, June 30,
2008 2008
Deductible temporary differences: ------------ ------------
U.S. federal deferred operating loss $ 3,887,494 $ 3,608,074
State deferred operating loss 391,391 350,300
Foreign deferred operating loss 121,250 106,923
------------ ------------
Less: valuation allowance (4,400,135) (4,065,297)
------------ ------------
Total tax assets $ - $ -
============ ============
At September 30, 2008, the Company had carry forward losses for
income tax purposes of approximately $11,433,806 that may be
offset against future taxable income. Due to the uncertainty
regarding the success of future operations, management has
recorded a valuation allowance equal to 100% of the resultant
deferred tax asset.
F-70
NOTE 12 - INCOME TAXES (Continued)
The carry forward losses expire in future years through 2029 as
follows:
Expiration Year Amount
------
2025 $ 457,895
2026 1,499,867
2027 4,790,794
2028 3,863,427
2029 821,823
NOTE 13 - STOCK BASED COMPENSATION
The Company has granted stock options through certain informal
stock option plans to directors, officers and employees. These
options vest monthly as earned with no expiration date.
Prior to July 1, 2005, the Company accounted for these plans under
the recognition measurement provisions of APB No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"), and related
interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123").
Effective with its fiscal year beginning July 1, 2005, the Company
adopted the fair value recognition provisions of SFAS No. 123R,
Share-Based Payment ("SFAS No. 123R"), using the
modified-prospective-transition method. Under that transition
method, compensation cost is recognized in the periods after
adoption for (i) all stock option awards granted or modified after
December 31, 2005 based on the grant-date fair value estimated in
accordance with the
provisions of SFAS 123R and (ii) all stock options granted prior
to but not yet vested as of July 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of
SFAS 123. The results for prior periods were not restated.
Stock-based compensation cost of $0 and $11,802 for the years
ended June 30, 2008 and 2007, respectively. Related deferred
income tax asset was $0 as of June 30, 2008 and 2007.
The following table summarizes the allocation of stock-based
compensation expense under SFAS 123R:
September 30, September 30,
2008 2007
---------- ----------
Selling, general and administrative $ 0 $ 0
---------- ----------
Total stock-based compensation expense included in
operating expenses $ 0 $ 0
---------- ----------
Total stock-based compensation expense $ 0 $ 0
========== ==========
F-71
NOTE 13 - STOCK BASED COMPENSATION (Continued)
The fair value of stock option awards granted on or after July 1,
2005 was determined using a Black-Scholes-Merton option-pricing
model utilizing a range of assumptions related to dividend yield,
volatility, risk-free interest rate, and employee exercise
behavior. Dividend yield was determined to be $0 as these have not
been historically paid. Expected volatility is based on the
historical volatility calculated from the historical values of the
Company's stock prices. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of the grant.
The Company estimates forfeitures based on historical data.
On November 10, 2005, the FASB issued FASB Staff Position No.
123R-3, Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. The Company has elected to adopt
the shortcut method provided by the FASB Staff Position for
determining the initial pool of excess tax benefits available to
absorb tax deficiencies related to stock-based compensation
subsequent to the adoption of SFAS 123R. The shortcut method
includes simplified procedures to establish the beginning balance
of the pool of excess tax benefits (the "APIC Tax Pool") and to
determine the subsequent effect on the APIC Tax Pool and Cash Flow
Statements of the tax effects of employee stock-based compensation
awards.
Prior to adoption of SFAS 123R, all tax benefits from deductions
resulting from the exercise of stock options were presented as
operating cash flows in the Cash Flow Statement. SFAS 123R
requires the cash flow tax benefits resulting from tax deductions
in excess of the compensation cost recognized (excess tax
benefits) to be classified as financing cash flows. Excess tax
benefits aggregating $0 were reported in Financing Activities for
the quarters ended September 30, 2008 and 2007.
A summary of options granted and outstanding is presented below:
September 30, 2008
-------------------------------------
Weighted average
Number of options exercise price
----------------- --------------
Outstanding at beginning of period 48,513 $ 0.50
Granted
-- --
Exercised
-- --
Forfeited
-- --
------ ------
Outstanding at end of period 48,513 $ 0.50
------ ------
Exercisable at end of period 48,513 $ 0.50
====== ======
The weighted average fair value of shares granted was $0.50 and due
April 2009.
F-72
NOTE 14 - WARRANTS
The Company has issued warrants to purchase its common stock in
connection with financing transactions. As of September 30, 2008,
the warrants are exercisable and have terms as follows:
In connection
with
Exercise Price financing
per Share Termination Date transactions Shares
--------- ---------------- ------------ ------
$0.40 January 2008 350,000 350,000
$0.40 January 2009 213,200 213,200
Total 563,200 563,200
======= =======
The Company issued warrants to purchase an aggregate of 9,161,420
shares of the Company's common stock at prices ranging from $0.40
to $1.00 per share in connection with financing transactions. The
warrants vested immediately and had expiration dates ranging from
1 to 2 years from the date of issuance. The fair value of the
warrants at each reporting or measurement date was determined
based on the Black-Scholes option pricing model. The fair value of
the warrants was calculated with the following weighted average
assumptions: no dividend yield; expected volatility of 42%; risk
free rates ranging from 3.26% to 5.18% and an expected life equal
to the vesting period of 1 month.
The aggregate fair value of the warrants was $1,407,497. For the
quarters ended September 30, 2008 and 2007, $0 and $14,126,
respectively was charged to other financing charges with the
offset to additional paid-in capital. Of these warrants, 800,000
expired unexercised in January 2008.
F-73