UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended September 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number : 000-53268
CHINA WI-MAX COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 61-1504884
- ------------------------ ------------------------
(State of Incorporation) (IRS Employer ID Number)
1905 Sherman Street, Suite 335, Denver, Colorado 80203
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(Address of principal executive offices)
303-668-0199
--------------------------
(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 13, 2008, there were 10,144,000 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Balance Sheets -September 30, 2008 (unaudited) and
December 31, 2007 F-1
Statements of Operations (unaudited) -
Nine and Three months ended September 30, 2008 and 2007 and
From July 5, 2006 (Inception) to September 30, 2008 F-2
Statements of Changes in Shareholders' Deficit (Unaudited) - From July
5, 2006 (Inception) to September 30, 2008 F-3
Statements of Cash Flows (Unaudited) - Nine months ended September 30,
2008 and 2007 and From July 5, 2006 (Inception) to September
30, 2008 F-4
Notes to the Financial Statements (Unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable 4
Item 4. Controls and Procedures 4
Item 4T. Controls and Procedures 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -Not Applicable 5
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 5
Item 3. Defaults Upon Senior Securities - Not Applicable 5
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 6
Item 5. Other Information - Not Applicable 6
Item 6. Exhibits 6
SIGNATURES 7
PART I
ITEM 1. FINANCIAL STATEMENTS
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
ASSETS
September 30, December 31,
2008 2007
------------------ ------------------
Unaudited
Current assets:
Cash $ 120,984 $ 182,401
Receivable from issuance of common stock (Note 6) - 2,570
Accounts receivable (Note 7) 21,882 -
Prepaid expenses 17,765 8,019
------------------ ------------------
Total current assets 160,631 192,990
------------------ ------------------
Property and equipment (Note 3) 506,549 -
------------------ ------------------
Other assets:
Debt-issue costs, net 1,261 3,162
Deposits for acquisition of long-lived assets (Note 3) 368,042 491,666
------------------ ------------------
369,303 494,828
------------------ ------------------
Total assets $ 1,036,483 $ 687,818
================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 45,001 $ 87,501
Accrued interest 144,397 16,380
Convertible notes payable (Note 4) 1,004,300 914,000
------------------ ------------------
Total current liabilities 1,193,698 1,017,881
------------------ ------------------
Non-current liabilities:
Convertible notes payable (Note 4) 1,053,200 -
------------------ ------------------
Total liabilities 2,246,898 1,017,881
------------------ ------------------
Shareholders' deficit (Note 6):
Common stock; $.001 par value; 50,000,000 shares authorized;
10,144,000 and 9,770,000 shares issued and outstanding as of
September 30, 2008 and December 31, 2007, respectively 10,144 9,770
Additional paid-in capital 358,736 113,295
Accumulated other comprehensive income 25,466 -
Deficit accumulated during the development stage (1,604,761) (453,128)
------------------ ------------------
Total shareholders' deficit (1,210,415) (330,063)
------------------ ------------------
$ 1,036,483 $ 687,818
================== ==================
See notes to unaudited financial statements.
F-1
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Period from
July 5, 2006
Three months Three months Nine months Nine months (inception)
ended ended ended ended through
September 30, September 30, September 30, September 30, September 30,
2008 2007 2008 2007 2008
--------------- ---------------- ---------------- ---------------------------------
Revenue $ 15,195 $ - $ 15,195 $ - $ 15,195
Cost of revenue (11,670) - (11,670) - (11,670)
--------------- ---------------- ---------------- ---------------- ---------------
Gross margin 3,525 - 3,525 - 3,525
Operating expenses:
General and administrative expense (297,035) (16,340) (1,026,084) (79,884) (1,460,724)
--------------- ---------------- ---------------- ---------------- ---------------
Operating loss (293,510) (16,340) (1,022,559) (79,884) (1,457,199)
--------------- ---------------- ---------------- ---------------- ---------------
Other expense:
Interest expense (Note 4) (49,387) - (129,074) - (147,562)
--------------- ---------------- ---------------- ---------------------------------
Net loss (342,897) (16,340) (1,151,633) (79,884) (1,604,761)
Foreign currency translation gain 25,466 - 25,466 - 25,466
--------------- ---------------- ---------------- ---------------------------------
Comprehensive loss $ (317,431) $ (16,340) $ (1,126,167) $ (79,884) $ (1,579,295)
=============== ================ ================ ================ ===============
Basic and diluted net loss per share $ (0.03) $ * $ (0.12) $ (0.01)
=============== ================ ================ ================
Weighted average number of common
shares outstanding 10,105,000 9,000,000 9,959,179 6,361,319
=============== ================ ================ ================
*Less than ($0.01) per share.
See notes to unaudited financial statements.
F-2
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
STATEMENTS OF SHAREHOLDERS' DEFICIT
PERIODS FROM JULY 5, 2006 (INCEPTION) THROUGH SEPTEMBER 30, 2008
Accumulated Deficit
Additional other accumulated Total
Common stock paid-in comprehensive during the share-
----------------------------- development holders'
Shares Amount capital income stage Deficit
----------- ------------ ----------- ---------- --------------------------
Common stock issued for cash between
July 5, 2006 (inception) and December
31, 2006 at par value ($0.001 per
share) 3,825,000 $ 3,825 $ - $ - $ - $ 3,825
Net loss - - (8,538) (8,538)
----------- ------------ ----------- ------------ ------------ ------------
Balances, December 31, 2006 3,825,000 3,825 - - (8,538) (4,713)
Common stock issued for cash between
January and June 2007 at par value
($0.001 per share) 5,230,000 5,230 - - - 5,230
Common stock issued for cash between
June and December 2007 at par value
($0.001 per share) 260,000 260 - - - 260
Common stock issued for services,
valued at $0.25 per share (Note 6) 455,000 455 113,295 - - 113,750
Net loss - - - - (444,590) (444,590)
----------- ------------ ----------- ------------ ------------ ------------
Balances, December 31, 2007 9,770,000 9,770 113,295 - (453,128) (330,063)
Shares of common stock cancelled at
par value (unaudited) (260,000) (260) - - - (260)
Common stock issued for services,
valued at $0.25 per share (Note 6)
(unaudited) 634,000 634 157,866 - - 158,500
Fair value of options vesting during
the period (Note 6) (unaudited) - - 87,575 - - 87,575
Net loss (unaudited) - - - - (1,151,633) (1,151,633)
Other comprehensive income adjustments
Gain on foreign currency translation
(unaudited) - - - 25,466 - 25,466
----------- ------------ ----------- ------------ ------------ ------------
Balances, September 30, 2008 (unaudited) 10,144,000 $ 10,144 $ 358,736 $ 25,466 $(1,604,761) $(1,210,415)
=========== ============ =========== ============ ============ ============
See notes to unaudited financial statements.
F-3
CHINA WI-MAX COMMUNICATIONS,INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period from
July 5, 2006
(Inception)
through
Nine months ended Nine months ended September 30,
September 30, 2008 September 30, 2007 2008
-------------------- -------------------- -----------------
Cash flows from operating activities:
Net loss $ (1,151,633) $ (79,884) $ (1,604,761)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services 158,500 25,000 272,250
Non-cash stock option expense (Note 6) 87,575 - 87,575
Amortization of debt-issuance costs 1,901 - 4,009
Changes in assets and liabilities:
Increase in accounts receivable (21,882) (2,730) (21,882)
Increase in prepaid expenses (9,746) - (17,765)
Increase (decrease) in accounts payable (42,500) 22,303 45,001
Increase in accrued interest 128,017 - 144,397
----------------- ----------------- -----------------
Net cash used in operating activities (849,768) (35,311) (1,091,176)
-------------------- -------------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (199,883) - (481,083)
Deposits for acquisition of long-lived assets (157,576) (35,000) (368,042)
-------------------- -------------------- --------------------
Net cash used in investing activities (357,459) (35,000) (849,125)
-------------------- -------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable 1,143,500 101,500 2,057,500
Proceeds from issuance of common stock 2,310 5,075 9,055
Debt issue costs - - (5,270)
-------------------- -------------------- -----------------
Net cash provided by financing activities 1,114,810 106,575 2,061,285
-------------------- -------------------- -----------------
Net (decrease) increase in cash (61,417) 36,264 120,984
Cash, beginning of period 182,401 1,116 -
-------------------- -------------------- -----------------
Cash, end of period $ 120,984 $ 37,380 $ 120,984
==================== ==================== =================
Supplemental disclosure of non-cash investing
and financing activities:
Receivable from issuance of common stock $ - $ 5,430 $ -
==================== ==================== =================
See notes to unaudited financial statements.
F-4
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
1. Organization, basis of presentation, going concern and management's
plans:
Organization and basis of presentation:
China Wi-Max Communications, Inc. (the "Company") is a development
stage telecommunications broadband provider. The Company is a Nevada
corporation formed in July 2006, and is focused on providing commercial
customers with high bandwidth connections throughout first and second
tier markets in China. For accounting purposes, the Company is
classified as a development stage enterprise in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 7.
The Company is implementing plans to build, own, and operate
metropolitan area Internet Protocol (IP)-based broadband networks
using a combination of Company-owned optical fiber and licensed Wi-Max
(Worldwide Interoperability for Microwave Access) capable wireless
spectrum. These networks are designed to provide the reliability,
redundancy, scalability, and other features expected of a carrier
class network. The Company intends to provide value-added services
such as IP transport, Internet Service Provider (ISP) services, and
broadband internet access. The Company plans to position itself to
bypass the local loop facilities of the current local exchange
carriers to connect enterprise customers directly to a global
communications network.
In September 2008, the Company effectuated the formation and control of
two wholly-owned subsidiaries in China: Beijing Yuan Shan Da Chuan
Business Development Ltd. ("Da Chuan") and Beijing Yuan Shan Shi Dai
Technology Ltd. ("Shi Dai"). Da Chuan has contractual agreements with
two local Chinese companies to use licenses to deliver "Value Added
Telecommunications Services". Shi Dai owns optical fiber assets located
in Beijing and Hangzhou; Shi Dai's purchases of optical fiber assets
were made at the direction of and with funding from China Wi-Max prior
to consolidation. The Company began generating revenue in September
2008, when it began initial operation of its network in Beijing.
The Company's financial statements as of September 30, 2008, and for
the period from September 24, 2008 (the date at which the Company
gained 100% ownership of Da Chuan and Shi Dai) through September 30,
2008, include the accounts of Da Chuan and Shi Dai.
The accompanying unaudited interim financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such regulations.
The unaudited condensed consolidated financial statements reflect all
adjustments and disclosures that are, in the opinion of management,
necessary for a fair presentation. Except as described above, all such
adjustments are of a normal recurring nature. The results for the
nine-month period ended September 30, 2008 are not necessarily
indicative of the results expected for the year ending December 31,
2008. These interim financial statements should be read in conjunction
with the financial statements and notes included in the Company's
Registration Statement on Form 10/A, as filed with the SEC.
F-5
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
1. Organization, basis of presentation, going concern and management's
plans (continued):
Going concern and management's plans:
The accompanying unaudited interim financial statements have been
prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the
normal course of business. The Company reported a net loss of
approximately $1,152,000 for the nine months ended September 30, 2008,
and a working capital deficiency and shareholders' deficit of approxi-
mately $1,033,000 and 1,210,000, respectively, at September 30, 2008.
The Company has a limited operating history and minimal revenue produc-
ing operations. In addition, the Company does not have a revolving loan
agreement with any financial institution, nor can the Company provide
any assurance it will be able to enter into any such agreement in the
future, or be able to raise funds through a future issuance of debt or
equity. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and
classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
To address its current cash flow concerns, the Company completed a $1
million note issuance consisting of 12% convertible notes maturing in
December 2008, convertible at $0.25 per share. The Company is in the
process of raising additional capital through a $1 million bridge loan,
subsequently increased to $1.5 million, which consists of 10%
convertible notes maturing in December 2009, convertible at $0.50 per
share. The 10% convertible note debt issuance is expected to be
completed in the fourth quarter of 2008. In addition, the Company is
planning a $5 million private placement of stock in early 2009.
Management anticipates that the proceeds from the bridge loans and the
private placement will be used primarily to acquire long-lived assets
and to begin marketing the Company's services, including the
implementation of required infrastructure.
2. Summary of significant accounting policies:
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-6
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
2. Summary of significant accounting policies (continued):
International operations:
The Company's foreign operations are located in China. Foreign
transactions are conducted in currencies other than the U.S. dollar,
primarily the Chinese Renmimbi (RMB). As a result, the Company is
exposed to movements in foreign currency exchange rates. In addition,
the Company is subject to risks including adverse developments in the
foreign political and economic environment, trade barriers, managing
foreign operations and potentially adverse tax consequences. There can
be no assurance that any of these factors will not have a material
negative impact on the Company's financial condition or results of
operations in the future.
Long-lived assets:
Management assesses the carrying values of long-lived assets for
impairment when circumstances indicate that such amounts may not be
recoverable from future operations. Generally, assets to be held and
used are considered impaired if the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset.
Debt issue costs:
Debt issue costs of approximately $5,000 are being amortized to
interest expense on a straight-line basis over the term of the related
debt, which matures in December 2008 (Note 4). Accumulated amortization
is approximately $4,000 as of September 30, 2008.
Convertible securities:
Convertible notes are accounted for in accordance with the provisions
of Emerging Issues Task Force ("EITF") Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features ("EITF
98-5") and EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments ("EITF 00-27"). Under these
pronouncements, the Company, where applicable, records a beneficial
conversion feature amortized as additional discount on debt and
recorded as expense. The Company has also considered EITF No. 05-2, The
Meaning of Conventional Convertible Debt Instruments and EITF Issue No.
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock.
Revenue recognition:
The Company has minimal revenue-producing operations. The Company
recognizes revenue pursuant to Securities and Exchange Commission,
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue Recognition.
Consistent with the requirements of these SABs, revenue will be
recognized only when: a) persuasive evidence of arrangement exists, b)
delivery has occurred, c) the seller's price to the buyer is fixed, and
d) collectibility is reasonably assured.
F-7
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
2. Summary of significant accounting policies (continued):
Revenue recognized through September 30, 2008 represents broadband
service revenue which has been recognized as the service was purchased.
Loss per share:
Basic loss per share of common stock is computed based on the weighted
average number of common shares outstanding during the year. Common
shares issuable upon the conversion of stock options and debt
securities (8,323,600 at September 30, 2008; 406,000 at September 30,
2007) are not considered in the calculation, as the effect would be
antidilutive. Therefore, diluted loss per share is equivalent to basic
loss per share.
Recently issued and adopted accounting pronouncements:
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment
to FASB Statement No. 115. This statement permits companies to choose
to measure many financial instruments and other items at fair value.
The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. This statement is
expected to expand the use of fair value measurement of accounting for
financial instruments, and the fair value option established by this
statement permits all entities to measure eligible items at fair value
at specified election dates. This statement was effective for the
Company on January 1, 2008. The Company did not apply the fair value
option to any of its outstanding instruments, therefore SFAS No. 159
did not have an impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurement. This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157
does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. This statement is effective
for fiscal years beginning after November 15, 2007. SFAS No. 157 was
effective for the Company on January 1, 2008 for all financial assets
and liabilities. For non-financial assets and liabilities, SFAS No. 157
is effective for the Company on January 1, 2009. Management is
currently determining the effect that the adoption of SFAS No. 157 may
have on its financial statements beyond it's current fiscal year.
F-8
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
2. Summary of significant accounting policies (continued):
In March 2008, the FASB issued SFAS No. 161, Disclosures about Deriva-
tive Instruments and Hedging Activities. SFAS No. 161 requires addition
-al disclosure related to derivative instruments and hedging
activities. The provisions of SFAS No. 161 are effective for fiscal
years and interim periods beginning after November 15, 2008, and the
Company is currently evaluating the impact of adoption.
3. Property and equipment and deposits for acquisition of long-lived
assets:
As of September 30, 2008, property and equipment consists of fiber
optic cable owned by Shi Dai and located in Beijing and Hangzhou,
China. These assets are recorded at cost and are depreciated over their
estimated useful lives of 25 years. As these assets were placed in
service in late September 2008, depreciation expense and related
accumulated depreciation was immaterial for the period.
As of September 30, 2008, the Company has made a non-refundable deposit
of $368,042 with a Chinese company, Beijing Gao Da Yang Guang
Communication Technology Ltd. ("Gao Da") in Beijing, China. Gao Da, at
the direction of the Company, is acquiring long-lived assets on the
Company's behalf. These long-lived assets are to consist of an ISP and
three wireless licenses and are to be held by Gao Da for use by the
Company. The Company is planning to acquire a 50% ownership interest in
Gao Da, at a future date. The Company currently has a pledge of all
shares of Gao Da collateralizing the deposits. In September 2008, Da
Chuan has entered into a contractual agreement to use the licenses of
Gao Da for business operations (Note 7).
4. Convertible notes payable:
In June 2007, the Company authorized the sale of up to $1 million of
convertible notes payable. During January 2008, the Company
oversubscribed the offering and issued $1,004,300 of notes payable,
which mature on December 31, 2008, bear interest at 12% per annum, and
are unsecured. Principal and interest are convertible at any time into
shares of the Company's common stock at $0.25 per share, at the option
of the note holders. In addition, in March 2008, the Company authorized
the sale of up to an additional $1 million of convertible notes
payable. As of September 30, 2008, the Company issued $1,053,200 of
notes payable, which mature on December 31, 2009, bear interest at 10%
per annum, and are unsecured. Principal and interest are convertible at
any time into shares of the Company's common stock at $0.50 per share,
at the option of the note holders.
5. Income taxes:
Based on statutory rates, the Company's expected income tax benefit was
approximately $391,000 and $27,000 for the nine month periods ended
September 30, 2008 and 2007, respectively., The expected income tax
benefit differs from the actual benefit of $0 each period, due
primarily to the valuation allowance. As the Company is unable to
determine that it is more likely than not that future taxable income of
the Company will be sufficient to utilize the operating loss
carryforwards, a valuation allowance has been established against these
assets.
F-9
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
6. Shareholders' deficit:
Receivable from issuance of common stock:
At December 31, 2007, the Company had a receivable for common stock
issued of $2,570. All payments were received subsequent to the balance
sheet date.
Stock option plan:
Effective January 1, 2008, the Company established a Stock Option Award
and Compensation Plan (the "Plan") covering up to four million shares
of the Company's common stock. Any employee, consultant or Director of
the Company and its subsidiaries are eligible to participate. The
exercise prices of the options granted were determined by the Plan
committee, whose members are appointed by the Board of Directors, and
the exercise prices are generally to be established at the estimated
fair value of the Company's common stock at the date of grant. Options
are to be granted with terms not to exceed five years. The Company
granted 2,600,000 options during the first quarter of 2008 with an
exercise price of $.25 per share and cancelled 400,000 of these grants
in the second quarter of 2008.. There were 581,250 vested options as of
September 30, 2008. Before any employee options may be delivered or
exercised, the shareholders must ratify the Plan.
The compensation committee may award incentive stock options and
nonqualified stock options under the 2008 Plan. Only employees may
receive incentive stock options. The compensation committee also
determines the exercise price of each option. However, the exercise
price of an incentive stock option may not be less than 100% of the
fair market value of the underlying shares on the date of grant. The
exercise price of any option may not be less than the par value of the
underlying share(s).
The compensation committee determines the term of each option, but no
term may exceed 10 years from the date of grant. The compensation
committee also determines at what time or times each option may be
exercised and any conditions that must be met before an option may be
exercised. Options may be made exercisable in installments, and the
exercisability of options may be accelerated by the compensation
committee.
The Company recorded total stock-based compensation of $15,650 and
$87,575 for the three and nine months ended September 30, 2008,
respectively, for options that vested during the periods. These costs
are included in general and administrative expense. As of September 30,
2008, the estimated fair value of unvested stock options was
approximately $206,000, which is expected to be recognized over a
weighted average period of approximately one year.
F-10
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
6. Shareholders deficit (continued):
Stock option plan:
The Company uses the Black-Scholes option pricing model to determine
the weighted average fair value of options. The weighted average fair
value of options granted during the nine months ended September 30,
2008 was $0.13 per option. The assumptions utilized to determine the
fair value of options granted during the nine months ended September
30, 2008 are provided in the following table. There were no options
granted during 2007.
Risk free interest rates 1.61% - 2.89%
Expected volatility 80% - 89%
Expected term in years 2 - 3
Expected dividend yield -
The following table sets forth the activity in the Company's Stock
Option Plan since its January 1, 2008 establishment:
Weighted
Number of Average
Shares Under Exercise Average
-lying Options Price Exercisable Fair Value
------------- ------------- --------------- -------------
Outstanding January 1, 2008 - - - -
Granted during period 2,600,000 $0.25 681,250 $0.13
Forfeited/expired (400,000) 0.25 (100,000) 0.14
------------- ------------- --------------- -------------
Outstanding September 30, 2008 2,200,000 $0.25 581,250 $0.13
============= ============= =============== =============
It was determined that there was no intrinsic value attributable to
options granted during the nine months ended September 30, 2008, as the
estimated market price of the Company's common stock of $.25 per share
was the same as the exercise price of the options.
Common stock issued for services:
During the nine months ended September 30, 2008, the Company issued
634,000 shares of common stock to various parties as employment signing
bonuses and payments for services performed for the Company, valued at
$158,500 ($0.25 per share). No shares were issued for services in the
three months ended September 30, 2008. There were 100,000 shares of
common stock issued for services during the nine months ended September
30, 2007, valued at $25,000. No shares were issued for services in the
three months ended September 30, 2007.
F-11
CHINA WI-MAX COMMUNICATIONS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007
(Unaudited)
7. Commitment:
In September 2008, the Company, through Da Chuan, entered into a
20-year contract with Gao Da, in which the Company is entitled to
utilize and manage all aspects of Gao Da's business assets (which
primarily consist of optical fiber assets and licenses) for the
Company's benefit, as defined. In September 2008, Gao Da also assigned
the rights, title and interest in certain customer accounts to the
Company. As consideration for the service agreement, the Company is to
pay or reimburse Gao Da for any licensing fees for base stations or
license renewal expenses, and the Company is to pay a quarterly fee to
Gao Da based on a percentage of net revenue generated from Gao Da's
business operations, as defined. At September 30, 2008, the accounts
receivable balance of $21,882 is due from Gao Da. This balance was
collected subsequent to September 30, 2008.
Gao Da's president and sole shareholder owns approximately 7.4% of the
Company's common stock.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward-looking statements.
The independent registered public accounting firm's report on the Company's
financial statements as of December 31, 2007, and for each of the periods then
ended, includes a "going concern" explanatory paragraph, that describes
substantial doubt about the Company's ability to continue as a going concern.
GENERAL
China Wi-Max plans to be a telecommunications broadband business focused on
providing commercial customers with high bandwidth connections in first and
second tier markets in China through subsidiary companies. Through these wholly
and partially owned subsidiaries, China Wi-Max intends to build, own, and
operate metropolitan area Internet Protocol (IP) based broadband networks, using
both owned optical fiber and licensed Wi-Max capable wireless spectrum.
China Wi-Max currently has two wholly owned Chinese operating subsidiaries. The
operating subsidiaries have the assets and licenses or have entered into
contract arrangements with other companies that have the requisite licenses to
deliver value added telecommunications services in Beijing, China. Of equal
importance is raising sufficient capital to enable execution of the business
plan both short and long term, as telecommunications is a capital intensive
business. China Wi-Max operating subsidiaries' personnel and contract staff in
China are continuing to evaluate equipment providers for the core and last mile
network and developing sales and marketing plans and gathering necessary
information to execute those plans. The initial fiber network in Beijing carried
its first commercial traffic in September, 2008. Appropriate legal documents
needed for all aspects of the business have been or are being developed.
Ensuring that business plans and the associated execution of those plans are
carried out is an ongoing high priority activity.
To the extent China Wi-Max operations are not sufficient to fund the Company's
capital requirements, China Wi-Max may enter into a revolving loan agreement
with financial institutions or attempt to raise capital through the sale of
additional capital stock or through the issuance of debt. At the present time
China Wi-Max does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurance that it will be able to
enter into any such agreement in the future or be able to raise funds through
the further issuance of debt or equity.
1
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended September 30, 2008 Compared to
the Three Months Ended September 30, 2007
During the three months ended September 30, 2008 and 2007, China Wi-Max
recognized revenues of approximately $15,000 and $0 from its operational
activities.
During the three months ended September 30, 2008, China Wi-Max incurred general
and administrative expenses of $297,035 compared to $16,340 for the three months
ended September 30, 2007. The $280,695 increase was a result of an increase in
the Company's operational activities compared to the prior period. During the
three months ended September 30, 2008, the Company continued to increase its
staff and outside consultants, as it began implementation of its business plan.
As a result of the staff increases, there was an increase of approximately
$116,000 in salary and wages, expenses for operations in China increased by
$73,000, consulting and professional fees increased by $49,000 and travel
increased by $14,000 over the prior period ended September 30, 2007
During the three months ended September 30, 2008, China Wi-Max recognized a net
loss of $342,897 compared to a net loss of $16,340 during the three months ended
September 30, 2007. The $326,557 increase in net loss was primarily a result of
the $280,000 increase in general and administrative expenses, discussed above
combined with the $49,387 increase in interest expense as a result of the
issuance of convertible promissory notes discussed below.
China Wi-Max's basic loss per share was $.03 during the three months ended
September 30, 2008 versus a net loss of less than $0.01 per share during the
three months ended September 30, 2007.
Results of Operations for the Nine Months Ended September 30, 2008 Compared to
the Nine Months Ended September 30, 2007
During the nine months ended September 30, 2008 and 2007, China Wi-Max
recognized revenues of approximately $15,000 and $0 from its operational
activities.
During the nine months ended September 30, 2008, China Wi-Max incurred general
and administrative expenses of $1,026,084 compared to $79,884 for the nine
months ended September 30, 2007. The $946,200 increase was primarily the result
of an increase in the Company's operational activities compared to the prior
period. During the nine months ended September 30, 2008, the Company hired its
initial staff and increased use of outside consultants as it continued
implementation of its business plan. The period over period increase was
primarily a result of the staff increases, with an increase of $310,000 in
salary and wages, increased consulting and professional fees of $280,000,
expenses for operations in China increased of $108,000 and increased travel
expense of $28,000. During the nine months ended September 30, 2008, China
Wi-Max incurred $246,075 in expenses related to stock and options issued as
payment for services compared to $25,000 for the nine months ended September 30,
2007.
During the nine months ended September 30, 2008, China Wi-Max recognized a net
loss of $1,115,633 compared to a net loss of $79,884 during the nine months
ended September 30, 2007. The $1,071,749 increase in net loss was primarily the
result of the $946,200 increase in general and administrative expenses,
discussed above combined with the 129,074 increase in interest expense as a
result of the issuance of convertible promissory notes discussed below.
2
China Wi-Max's basic loss per share was $0.12 during the nine months ended
September 30, 2008 versus a net loss per share of $0.01 during the nine months
ended September 30, 2007.
LIQUIDITY
Cash flow from operations has not historically been sufficient to sustain China
Wi-Max's operation without additional sources of capital. At September 30, 2008,
the Company had total current assets of $160,631, consisting of cash of
$120,984, accounts receivable of $21,882 and prepaid expenses of $17,765. At
September 30, 2008, the Company had total current liabilities of $1,193,698.
Total current liabilities consist of accounts payable of $45,001, accrued
interest of $144,397 and current convertible notes payable of $1,004,300. At
September 30, 2008, the Company had a working capital deficit of $1,033,067.
During the nine months ended September 30, 2008, China Wi-Max used $821,732 in
its operating activities. The net loss of $1,151,633 was adjusted for $158,500
of services paid for by the issuance of common stock, $87,575 in non-cash option
expenses and $1,901 in amortization of debt issuance costs. During the nine
months ended September 30, 2008, there was a $32,892 increase in accounts
receivable, $3,834 decrease in prepaid expenses, a $32,892 decrease in accounts
payable, a $128,017 increase in accrued interest and a $40 increase in payroll
liabilities.
During the nine months ended September 30, 2007, China Wi-Max used $35,311 in
its operating activities. A net loss of $79,884 was adjusted for $25,000 of
services paid for by the issuance of common stock. During the nine months ended
September 30, 2007, there was a $3,686 decrease in accounts receivable and a
$15,887 increase in accounts payable.
During the nine months ended September 30, 2008, China Wi-Max used $357,459 in
its investing activities, of which $174,417 was for purchases of optical fiber
and $183,042 was for deposits for the acquisition of long-lived assets, which
relate to the acquisition of business and wireless licenses in Beijing, Hangzhou
and Shanghai, China. During the nine months ended September 30, 2007, China
Wi-Max used $35,000 in its investing activities on deposits for long lived
assets in Beijing, China.
During the nine months ended September 30, 2008, China Wi-Max received
$1,143,240 from its financing activities. During the nine months ended September
30, 2007, China Wi-Max received $106,575 from its financing activities.
In June 2007, the Board of Directors authorized the sale of up to $1 million of
unsecured convertible promissory notes. Principal and interest are convertible
at any time into shares of China Wi-Max's common stock at $0.25 per share, at
the option of the note holders. As of January 2008, the Company oversubscribed
the offering and issued $1,004,300 of notes payable, which mature on December
31, 2008, bear interest at 12% per annum, and are unsecured. During the nine
months ended September 30, 2008, China Wi-Max issued an additional $1,053,200 in
unsecured convertible promissory notes, which mature on December 31, 2009,
bearing interest at 10% per annum, and are unsecured. Principal and interest are
convertible at any time into shares of China Wi-Max's common stock at $0.50 per
share, at the option of the promissory note holders. China Wi-Max has not paid
nor is any principal or interest due on these notes. As of September 30, 2008,
there is $2,057,500 in outstanding convertible notes payable and accrued
interest of $144,397. China Wi-Max is not in default with regard to these notes.
During the nine months ended September 30, 2008, China Wi-Max issued 634,000
shares of its common stock to individuals as employment signing bonuses and
payments for services performed for China Wi-Max, valued at $158,500.
3
During the nine months ended September 30, 2008, China Wi-Max issued stock
options exercisable for 2,600,000 shares of its common stock. The options have
an exercise price of $0.25 per share and a term of 5 years. Subsequent to the
issuance, options exercisable for 400,000 shares of common stock were cancelled.
The options have variable vesting rates. During the nine months ended September
30, 2008, options exercisable for 581,250 shares were vested. These options were
valued using the Black-Scholes model, and the Company has recorded $87,575 of
stock based compensation expense during the nine months ended September 30,
2008.
To the extent China Wi-Max's operation are not sufficient to fund its capital
requirements, China Wi-Max may enter into a revolving loan agreement with
financial institutions or attempt to raise capital through the sale of
additional capital stock or through the issuance of debt. At the present time
China Wi-Max does not have a revolving loan agreement with any financial
institution nor can it provide any assurance that it will be able to enter into
any such agreement in the future or be able to raise funds through the further
issuance of debt or equity.
In the event that our operating plan changes due to changes in our strategic
plans, lower than expected revenues, unanticipated expenses, increased
competition, unfavorable economic conditions or other unforeseen circumstances,
including the continued turmoil and tightening of the credit markets, and
further weakening of consumer confidence and spending, our liquidity may be
negatively impacted. If so, we could be required to adjust our expenditures for
the remainder of 2008 and for 2009 to conserve working capital or raise
additional capital, possibly including debt or equity financing, to fund
operations and our growth strategy.
Need for Additional Financing
China Wi-Max's business plan requires funding to develop and expand a new
capital intensive business. China Wi-Max has been addressing funding needs for
the next twelve months estimated at $10 to $15 million dollars to carry out the
business plan. To continue to expand and grow the business beyond twelve months
will require significant additional capital and China Wi-Max expects to be
continually raising funds for at least the next twenty-four months to thirty-six
months. Although management believes there is tremendous upside potential,
failure to raise sufficient additional capital could result in reduced growth,
or in the worst case, failure of the business. These ongoing capital needs are
reflected in the Company's independent registered public accounting firm's Going
Concern comments for the audited period ending December 31, 2007.
No commitments to provide additional funds have been made by our management or
other stockholders. Accordingly, there can be no assurance that any additional
funds will be available to us to allow it to cover our expenses as they may be
incurred.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), we carried out an evaluation under the
supervision and with the participation of our management, including the Chief
Executive Officer/Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 15d-14 as of the end of the period covered by this report. Based on the
foregoing evaluation, our Chief Executive Officer/Chief Financial Officer has
concluded that our disclosure controls and procedures are effective in timely
alerting him to material information required to be included in our periodic SEC
filings and to ensure that information required to be disclosed in our periodic
SEC filings is accumulated and communicated to our management, including our
Chief Executive Officer/Chief Financial Officer, to allow timely decisions
regarding required disclosure.
4
Management's Report on Internal Control over Financial Reporting
This quarterly report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the Company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission of newly public
companies.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Report on Internal Control over Financial Reporting
This quarterly report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the Company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission of newly public
companies.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from July 1,
2008 through September 30, 2008.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
- ----------------- ------------------------- -------------- ------------------------------- ---------------------------------
7/29/08 Common Stock 150,000 $75,000 Convertible Business Associate
Promissory Note
- ----------------- ------------------------- -------------- ------------------------------- ---------------------------------
7/30/08 Common Stock 300,000 $150,000 Convertible Business Associate
Promissory Note
- ----------------- ------------------------- -------------- ------------------------------- ---------------------------------
8/29/08 Common Stock 220,000 $110,000 Convertible Business Associate
Promissory Note
- ----------------- ------------------------- -------------- ------------------------------- ---------------------------------
9/30/08 Common Stock 76,400 $38,200 Convertible Business Associate
Promissory Note
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended
(the "1933 Act"). All of the individuals and/or entities listed above that
purchased the unregistered securities were almost all existing shareholders, all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates. All purchasers were
provided access to all material information, which they requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with their purchases. All purchasers of
the unregistered securities acquired such securities for investment and not with
a view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Exhibit 32 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act
6
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHINA WI-MAX COMMUNICATIONS, INC.
(Registrant)
Dated: November 18, 2008 By: /s/ George E. Harris
--------------------------------
George E. Harris, President and
Chief Financial Officer
7