UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ________________________________
CINTEL CORP.
------------
(Exact name of small business issuer in its charter)
NEVADA 52-2360156
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9900 Corporate Campus Drive, Suite 3000, Louisville, KY 40223
--------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (502) 657-6077
WITH COPIES TO:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of October 26, 2005, the issuer
had 41,834,102 outstanding shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 1
Item 2. Management's Discussion and Analysis or Plan of Operation......... 19
Item 3. Controls and Procedures........................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 21
Item 3. Defaults Upon Senior Securities................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............... 21
Item 5. Other Information................................................. 21
Item 6. Exhibits.......................................................... 21
SIGNATURES................................................................. 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CINTEL CORP.
Consolidated Balance Sheets
September 30, 2005 and 2004
2005 2004
ASSETS
Current
Cash and cash equivalents (note 3) $ 143,192 $ 258,725
Accounts receivable (net of allowance for doubtful
accounts of $1,013,918; 2003 - $414,133) 684,175 1,330,677
Inventory (note 4) 212,399 250,974
Prepaid and sundry assets 200,035 110,706
Loans receivable 9,635 4,846
Deferred taxes 202,024 118,412
-----------------------------
1,451,460 2,074,340
Deferred taxes 947,365 576,743
Equipment (note 5) 411,860 555,273
Investments 48,204 43,609
-----------------------------
$ 2,858,889 $ 3,249,965
=============================
LIABILITIES
Current
Accounts payable $ 1,217,944 $ 1,008,171
Customer deposits 191,800 --
Loans payable - current (note 6) 1,430,542 1,549,820
Shareholder loan (note 7) 179,902 --
-----------------------------
3,020,188 2,557,991
Accrued Severance 63,985 --
Loans Payable (note 6) 509,484 51,439
Convertible Debenture (note 8) 30,000 --
-----------------------------
3,623,657 2,609,430
-----------------------------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 9) 41,834 20,944
Paid in Capital 5,277,110 4,486,600
Treasury Stock (105,185) --
Accumulated Other Comprehensive Income 45,241 6,145
Accumulated Deficit (6,023,768) (3,873,154)
-----------------------------
(764,768) 640,535
-----------------------------
$ 2,858,889 $ 3,249,965
=============================
(The accompanying notes to the financial statements are an integral part of
these statements)
- 1 -
CINTEL CORP.
Consolidated Statement of Operations
Nine Months Ended September 30, 2005 and 2004
2005 2004
Revenue
Merchandise $ 957,125 $ 798,712
Finished goods 264,392 535,537
Services 29,396 33,941
-----------------------------
1,250,913 1,368,190
-----------------------------
Cost of Sales
Merchandise 833,462 780,190
Finished goods 170,188 396,771
-----------------------------
1,003,650 1,176,961
-----------------------------
Gross Profit 247,263 191,229
-----------------------------
Expenses
Office and general 408,554 167,671
Salaries and employee benefits 378,410 341,072
Professional fees 222,087 168,934
Travel 170,135 35,378
Depreciation 163,521 149,908
Amortization of deferred financing fees 120,000 --
Taxes and dues 52,426 15,058
Research and development -- 230,978
-----------------------------
1,515,133 1,108,999
-----------------------------
Operating Loss (1,267,870) (917,770)
-----------------------------
Other
Interest and other income 7,594 12,338
Foreign exchange -- (1,093)
Interest expense (209,541) (111,753)
-----------------------------
(201,947) (100,508)
-----------------------------
Loss Before Income Taxes (1,469,817) (1,018,278)
Deferred income taxes recoverable 235,181 163,000
-----------------------------
Net Loss $ (1,234,636) $ (855,278)
=============================
Basic Loss per Share $ (0.04) $ (0.04)
=============================
Weighted Average Number of Shares (note 9) 32,323,055 20,455,411
=============================
(The accompanying notes to the financial statements are an integral part of
these statements)
- 2 -
CINTEL CORP.
Consolidated Statement of Operations
Three Months Ended September 30, 2005 and 2004
2005 2004
Revenue
Merchandise $ 630,499 $ 160,080
Finished goods 66,689 387,965
Services 7,752 10,650
-----------------------------
704,940 558,695
-----------------------------
Cost of Sales
Merchandise 556,063 150,325
Finished goods 93,819 232,524
-----------------------------
649,882 382,849
-----------------------------
Gross Profit 55,058 175,846
-----------------------------
Expenses
Office and general 200,404 55,123
Salaries and employee benefits 93,050 115,456
Travel 17,865 238
Depreciation 50,884 47,304
Amortization of deferred financing fees 30,000 --
Professional fees 26,711 79,625
Taxes and dues 2,831 6,723
Research and development -- 37,829
-----------------------------
421,745 342,298
-----------------------------
Operating Loss (366,687) (166,452)
-----------------------------
Other
Interest and other income 1,336 2,073
Interest expense (42,758) (61,735)
-----------------------------
(41,422) (59,662)
-----------------------------
Loss Before Income Taxes (408,109) (226,114)
Deferred income taxes recoverable 65,308 47,000
-----------------------------
Net Loss $ (342,801) $ (179,114)
=============================
Basic Loss per Share $ (0.01) $ (0.01)
=============================
Weighted Average Number of Shares (note 9) 41,240,272 20,737,634
=============================
(The accompanying notes to the financial statements are an integral part of
these statements)
- 3 -
CINTEL CORP.
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2005 and 2004
Paid in Accumulated
Capital in Other Total
Number of Capital Excess of Treasury Comprehensive Accumulated Stockholders'
Shares Stock Par value Stock Loss Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2004 20,314,300 $20,314 $4,427,330 $ -- (38,627) $(3,017,876) $ 1,391,141
Common shares issued for
consulting services 630,000 630 59,270 -- -- -- 59,900
Foreign exchange on
translation -- -- -- -- 44,772 -- 44,772
Net loss -- -- -- -- -- (855,278) (855,278)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 20,944,300 $20,944 $4,486,600 $ -- 6,145 $(3,873,154) $ 640,535
==============================================================================================================================
Balance, January 1, 2005 23,409,800 $23,410 $4,573,535 $ -- 23,826 $(4,789,132) $ (168,361)
Common shares issued for
consulting services -
March 31, 2005 640,000 640 63,860 -- -- -- 64,500
Common shares issued for
consulting services -
June 30, 2005 1,350,000 1,350 51,151 -- -- -- 52,501
Common shares issued for
consulting services -
Sep 30, 2005 500,000 500 14,500 -- -- -- 15,000
Common shares issued as
repayment of promissory note 11,987,320 11,987 368,011 -- -- -- 379,998
Conversion of convertible
debenture into common
stock (note 8) 3,946,982 3,947 206,053 -- -- -- 210,000
Repurchase of employees'
stocks -- -- -- (105,185) -- -- (105,185)
Foreign exchange on
translation -- -- -- -- 21,415 -- 21,415
Net loss -- -- -- -- -- (1,234,636) (1,234,636)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2005 41,834,102 $41,834 $5,277,110 $(105,185) 45,241 $(6,023,768) $ (764,768)
==============================================================================================================================
(The accompanying notes to the financial statements are an integral part of
these statements)
- 4 -
CINTEL CORP.
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2005 and 2004
2005 2004
Cash Flows from Operating Activities
Net loss $ (1,234,636) $ (855,278)
Adjustments for working capital and non-cash items:
Depreciation 163,521 149,908
Amortization of financing fees 120,000 --
Common stock issued for consulting services 131,999 59,900
Net Changes in Assets & Liabilities
Accounts receivable (99,091) 1,071,040
Inventory 81,325 (96,871)
Prepaid and sundry assets 85,190 45,339
Deferred taxes (235,181) (163,000)
Accounts payable 412,935 (695,097)
Accrued severance (58,026) --
-----------------------------
(631,964) (484,059)
-----------------------------
Cash Flows from Investing Activities
Acquisition of equipment, net (14,006) 2,910
Loans receivable (9,849) (4,803)
-----------------------------
(23,855) (1,893)
-----------------------------
Cash Flows from Financing Activities
Payments of deferred financing fees (240,000) --
Proceeds from convertible debenture - net 240,000 --
Repayment of promissory note - net 40,000 --
Repurchase of employees' stocks (105,185) --
Customer deposits 196,064 --
Loans payable 237,691 193,286
Shareholder loan 150,570 --
-----------------------------
519,140 193,286
-----------------------------
Foreign Exchange on Cash and Cash Equivalents (1,516) 16,824
-----------------------------
Net Decrease in Cash and Cash Equivalents (138,195) (275,842)
Cash and Cash Equivalents - beginning of year 281,387 534,567
-----------------------------
Cash and Cash Equivalents - end of year $ 143,192 $ 258,725
=============================
During the year, the company had cash flows arising
from interest and income taxes paid as follows:
Interest paid $ 209,541 $ 107,877
=============================
Income taxes paid $ -- $ --
=============================
(The accompanying notes to the financial statements are an integral part of
these statements)
- 5 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
1. Operations and Business
Cintel Corp., formerly Link2 Technologies, Inc. ("the Company"), was
incorporated in the State of Nevada on August 16, 1996 and on April 24,
2001 changed its name from "Great Energy Corporation International" to
Link2 Technologies, Inc. On September 30, 2003 the Company changed its
name to Cintel Corp.
On September 30, 2003, the Company entered into a definitive Share
Exchange Agreement (the "Agreement") with Cintel Co., Ltd., ("Cintel
Korea") a Korean corporation and its shareholders. The Agreement provided
for the acquisition by the Company from the shareholders of 100% of the
issued and outstanding capital stock of Cintel Korea. In exchange, the
shareholders of Cintel Korea received 16,683,300 shares of the Company. As
a result, the shareholders of Cintel Korea controlled 82% of the Company.
While the Company is the legal parent, as a result of the
reverse-takeover, Cintel Korea became the parent company for accounting
purposes.
Upon completion of the share exchange, the business operations of Cintel
Korea constituted virtually all of the business operations of the Company.
Cintel Korea develops network solutions to address technical limitations
to the Internet. Cintel Korea has developed what it believes is the first
Korean server load balancing technology. Cintel Korea is now focused on
the development of advanced solutions for Internet traffic management. The
business operations of Cintel Korea are located in Seoul, Korea.
2. Summary of Significant Accounting Policies
The accounting policies of the Company are in accordance with generally
accepted accounting principles of the United States of America, and their
basis of application is consistent. Outlined below are those policies
considered particularly significant:
a) Basis of Financial Statement Presentation
These financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America with the assumption that the Company will be able to realize
its assets and discharge its liabilities in the normal course of
business.
b) Basis of Consolidation
The merger of the Company and Cintel Korea has been recorded as the
recapitalization of the Company, with the net assets of the Company
brought forward at their historical basis. The intention of the
management of Cintel Korea was to acquire the Company as a shell
company listed on NASDAQ. Management does not intend to pursue the
business of the Company. As such, accounting for the merger as the
recapitalization of the Company is deemed appropriate.
- 6 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
2. Summary of Significant Accounting Policies (cont'd)
c) Unit of Measurement
The US Dollar has been used as the unit of measurement in these
financial statements.
d) Use of Estimates
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and related notes
to financial statements. These estimates are based on management's
best knowledge of current events and actions the Company may
undertake in the future. Actual results may ultimately differ from
estimates, although management does not believe such changes will
materially affect the financial statements in any individual year.
e) Revenue Recognition
The Company recognizes revenues upon delivery of merchandise sold,
and when services are rendered for maintenance contracts.
f) Cash and Cash Equivalents
Cash and highly liquid investment with an initial maturity period of
90 days or less are considered cash equivalents and recorded at
cost.
g) Investments
Investments in available-for-sale securities are being recorded in
accordance with FAS-115 "Accounting for Certain Investments in Debt
and Equity Securities". Equity securities that are not held
principally for the purpose of selling in the near term are reported
at fair market value with unrealized holding gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity.
h) Inventories
Inventories are stated at the lower of cost or net realizable value.
Net realizable value is determined by deducting selling expenses
from selling price.
The cost of inventories is determined on the first-in first-out
method, except for materials-in-transit for which the specific
identification method is used.
i) Equipment
Equipment is stated at cost. Major renewals and betterments are
capitalized and expenditures for repairs and maintenance are charged
to expense as incurred. Depreciation is computed using the
straight-line method over a period of 5 years.
- 7 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
2. Summary of Significant Accounting Policies (cont'd)
j) Government Grants
Government grants are recognized as income over the periods
necessary to match them with the related costs that they are
intended to compensate.
k) Currency Translation
The Company's functional currency is Korean won. Adjustments to
translate those statements into U.S. dollars at the balance sheet
date are recorded in other comprehensive income.
Foreign currency transactions of the Korean operation have been
translated to Korean Won at the rate prevailing at the time of the
transaction. Realized foreign exchange gains and losses have been
charged to income in the year.
l) Financial Instruments
Fair values of cash equivalents, short-term and long-term
investments and short-term debt approximate cost. The estimated fair
values of other financial instruments, including debt, equity and
risk management instruments, have been determined using market
information and valuation methodologies, primarily discounted cash
flow analysis. These estimates require considerable judgment in
interpreting market data, and changes in assumptions or estimation
methods could significantly affect the fair value estimates.
m) Income Tax
The Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment.
- 8 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
2. Summary of Significant Accounting Policies (cont'd)
n) Earnings or Loss per Share
The Company adopted FAS No.128, "Earnings per Share" which requires
disclosure on the financial statements of "basic" and "diluted"
earnings (loss) per share. Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of common shares outstanding for the year. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding plus common
stock equivalents (if dilutive) related to stock options and
warrants for each year.
o) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any
significant off-balance sheet risk and credit risk concentration.
The Company does not have significant off-balance sheet risk or
credit concentration. The Company maintains cash and cash
equivalents with major Korean financial institutions.
The Company's provides credit to its clients in the normal course of
its operations. It carries out, on a continuing basis, credit checks
on its clients and maintains provisions for contingent credit losses
which, once they materialize, are consistent with management's
forecasts.
For other debts, the Company determines, on a continuing basis, the
probable losses and sets up a provision for losses based on the
estimated realizable value.
Concentration of credit risk arises when a group of clients having a
similar characteristic such that their ability to meet their
obligations is expected to be affected similarly by changes in
economic conditions. The Company does not have any significant risk
with respect to a single client.
p) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
an amendment of ARB No. 43, Chapter 4" (Statement 151). This
statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage). As currently worded in ARB 43, Chapter 4, the term "so
abnormal" was not defined and its application could lead to
unnecessary noncomparability of financial reporting. This Statement
eliminates that term and requires that those items be recognized as
current-period charges regardless of whether they meet the criterion
of "so abnormal." In addition, this Statement requires that
allocation of fixed production overhead to the costs of conversion
be based on the normal capacity of the production facilities. The
adoption of Statement 151 will not have a material impact on the
Company's consolidated financial statements.
- 9 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
2. Summary of Significant Accounting Policies (cont'd)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment of APB Opinion No. 29" (Statement
153). This Statement amends Opinion 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The
adoption of FAS 153 will not have a material impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be
recognized over the period during which the employee is required to
provide service in exchange for the award requisite service period
(usually the vesting period). No compensation cost is recognized for
equity instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met;
those conditions are much the same as the related conditions in
Statement 123. This Statement is effective for public entities that
do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15,
2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or
cancelled after that date. The cumulative effect of initially
applying this Statement, if any, is recognized as of the required
effective date and is not expected to have a material impact on the
Company's consolidated financial statements.
3. Cash and cash equivalents
Included in cash and cash equivalents is cash restricted for use by the
Company of $134,260 (2004 - $121,242). The fund is being held as security
for one of the bank loans as described in note 6. The loan will mature on
December 11, 2005. As at September 30, 2005, the amount outstanding was
$393,190 (2004 - $606 ,211).
4. Inventory
Inventory includes $5,427 (2004 - $17,846) of merchandise and $206,972
(2004 - $233,128) of raw materials.
- 10 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
5. Equipment
Equipment is comprised as follows:
2005 2004
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------------------------------------------------------------
Furniture and fixtures $ 45,799 $ 28,074 $ 34,185 $ 19,849
Equipment 631,257 547,983 565,651 424,680
Vehicles 14,843 14,841 13,429 12,756
Software 696,737 385,878 622,090 222,797
------------------------------------------------------------
1,388,636 976,776 1,235,355 680,082
------------------------------------------------------------
Net carrying amount $ 411,860 $ 555,273
------------ ------------
6. Loans Payable
2005 2004
Current Long-term Total Total
--------------------------------------------------------------
Bank loans $ 968,590 $ -- $ 968,590 $ 1,214,640
Promissory note 39,000 -- 39,000 39,000
Government loans (#1, 2 & 3) 61,236 37,826 99,062 89,621
Discount of interest-free government loans -- (7,842) (7,842) (12,780)
Note payable #1 -- 479,500 479,500 --
Notes payable (#2, 3 & 4) 361,716 -- 361,716 270,778
--------------------------------------------------------------
$ 1,430,542 $ 509,484 $ 1,940,026 $ 1,601,259
==============================================================
Bank Loans
The bank loans bear interest at 7.5% to 21% and mature between November
and December 2005. The loans are repayable upon maturity.
Promissory Note
The promissory note is non-interest bearing, unsecured, and due on demand.
- 11 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
6. Loans Payable (cont'd)
Government Loan #1
The loan is non-interest bearing, unsecured, and repayable in annual
payments of $17,789 and matured on July 2005. The company is in arrears on
the 2004 and 2005 payment. Total amount outstanding at September 30, 2005
was $35,580.
Government Loan #2
The loan is non-interest bearing, unsecured, and repayable in annual
payments of $12,828 and matured on July 2005. The company is in arrears on
the 2004 and 2005 payment. Total amount outstanding at September 30, 2005
was $25,656.
Government Loan #3
The loan is non-interest bearing, unsecured, repayable in annual payments
of $9,564 starting 2006 and matures October 2009. The total amount
outstanding at September 30, 2005 was $37,826.
Note Payable #1
The note payable is a non-interest bearing loan and is repayable in August
2015.
Note Payable #2
The note payable of $210,980 bears interest at 4% per month, is personally
guaranteed by the chief executive officer of the Company, and is due on
demand.
Notes Payable #3
The notes payable of $54,836 is non-interest bearing and due on demand.
Notes Payable #4
The notes payable of $95,900 bears interest at 9% per annum and is
repayable at maturity in October 2005.
7. Shareholder Loan
The loan from the chief executive officer, who is also a 11% shareholder
of the company, is non-interest bearing, unsecured, and due on demand.
- 12 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
8. Convertible Debenture
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" the Company accounts
for the convertible debenture as a liability at face value and no formal
accounting recognition is assigned to the value inherent in the conversion
feature.
The convertible debenture has a face value of $240,000 with an annual
coupon rate of 5%, and both principal and interest are to be repaid either
in cash or common shares by August 4, 2007.
The debenture has been repaid as follows:
Issued - February 2005 240,000
Converted - quarter ended March 2005 (140,000)
Converted - quarter ended June 2005 (70,000)
-----------
Balance - September 30, 2005 $ 30,000
===========
9. Capital Stock
Authorized
300,000,000 common shares, par
value $0.001 per share (2004 -
50,000,000)
2005 2004
Issued
41,834,102 common shares
(2004 - 20,944,300) $ 41,834 $ 20,944
=========================
On September 30, 2003, the Company cancelled 4,800,000 shares of
common stock for no consideration. As well, the Company granted a 2
to 5 reverse stock split. The reverse split has retroactively been
taken into consideration in the consolidated financial statements an
the calculation of earnings per share. Subsequently, the Company
issued 16,683,300 common shares in exchange for 100% of the
outstanding shares of Cintel Co., Ltd.
In June 2004, 300,000 common shares were issued for consulting
services at the value of $33,000.
In July 2004, 160,000 common shares were issued for consulting
services at the value of $12,800.
- 13 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
9. Capital Stock (cont'd)
In August 2004, 50,000 common shares were issued for consulting
services at the value of $4,500.
In September 2004, 120,000 common shares were issued for consulting
services at the value of $9,600.
In September 2004, the Company increased its authorized capital from
50,000,000 common shares to 300,000,000 common shares.
In October 2004, 120,000 common shares were issued for consulting
services at the value of $14,400.
In November 2004, 170,000 common shares were issued for consulting
services at the value of $15,000.
In November 2004, 25,000,000 common shares were held in escrow for
future conversion to repay the promissory note as described in note.
As at June 30, 2005, 13,458,595 common shares have been issued on
repayment as described below. The balance of shares held in escrow
at June 30, 2005 was 11,541,405.
In November 2004, the Company issued 412,286 common shares upon the
repayment of $20,000 of the promissory note as described in note.
In December 2004, the Company issued 1,763,214 common shares upon
the repayment of $40,000 of the promissory note as described in
note.
In January 2005, the Company issued 240,000 common shares for
consulting service at the value of $20,500.
In January 2005, the Company issued 2,262,424 common shares upon the
repayment of $40,000 of the promissory note as described in note .
In February 2005, the Company issued 622,200 common shares upon the
repayment of $50,000 of the promissory note as described in note .
In February 2005, 400,000 common shares were issued for consulting
services at the value of $44,000.
In March 2005, the Company issued 1,485,120 common shares upon the
repayment of $80,000 of the promissory note as described in note .
In March 2005, the Company repurchased 93,830 common shares for
$105,185
- 14 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
9. Capital Stock (cont'd)
In March 2005, 1,905,136 common shares were issued upon the
conversion of $140,000 of convertible debenture as described in note
8.
In April 2005, the Company issued 1,311,769 common shares upon the
repayment of $40,000 of the promissory note as described in note .
In April 2005, 1,200,000 common shares were issued for consulting
services at the value of $48,000.
In April 2005, 712,500 common shares were issued upon the conversion
of $20,000 of convertible debenture as described in note 8.
In May 2005, 1,329,346 common shares were issued upon the conversion
of $50,000 of convertible debenture as described in note 8.
In May 2005, the Company issued 2,333,551 common shares upon the
repayment of $70,000 of the promissory note as described in note .
- 15 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
9. Capital Stock (cont'd)
In June 2005, 150,000 common shares were issued for consulting
services at the value of $4,500.
In June 2005, the Company issued 3,268,031 common shares upon the
repayment of $80,000 of the promissory note.
In July 2005, the Company issued 704,225 common shares upon the
repayment of $20,000 of the promissory note.
In September 2005, 500,000 common shares were issued for consulting
services at the value of $15,000.
Stock Warrants and Options
The Company has accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model. The assumptions are evaluated annually and revised as
necessary to reflect market conditions and additional experience. The
following assumptions were used: 2005 2004
Interest rate 6.5% 6.5%
Expected volatility 70% 70%
Expected life in years 6 6
In 1999 the Board of Directors of Cintel Korea adopted an option plan to
allow employees to purchase ordinary shares of the Cintel Korea.
In August 1999, the share option plan granted 96,000 stock options for the
common stock of Cintel Korea having a $0.425 nominal par value each and an
exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In
2003, an additional 30,000 stock options were cancelled.
In March 2000, 225,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.68. In 2002, 135,000 and in
2003, an additional 47,000 of these stock options were cancelled.
In February 2001, 30,000 stock options were granted having a $0.425
nominal par value each and an exercise price of $0.72. In 2003, all of
these stock options were cancelled.
In March 2003, 65,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.71. In the same year, 15,000 of
these stock options were cancelled.
- 16 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
9. Capital Stock (cont'd)
The options vest gradually over a period of 3 years from the date of
grant. The term of each option shall not be more than 8 years from the
date of grant. No options have vested in the nine months ended September
30, 2005 and 2004.
The stock options have not been included in the calculation of the diluted
earnings per share as their inclusion would be antidilutive.
The following table summarizes the stock option activity during 2005 and
2004:
2005 2004
Outstanding, beginning of year 106,000 106,000
Exercised -- --
Cancelled -- --
--------------------------
Outstanding, end of year 106,000 106,000
==========================
Weighted average fair value of options
granted during the year $ -- $ --
==========================
Weighted average exercise price of common
stock options, beginning of year $ 0.62 $ 0.62
==========================
Weighted average exercise price of common
stock options granted in the year $ -- $ --
==========================
Weighted average exercise price of common
stock options, end of year $ 0.67 $ 0.67
==========================
Weighted average remaining contractual
life of common stock options 2 years 3 years
==========================
10. Income Taxes
The Company has deferred income tax assets as follows:
2005 2004
Deferred income tax assets
Research and development expenses
amortized over 5 years for tax purposes $ 197,242 218,597
Other timing differences 152,713 63,652
Net operating loss carryforwards 799,434 412,906
---------------------
$1,149,389 695,155
=====================
- 17 -
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2005 and 2004
11. Contingent Liabilities and Commitments
a) The Company is committed to an office space lease obligation which
expires in March 2006. The minimum annual payments (exclusive of
taxes and insurance) under the leases for 2006 is $26,503. Rent
expenses paid in 2005 and 2004 were $58,147 and $62,527
respectively.
b) The Company has entered into a contract with iMimic Networking, Inc.
for the use of the iMimic solution within Korea starting November
17, 2000. For the use of this solution, the Company paid $70,000 as
an upfront payment and pays a $640 royalty for each product sold
that uses the iMimic solution. The Company is also required to pay
an annual royalty fee of $10,000. The contract has no fixed
termination date.
c) On September 14, 2004, the Company entered into a Standby Equity
Distribution Agreement with US-based investment fund Cornell Capital
Partners LP. Under the terms of the agreement, Cornell has committed
to provide up to $5 million of funding to the Company over a 24
month period, to be drawn down at the Company's discretion through
the sale of the Company's common stock to Cornell. As at September
30, 2005, there was no balance outstanding.
12. Subsequent Events
On October 17, 2005, Cintel Corp. (the "Company") entered into a
securities purchase agreement to sell an aggregate of $440,000 convertible
notes. The Convertible Notes do not bear interest and, unless converted
into shares of the Company's common stock, are due and payable on April 7,
2007. The Convertible Notes are convertible into the Company's common
stock at any time after issuance at a conversion price of $0.04 per share.
- 18 -
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
The information in this report contains forward-looking statements. All
statements other than statements of historical fact made in this report are
forward looking. In particular, the statements herein regarding industry
prospects and future results of operations or financial position are
forward-looking statements. Forward-looking statements reflect management's
current expectations and are inherently uncertain. Our actual results may differ
significantly from management's expectations.
The following discussion and analysis should be read in conjunction with
the financial statements included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment of our management.
Results of Operations for nine months ended September 30, 2005 compared to nine
months ended September 30, 2004
- -------------------------------------------------------------------
9/30/2005 9/30/2004
- -------------------------------------------------------------------
Revenue 1,250,913 1,368,190
- -------------------------------------------------------------------
Cost of sales 1,003,650 1,176,961
- -------------------------------------------------------------------
Gross Profit 247,263 191,229
- -------------------------------------------------------------------
Expenses 1,515,133 1,108,999
- -------------------------------------------------------------------
Operating (Loss) (1,267,870) (917,770)
- -------------------------------------------------------------------
Loss Before Income Taxes (1,469,817) (1,018,278)
- -------------------------------------------------------------------
The main economic factors for the decrease of 8.6 % in revenue for the
first nine months of 2005 compared to the previous year can be attributed to the
slow economic condition in Korea and the temporary delay of some projects until
the following quarter. The economic climate is turning positive and we expect
this issue to disappear by the next quarter. In the upcoming quarter, the
company expects significant new revenues due to factors such as a new strategic
alliance with companies such as Hyundai HDS and is continuing to capitalize on
past opportunities. The company will increase the reach with current trusted
customers and partners with our expanded revenue generating product lines.
A 14.7% decrease in costs compared to last year can be attributed to
higher profit margins on products sold. For example, the profit margin of
merchandise in Q3, 2005 was 2.3%, but that margin in Q3, 2005 was 12.9%. Second,
the gross profit margin of finished products in 2004 was 25.9%, but in 2005 it
was 35.6%. Our contract with the Korea Museum Project with KT (Korea Telecom) is
a direct example of 12.9 % increase in merchandise. Although the total dollar
amount on finished goods was down the cost of sale was more than proportionately
reduced and thus resulted in these increased margins.
One large factor in our increase in cost of overseas operations was a
result of travel expenses to markets such as China, Australia and the United
States. Another cost increase is directly related with an increase in expenses
to build alliances and research of potential new markets that will help to build
our bonds with large customers and corporate alliances. The results of this
contribution should be clear by the end of this year.
Management believes the ITM market continues to expand globally soon.
Although the company's financial performance is down compared to last year
largely due to a lack of diversification in its products and markets, the
company can expect to show additional revenue and profits in near future with
the strong relationships it has with its enterprise level customers. In
accordance with the directive of the board of directors, management will use the
balance of fiscal year 2005 to expand its products and markets. In its core
market, Korea, CinTel will better leverage its alliance with Hyundai HDS and
expand the solution portfolio from the single ITM solutions to include more
enterprise IT solutions, including security products with HDS. We believe this
partnership with HDS will continue to enable growth for CinTel in the current IT
environment. CinTel is taking steps to establish several business partnerships
in the U.S. Additionally, CinTel will study other markets to enter where we can
leverage our distribution channels and product strengths.
- 19 -
Operations for the next twelve months
Our financial plan for the next twelve months depends on important
assumptions, most of which are shown in the following table. The key underlying
assumptions are:
o We assume a slow-growth economy without major recession.
o We assume there are no unexpected discoveries in technology to make
our products immediately obsolete.
o We expect the global IT spending environment to remain flat to
slightly above this year's levels.
o Nature and Limitation of Projections -This financial projection is
based on sales volume at the levels described in the revenue section
and presents, to the best of management's knowledge and belief, the
company's expected assets, liabilities, capital, revenues, and
expenses. The projections reflect management's judgment of the
expected conditions and its expected course of action, given the
assumptions.
o Revenues - The Company's revenues are derived primarily from the
sale of IT solutions to enterprise customers. Revenue projections
are based on the 2005 sales in the comparable market nationwide,
based on industry average. The exact numbers can be found in the
Sales Forecast table and chart section.
o Expenses - The Company's expenses are primarily those of salaries,
sales commissions, development costs, operating costs, and
administrative costs. Other expenses are based on management's
estimates and industry averages.
Trends
The ITM market is currently undergoing rapid transformation from a pure
caching appliance environment to a convergence of more enterprise network
traffic and application management features such as SSL VPN, Application
Acceleration (Web-enabled), WAN optimization, Firewall and Content Security.
CinTel must incorporate these functionalities into its current product line to
better compete in the marketplace.
Wireless ISP market access penetration is rapidly increasing in North
America as wireless and Broadband technologies are being deployed. As the
standards are agreed upon, and as the new business models begin to surface
broadband access penetration will become ubiquitous and will open up new
business opportunities for companies like CinTel and others in this space.
Income/loss elements not a part of regular business operations
Although in the normal course of business there will always be a
percentage of receivables that will go uncollected, a significant amount was
written off the books this fiscal year. This was due to the downturn in Korea's
IT climate that began a few years ago, and these companies were never able to
recover from that, and management has conceded and recognized the fact. This is
not a symptom of poor vendor qualification.
Liquidity
Although results of this fiscal quarter did not yield a profit, we believe
this was due to our concentration of risk on a small number of customers for the
majority of our revenues, and not due to any specific weakness in our business
opportunity overall in a broader marketplace. Therefore we do not believe
reducing expenses to achieve profitability in one single year will help to grow
the business in the long run for our shareholders. We anticipate increasing our
expenditure to capture market share in the areas we have outlined above will
result in a solid base for future growth and profitability.
- 20 -
Item 3. Controls and Procedures.
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and principal financial officer of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective to ensure that all information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is: (1) accumulated and
communicated to our management, including our chief executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure; and (2) recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms. There was
no change in our internal controls or in other factors that could affect these
controls during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
Item 1. Legal Proceedings.
We are not a party to any pending legal proceeding, nor is our property
the subject of a pending legal proceeding. None of our directors, officers or
affiliates is involved in a proceeding adverse to our business or has a material
interest adverse to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In July 2005, the Company issued 704,225 common shares upon the repayment
of $20,000 of the promissory note. This transaction was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), Section 3(a)(9) of the
Securities Act and/or Regulation S promulgated pursuant to the Securities
Act.
In September 2005, 500,000 common shares were issued for consulting
services at the value of $15,000. This transaction was exempt pursuant to
section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit
Number Description
- --------------------------------------------------------------------------------
31.1 Certification by Chief Executive Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
31.2 Certification by Chief Financial Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
32.1 Certification by Chief Executive Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
32.2 Certification by Chief Financial Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
- 21 -
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CINTEL CORP.
Dated: November 21, 2005 By: /s/ Sang Don Kim
-----------------------------------
Sang Don Kim
Chief Executive Officer
Dated: November 21, 2005 By: /s/ Kyo Jin Kang
-----------------------------------
Kyo Jin Kang
Principal Financial Officer and
Principal Accounting Officer