UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER : 333-100046
CINTEL CORP.
------------
(Exact name of small business issuer in its charter)
NEVADA 52-236015
------ ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 15, 2006, the issuer had
87,620,196 outstanding shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
EXPLANATORY NOTE
This quarterly report on Form 10-QSB/A ("Form 10-QSB/A") is being filed to
amend our quarterly report on Form 10-QSB for the fiscal quarter ended June 30,
2006 (the "Original Form 10-QSB"), which was originally filed with the
Securities and Exchange Commission ("SEC") on August 18, 2006. Accordingly,
pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended,
the Form 10-QSB/A contains current dated certifications from the Principal
Executive Officer and the Principal Financial Officer. The Form 10-QSB/A is
being amended because upon further consideration, the Company determined that it
was not, more likely than not, that deferred tax losses would be realized. The
Company is revising the valuation allowance for the deferred tax asset
accordingly.
We have not updated the information contained herein for events occurring
subsequent to August 18, 2006, the filing date of the Original Form 10-QSB.
2
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 2
Item 2. Management's Discussion and Analysis or Plan of Operation....... 21
Item 3. Controls and Procedures......................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 25
Item 3. Defaults Upon Senior Securities................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............. 25
Item 5. Other Information............................................... 25
Item 6. Exhibits........................................................ 25
SIGNATURES................................................................. 28
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CINTEL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
Unaudited
CONTENTS
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statement of Operations 3 - 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
Cintel Corp.
We have reviewed the accompanying consolidated balance sheets of Cintel
Corp. and subsidiaries (the "Company") as of June 30, 2006 and 2005 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the six-month periods ended June 30, 2006 and 2005. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to such consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
August 1, 2006 except as to note 14
which is as of November 13, 2006.
1
CINTEL CORP.
Consolidated Balance Sheets
June 30, 2006 and 2005
Unaudited
Restated
2006 2005
---- ----
ASSETS
Current
Cash and cash equivalents (note 3) $ 1,395,406 $ 373,982
Investments in trading securities (fair market value $192,812) 175,051 -
Accounts receivable (net of allowance for doubtful accounts of
$1,114,358; 2005 - $965,246) 1,636,762 290,083
Inventory (note 4) 557,326 267,433
Prepaid and sundry assets 813,401 225,429
Loans receivable (note 5) 158,100 -
Deferred taxes (note 6,14) - 208,146
------------------------------
4,736,046 1,365,073
Deferred Financing Fees - 30,000
Deferred Taxes (note 6,14) - 888,050
Investments (note 7) 1,920,936 -
Investments in available for sale securities (note 8) 16,977 48,752
Equipment (note 9) 509,893 466,422
------------------------------
$ 7,183,852 $ 2,798,297
==============================
LIABILITIES
Current
Accounts payable $ 1,368,722 $ 781,087
Shareholder loan - 161,779
Loans payable - current (note 10) 43,076 1,493,511
Convertible debenture (note 11) - 210,000
------------------------------
1,411,798 2,646,377
Accrued Severance 83,314 104,469
Loans Payable (note 10) 39,051 515,274
------------------------------
1,534,163 3,266,120
------------------------------
STOCKHOLDERS' EQUITY
Capital Stock (note 12) 87,180 40,630
Paid in Capital 14,249,448 5,243,316
Treasury Stock (5,630) (105,185)
Accumulated Other Comprehensive (Loss) Income (219,324) 34,383
Accumulated Deficit (8,461,985) (5,680,967)
------------------------------
5,649,689 (467,823)
------------------------------
$ 7,183,852 $ 2,798,297
==============================
APPROVED ON BEHALF OF THE BOARD
- --------------------------------------------------- ---------------------------------------------------
Director Director
(The accompanying notes to the financial statements are an integral part of these statements)
2
CINTEL CORP.
Consolidated Statement of Operations
Six Months Ended June 30, 2006 and 2005
Unaudited
Restated
2006 2005
---- ----
Revenue
Merchandise $ 3,455,083 $ 326,626
Finished goods 76,481 197,703
Services 49,150 21,644
------------------------------
3,580,714 545,973
------------------------------
Cost of Sales
Merchandise 3,311,900 277,399
Finished goods 51,404 76,369
------------------------------
3,363,304 353,768
------------------------------
Gross Profit 217,410 192,205
------------------------------
Expenses
Salaries and employee benefits 342,662 285,360
Professional fees 313,027 195,376
Office and general 187,579 208,150
Depreciation 108,916 112,637
Travel 100,282 152,270
Research and development 18,891 -
Taxes and dues 273 49,595
------------------------------
1,071,630 1,003,388
------------------------------
Operating Loss (854,220) (811,183)
------------------------------
Other Expense (Income)
Interest and other income (143,215) (6,258)
Foreign exchange 10,532 -
Interest expense 22,487 166,783
Amortization of deferred financing fees 60,000 90,000
Share of income from equity investment (16,260) -
------------------------------
(66,456) 250,525
------------------------------
Loss Before Income Taxes (787,764) (1,061,708)
------------------------------
Current 44,057 -
Deferred income taxes recoverable (note 14) - (169,873)
------------------------------
44,057 (169,873)
------------------------------
Net Loss $ (831,821) $ (891,835)
==============================
Basic Loss per Share $ (0.02) $ (0.03)
==============================
Fully Diluted Loss per Share $ (0.02) $ (0.03)
==============================
Weighted Average Number of Shares (note 12) 49,971,111 32,364,447
==============================
Fully Diluted Weighted Average Number of Shares (note 12) 49,971,111 32,364,447
==============================
(The accompanying notes to the financial statements are an integral part of these statements)
3
CINTEL CORP.
Consolidated Statement of Operations
Three Months Ended June 30, 2006 and 2005
Unaudited
Restated
2006 2005
---- ----
Revenue
Merchandise $ 1,236,885 $ 214,622
Finished goods 1,012 197,703
Services 21,118 7,130
------------------------------
1,259,015 419,455
------------------------------
Cost of Sales
Merchandise 1,174,595 165,721
Finished goods 680 76,369
------------------------------
1,175,275 242,090
------------------------------
Gross Profit 83,740 177,365
------------------------------
Expenses
Salaries and employee benefits 159,751 137,108
Professional fees 212,360 71,025
Office and general 91,665 109,500
Depreciation 57,502 56,887
Travel 68,857 106,876
Research and development 250 -
Taxes and dues 152 16,813
------------------------------
590,537 498,209
------------------------------
Operating Loss (506,797) (320,844)
------------------------------
Other Expense (Income)
Interest and other income (33,799) (4,799)
Foreign exchange 13,876 -
Interest expense 10,414 91,934
Amortization of deferred financing fees 30,000 30,000
Share of income from equity investment (16,260) -
------------------------------
4,231 117,135
------------------------------
Loss Before Income Taxes (511,028) (437,979)
------------------------------
Current 20,625 -
Deferred income taxes recoverable (note 14) - (92,559)
------------------------------
20,625 (92,559)
------------------------------
Net Loss $ (531,653) $ (345,420)
==============================
Basic Loss per Share $ (0.01) $ (0.01)
==============================
Fully Diluted Loss per Share $ (0.01) $ (0.01)
==============================
Weighted Average Number of Shares (note 12) 57,562,868 37,036,394
==============================
Fully Diluted Weighted Average Number of Shares (note 12) 57,562,868 37,036,394
==============================
(The accompanying notes to the financial statements are an integral part of these statements)
4
CINTEL CORP.
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2006 and 2005
Unaudited
Paid in Accumulated
Capital in Other Restated Total
Number of Capital Excess of Treasury Comprehensive Accumulated Stockholders'
Shares Stock Par value Stock Loss Deficit Equity
-----------------------------------------------------------------------------------------------------
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 1,990,000 1,990 115,011 - - - 117,001
Common shares issued as
repayment of promissory
note 11,283,095 11,283 348,717 - - - 360,000
Conversion of convertible
debentures into common
stock 3,946,982 3,947 206,053 - - - 210,000
Repurchase of employees'
stock - - - (105,185) - - (105,185)
Foreign exchange on
translation - - - - 10,557 - 10,557
Net loss - - - - - (891,835) (891,835)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 2005 40,629,877 $ 40,630 $ 5,243,316 $ (105,185) $ 34,383 $(5,680,967) $ (467,823)
=====================================================================================================
Balance, January 1, 2006 42,379,354 $ 42,379 $ 5,351,058 $ (5,630) $ 121,739 $(6,426,265) $ (916,719)
Adjustment due to
restatement (note 14) - - - - (18,247) (1,203,899) (1,222,146)
-----------------------------------------------------------------------------------------------------
Restated balance,
January 1, 2006 42,379,354 42,379 5,351,058 (5,630) 103,492 (7,630,164) (2,138,865)
Unrealized loss on
investment (note 7) - - - - (720,536) - (720,536)
Common shares issued for
consulting services
(note 12) 500,000 500 89,500 - - - 90,000
Conversion of convertible
debenture into common
stock (note 12) 44,300,542 44,301 8,808,890 - - - 8,853,191
Foreign exchange on
translation - - - - 397,720 - 397,720
Net loss - - - - - (831,821) (831,821)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 2006 87,179,896 $ 87,180 $14,249,448 $ (5,630) $ (219,324) $(8,461,985) $ 5,649,689
=====================================================================================================
(The accompanying notes to the financial statements are an integral part of these statements)
5
CINTEL CORP.
Consolidated Statement of Cash Flows
Six Months Ended June 30, 2006 and 2005
Unaudited
2006 2005
---- ----
Cash Flows from Operating Activities
Net loss $ (831,821) $ (891,835)
Adjustments for working capital and non-cash items:
Depreciation 108,916 112,637
Amortization of financing fees 60,000 90,000
Common stock issued for consulting services 45,000 117,001
Share of income from equity investment (16,260) -
Net Changes in Assets & Liabilities
Accounts receivable (502,992) 311,060
Inventory (81,026) 28,418
Prepaid and sundry assets (384,841) 60,092
Deferred taxes - (169,873)
Accounts payable 353,173 (43,259)
Accrued severance 9,645 (18,019)
------------------------------
(1,240,206) (403,778)
------------------------------
Cash Flows from Investing Activities
Investments in trading securities (184,367) -
Loans receivable (159,375) -
Acquisition of equipment, net (2,428) (356)
Proceeds from disposal of securities held for investment 36,000 -
------------------------------
(310,170) (356)
------------------------------
Cash Flows from Financing Activities
Payments of deferred financing fees - (240,000)
Proceeds from loans payable - 273,270
Proceeds from convertible debenture - net - 30,000
Repayment of promissory note - net - (160,000)
Advances from shareholder loan - 131,472
Proceeds from common shares issued for repayment of convertible
debenture 8,853,191 210,000
Repayment of convertible debt (8,853,191) -
Proceeds from common shares issued for repayment of promissory note - 360,000
Repurchase of employees' stocks - (105,185)
Loans payable (650,516) -
------------------------------
(650,516) 499,557
------------------------------
Foreign Exchange on Cash and Cash Equivalents 106,849 (2,828)
------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (2,094,043) 92,595
Cash and Cash Equivalents - beginning of year 3,489,449 281,387
------------------------------
Cash and Cash Equivalents - end of year $ 1,395,406 $ 373,982
==============================
During the year, the company had cash flows arising from interest and
income taxes paid as follows:
Interest paid $ 22,487 $ 107,084
==============================
Income taxes paid $ 42,403 $ -
==============================
(The accompanying notes to the financial statements are an integral part of these statements)
6
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
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.
c) Unit of Measurement
The US Dollar has been used as the unit of measurement in these
financial statements.
7
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
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 includes currency, cheques issued by others, other currency
equivalents, current deposits and passbook deposits. Cash equivalents
include securities and short-term money market instruments that can be
easily converted into cash. The investments that mature within three
months from the investment date, are also included as cash
equivalents.
g) Investments
Investments in securities are recorded in accordance with FAS-115
"Accounting for Certain Investments in Debt and Equity Securities".
Investments in available for sale securities that are not held
principally for the purpose of selling in the near term are reported
at fair market value when it is readily determinable. Investments in
trading securities are recorded at fair value. Unrealized holding
gains and losses from investments are excluded from earnings and
reported as a separate component of stockholders' equity.
Investments subject to significant influence have been recorded using
the equity method.
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.
8
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
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.
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.
9
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
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 December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123). 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.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and
Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3 (Statement No. 154). Statement No. 154 changes the
requirements for the accounting for and reporting of a change in
accounting principle. Statement No. 154 requires retrospective
application of any change in accounting principle to prior periods'
financial statements. Statement No. 154 is effective for the first
fiscal period beginning after December 15, 2005. We do not expect the
implementation of Statement No. 154 to have a significant impact on
our consolidated financial statements.
10
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
3. Cash and Cash Equivalents
In 2005, the company provided $135,786 as security for one of the bank
loans as described in note 10. As at June 30, 2005, the amount of loan
outstanding was $543,144. In 2006, the bank loan was repaid.
4. Inventory
Inventory includes $399,272 (2005 - $10,419) of merchandise and $158,054
(2005 - $257,014) of raw materials.
5. Loans Receivable
Loans receivable are comprised of the following;
2006 2005
---- ----
Loan receivable #1 $ 52,700 $ -
Loan receivable #2 105,400 -
------------------------------
$ 158,100 $ -
==============================
Loan receivable #1 to a private Korean company is non-interest bearing and
the maturity date has been extended to August of 2006. The loan is due on
demand and secured by a personal guarantee and the shares of the chief
executive officer of the indebted company.
Loan receivable #2 to the chief executive officer of the indebted company
per loan receivable #1 bears interest at 6% per annum, and is due on
demand. The loan is secured by 100% of the shares of a new private company
incorporated in March 2006.
11
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
6. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes". This Standard prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates. The effects
of future changes in tax laws or rates are not anticipated. Corporate
income tax rates applicable to the Korean subsidiary in 2006 and 2005 are
16.5 percent of the first 100 million Korean Won ($84,000) of taxable
income and 29.7 percent on the excess. For the United States operation, the
corporate tax rate is approximately 34%. The company provided a valuation
allowance equal to the deferred tax amounts resulting from the tax losses
in the United States, as it is not more likely than not that they will be
realized. Tax losses from the Korean subsidiary can be carried forward for
five years to offset future taxable income. The U.S. tax losses can be
carried forward for fifteen years to offset future taxable income. The
company has accumulated approximately $7,366,728 of taxable losses, which
can be used to offset future taxable income. The utilization of the losses
expires in years 2008 to 2010.
Under SFAS No. 109 income taxes are recognized for the following: a) amount
of tax payable for the current year, and b) deferred tax liabilities and
assets for future tax consequences of events that have been recognized
differently in the financial statements than for tax purposes. The Company
has deferred income tax assets arising from research and development
expenses. For accounting purposes, these amounts are expenses when
incurred. Under Korean tax laws, these amounts are deferred and amortized
on a straight-line basis over 5 years.
The Company has deferred income tax assets as follows:
Restated
2006 2005
---- ----
Deferred income tax assets
Research and development expenses
amortized over 5 years for tax purposes $ 258,646 214,829
Other timing differences (53,810) 154,439
Net operating loss carryforwards 1,999,849 726,928
------------------------------
2,204,685 1,096,196
Valuation Allowance (note 14) 2,204,685 -
------------------------------
$ - 1,096,196
==============================
12
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
7. Investments
Investments represent 500,000 shares, 20% ownership in a private Korean
company. The investment has been accounted for by the equity method.
Carrying cost of the investment has been written off to the net equity
balance of the investee. Unrealized holding loss in investment has been
excluded from earnings and reported as a separate component of
stockholders' equity.
8. Investments in Available for Sale Securities
2006 2005
---- ----
Stock #1 15,843 48,495
Other miscellaneous 1,134 257
------------------------------
$ 16,977 $ 48,752
==============================
Stock #1 represents a minority interest in a private Korean company which
is carried at cost.
9. Equipment
Equipment is comprised as follows:
2006 2005
---- ----
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---------------------------------------------------
Furniture and fixtures 71,416 36,941 44,768 26,538
Equipment 906,424 680,337 637,418 538,891
Vehicles 17,700 1,770 15,012 15,010
Software 732,205 498,804 710,830 361,167
---------------------------------------------------
$ 1,727,745 $ 1,217,852 $ 1,408,028 $ 941,606
---------------------------------------------------
Net carrying amount $ 509,893 $ 466,422
------------ ------------
13
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
10. Loans Payable
2006 2005
---- ----
Current Long-term Total Total
---------------------------------------------------
Bank loan $ - $ - $ - $ 1,878,870
Promissory Note 39,000 - 39,000 39,000
Government loans - 38,019 38,019 100,188
Discount of
interest-free
government
loans - (8,619) (8,619) (9,273)
Vehicle Loan 4,076 9,651 13,727 -
---------------------------------------------------
$ 43,076 $ 39,051 $ 82,127 $ 2,008,785
===================================================
Promissory Note
The promissory note is non-interest bearing, unsecured, and due on demand.
Government Loan
The loan is non-interest bearing, unsecured, repayable in annual payments
of $10,143 and matures in October 2009.
Vehicle Loan
The loan is interest bearing, secured by the vehicle as disclosed in note
7, and is repayable in 36 monthly installments of $331. The loan matures in
December 2008.
14
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
11. Convertible Debentures
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" the Company accounts
for the convertible debentures as a liability at face value and no formal
accounting recognition is assigned to the value inherent in the conversion
feature.
The convertible debentures outstanding during the year were unsecured and
non-interest bearing. The debenture holders had sixteen months from the
date of their agreements (the conversion date) to convert their debentures
into common stock of the company. Any balances outstanding after the
conversion date are repayable twenty months after the conversion date (or
thirty six months after the date of the agreements).
Conversion Conversion
Price Date Maturity date Amount
--------------------------------------------------
Convertible note #1 $ 0.35 6/15/2007 12/15/2008 $ 492,800
Convertible notes #2 0.04 4/17/2007 10/17/2008 440,000
Convertible notes #3 0.14 4/17/2007 10/17/2008 2,161,334
Convertible note #4 0.35 5/17/2007 11/17/2008 5,759,057
---------------------------------------------------
8,853,191
Less: conversions as at June 30, 2006 8,853,191
------------
Total outstanding at June 30, 2006 $ -
============
The two convertible debentures outstanding at June 30, 2005 had an annual
coupon rate of 12% and 5%. The convertible debentures were repaid in 2005.
15
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
12. Capital Stock
Authorized
300,000,000 common shares, par value $0.001 per share
2006 2005
---- ----
Issued
87,179,896 common shares (2005 - 40,629,877) $ 87,180 $ 40,630
=======================
In January 2005, the Company issued 240,000 common shares for
consulting service at the value of $20,500.
In January 2005, the Company issued 2,262,424 common shares from
escrow upon the repayment of $40,000 of the convertible debenture.
In February 2005, the Company issued 622,200 common shares from escrow
upon the repayment of $50,000 of the convertible debentures.
In February 2005, 400,000 common shares were issued for consulting
services at the value of $44,000.
In March 2005, the Company issued 1,485,120 common shares from escrow
upon the repayment of $80,000 of the convertible debenture.
In March 2005, the Company repurchased 93,830 common shares for
$105,259. The excess of repurchase price over fair market value was
recorded as an employee benefit.
In March 2005, 1,905,136 common shares were issued upon the conversion
of $140,000 of convertible debenture.
In April 2005, the Company issued 1,311,769 common shares from escrow
upon the repayment of $40,000 of the convertible debenture.
In April 2005, 1,200,000 common shares were issued for consulting
services at the value of $48,000.
In April 2005, 712,500 common shares were issued upon the conversion
of $20,000 of convertible debenture.
In May 2005, 1,329,346 common shares were issued upon the conversion
of $50,000 of convertible debenture.
In May 2005, the Company issued 2,333,551 common shares from escrow
upon the repayment of $70,000 of the convertible debenture.
16
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
12. 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 from escrow
upon the repayment of $80,000 of the convertible debenture.
In July 2005, the Company issued 704,225 common shares from escrow
upon the repayment of $20,000 of the convertible debenture.
In September 2005, 500,000 common shares were issued for consulting
services at the value of $15,000.
In October 2005, 400,000 common shares were issued for consulting
services at the value of $36,000.
In December 2005, the Company issued 145,252 common shares for the
repayment of $38,492 of the convertible debenture including interest.
In April 2006, 500,000 common shares were issued for consulting
services at the value of $90,000.
In May 2006, the Company issued 44,300,542 common shares for the
repayment of $8,853,191 of the convertible debenture including
interest.
The balance of shares held in escrow in March 2006 of 10,837,180 was
returned to the company.
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:
2006 2005
---- ----
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.
17
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
12. Capital Stock (cont'd)
In August 1999, the share option plan granted 96,000 stock options for the
common stock of Cintel Korea having a $0.425 nominal par value each and an
exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In
2003, an additional 30,000 stock options were cancelled.
In March 2000, 225,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.68. In 2002, 135,000 and in
2003, an additional 47,000 of these stock options were cancelled.
In February 2001, 30,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.72. In 2003, all of these stock
options were cancelled.
In March 2003, 65,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.71. In the same year, 15,000 of
these stock options were cancelled.
The options vest gradually over a period of 3 years from the date of grant.
The term of each option shall not be more than 8 years from the date of
grant. No options have vested during the year ended December 31, 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 2006 and
2005:
2006 2005
---- ----
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 1 years 2 years
==============================
18
CINTEL CORP.
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
Unaudited
13. Contingent Liabilities and Commitments
a) 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.
b) The Company is committed to office spaces' leases obligations which
expires in December 2006 and February 2007. Future minimum annual
payments (exclusive of taxes and insurance) under the leases are as
follows:
2006 $ 48,628
2007 2,000
-------------
$ 50,628
=============
Rent expenses paid in 2006 and 2005 were $73,367 and $47,560
respectively.
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. No amount was outstanding as
at June 30, 2006 ($550,000-2005).
14. Restatement of the Previously Issued Consolidated Financial Statements
On further consideration, the Company determined that at June 30, 2006 it
was not more likely than not that deferred tax losses would be realized,
therefore, the Company provided a 100% valuation allowance against the
deferred tax losses.
The effects of this restatement are to increase the valuation allowance to
$2,204,685 from $657,039 (note 6); to decrease the deferred tax assets on
the consolidated balance sheets to nil from $1,547,646 (comprised of
$11,114 current and $1,536,532 long term); and to decrease the deferred
income taxes recoverable to nil from $244,667 on the consolidated income
statements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this quarterly report on Form 10-QSB 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
consolidated financial statements of Cintel Corp. (referred to herein as the
"Company," "we," "us," and "our") 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.
OVERVIEW
Management believes the Internet Traffic Management ("ITM") market continues to
expand globally in the near future due to an increase in Web-based applications,
server based applications and more process intensive applications in Web-based
interfaces in the market. The Company can expect to show additional revenue in
the coming quarters with the strong relationships it has established with its
enterprise level customers. In accordance with the directive of the Company's
Board of Directors, management will use the balance of fiscal year 2006 to
expand its products and markets. In the Korean market, the Company plans to
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 Hyundai HDS. We believe this partnership with HDS will
continue to enable growth for the Company in the current IT environment. The
Company is also taking steps to establish several business partnerships in the
United States. Additionally, the Company plans to study other markets to enter
where management believes the Company will be able to leverage its distribution
channels and product strengths.
The Company has selected "digital content with ITM" as a new target market and
plans to launch an online game business in 2006 to help boost sales and secure
growth within the Company. In December 2005 we applied for a game server patent
that will be used to manage traffic of online game servers. Our strategy for
online gaming is not to develop online games but to enter the online game market
by a potential acquisition of an online Korean game company. As CinTel positions
itself as an online game publisher CinTel plans to expand into China, Japan,
other Asian countries, Europe and North America with additional licensing of
qualified Korean online games.
RESULTS OF OPERATIONS
- ---------------------
Six months period ended June 30, 2006 compared to the six months ended June 30,
2005
(Unit: USD)
- -------------------------- -------------------------- --------------------------
6/30/2006 6/30/2005
- -------------------------- -------------------------- --------------------------
Revenue 3,580,714 545,973
- -------------------------- -------------------------- --------------------------
Cost of sales 3,363,304 353,768
- -------------------------- -------------------------- --------------------------
Gross Profit 217,410 192,205
- -------------------------- -------------------------- --------------------------
Expenses 1,071,630 1,003,388
- -------------------------- -------------------------- --------------------------
Operating (Loss) (854,220) (811,183)
- -------------------------- -------------------------- --------------------------
Loss Before Income Taxes (787,764) (1,061,708)
- -------------------------- -------------------------- --------------------------
The first six months of 2006 and 2005 revenues totaled approximately $3.58
million and approximately $0.55 million, respectively, which reflects an
increase of approximately of $3.03 million. The main reason for the increase in
revenue for the first six months of 2006, as compared to the six months of 2005,
was primarily attributed to the work with the Republic of Korea Air Force for
the supply of network equipment. The company generated revenue of approximately
$1.95 million from such work with the Republic of Korea Air Force during the
first six months of 2006. In addition approximately $0.25 million of the revenue
generated during the first six months of 2006 is derived from the global system
integration project in Hyundai Heavy Industries plants located in Kuwait, in
consortium with KT Corp. Another primary generator of revenue of approximately $
0.70 million during the second quarter of 2006 is derived from Shinhan Bank for
the supply of a Proxy Server solution. In the future, the company expects
significant new revenues by opening up new markets with a strong strategic
alliance with Hyundai HDS and KT Corp.
The increase in cost of sales and gross margins for the first six months of 2006
compared to the same period in 2005 was primarily attributable to the relative
increase in revenue.
5
Total expenses for the first six months of 2006 and 2005 totaled approximately
$1.07 million and approximately $1 million, respectively, resulting in an
increase of 6.8%. The increase in expenses was primarily due to the increasing
costs of consulting service in order to establish company's new vision and
strategies and find a new business model for the most profitable future business
model such as digital contents, component material, semiconductor industries and
other business opportunities.
The operating loss for the first six months of 2006 and 2005 totaled $0.85
million and $0.81 million respectively. Total loss before income taxes the first
six months of 2006 and 2005 totaled $0.78 million and $1.06 million
respectively.
Three months period ended June 30, 2006 compared to the three months ended June
30, 2005
(Unit: USD)
- -------------------------- -------------------------- --------------------------
6/30/2006 6/30/2005
- -------------------------- -------------------------- --------------------------
Revenue 1,259,015 419,455
- -------------------------- -------------------------- --------------------------
Cost of sales 1,175,595 242,090
- -------------------------- -------------------------- --------------------------
Gross Profit 83,740 177,365
- -------------------------- -------------------------- --------------------------
Expenses 590,537 498,209
- -------------------------- -------------------------- --------------------------
Operating (Loss) (506,797) (320,844)
- -------------------------- -------------------------- --------------------------
Loss Before Income Taxes (511,028) (437,979)
- -------------------------- -------------------------- --------------------------
For the three months period ended June 30, 2006 and 2005 revenues totaled
approximately $1.26 million and approximately $0.42 million, respectively, which
reflects an increase of approximately of $0.84 million. The main reason for the
increase in revenue was primarily attributed to the work with the Shinhan Bank
for the supply of a Proxy Server solution.
The increase in cost of sales for the three months period ended June 30 of 2006
compared to the same period in 2005 was primarily attributable to the relative
increase in merchandise sales.
Total expenses for the three months period ended June 30, 2006 and 2005 totaled
approximately $0.59 million and approximately $0.49 million, respectively,
resulting in an increase of 18.5%. The increase in expenses was primarily due to
the increasing costs of consulting service in order to establish the company's
new vision and strategies and find a new business model.
The operating loss for the three months period ended June 30, 2006 and 2005
totaled $0.51 million and $0.32 million respectively. Total loss before income
taxes for the three months period ended June 30, 2006 and 2005 totaled $0.51
million and $0.43 million respectively.
Management believes the Internet Traffic Management ("ITM") market continues to
expand globally in the near future due to an increase in Web-based applications,
server based applications and more process intensive processes in Web-based
interfaces in the market. The company can expect to show additional revenue and
profits in the coming quarters 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 2006 to expand its
products and markets. In the Korea, CinTel plans to 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 Hyundai
HDS. We believe this partnership with HDS will continue to enable growth for
CinTel in the current IT environment. CinTel is also taking steps to establish
several business partnerships in the United States. We have not yet entered into
any agreements to provide your solutions in the United States. Additionally,
CinTel plan to study other markets to enter where we believe we will be able to
leverage our distribution channels and product strengths.
CinTel has selected "digital content with ITM" as a new target market and plans
to launch an online game business in 2006 to help boost sales and secure growth
within the company. In December 2005 we applied for a game server patent that
will be used to manage traffic of online game servers. Our strategy for online
gaming is not to develop online games but to enter the online game market by a
potential acquisition of an online Korean game company. As CinTel positions
itself as an Online game publisher CinTel plans to expand into China, Japan,
other Asian countries, Europe and North America with additional licensing of
qualified Korean online games.
6
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, CinTel had cash and cash equivalents including short term
investment totaling $1.39 million. Management believes it has the resources
necessary to maintain its current business operations for at least twelve months
from the date this report was filed.
BUSINESS 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 functions 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.
The Korean game industry is quit unique in the world market. According to our
research the market share of Korean video games, which are strong in USA and
Japan, is just 3.8% and ranked as 8th in the world. But the global market share
of Korean online games is almost 70% (including exports to oversea markets like
Japan and China) and 100 million users in over 33 countries are enjoying Korean
online games. (Source: News clipping of Daily Sports ("Ilgan Sports"),
10-25-2005)
Online gaming is strong in Asian countries like Korea, Taiwan and China, but the
online game market in the USA and Japan is expected to grow gradually as
broadband services are becoming affordable and available. Current online game
market in USA relies on business model of advertisement, sponsor and e-commerce
through casual gaming portal site. (Source: A Study On Global Digital Contents -
game by KIPA (Korea IT Industry Promotion Agency 2003). According to our
research it is expected that the USA online game market will grow to as much as
$2.6 billion by the year 2007. (Source: 10/2003: Datamonitor, `Global Online
games' 7/2002, IDC, Online game forecast 2002-2007). And the online game market
in Europe is also expected to grow gradually as broadband is becomes more
popular.
Component material or Semiconductor along with digital contents such as online
game might be new business item. Semiconductors are the basic blocks used to
create an increasing variety of electronic products and system Improvements in
semiconductor process and design technologies continue to result in ever
smaller, more complex and more reliable devices at a lower cost per function. As
performance has increased and size and costs have decreased, semiconductors have
become common components in products used in everyday life, including personal
computers, telecommunications systems, wireless handheld devices, automotive
products, industrial automation and control systems and security applications.
According to IC Insights, the percentage of semiconductor content in electronic
equipment increased from approximately 11 percent in 1989 to approximately 21
percent in 2004. Nevertheless, the market for semiconductors has historically
been volatile. Supply and demand have fluctuated cyclically and have caused
pronounced fluctuations in prices and margins. Following a severe downturn in
2001, the industry experienced a further period of low demand and ongoing
worldwide overcapacity during 2002. In 2003 and in particular in 2004, the
semiconductor market showed stronger performance. During our 2005 financial
year, global semiconductor market growth slowed significantly.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
SIGNIFICANT ACCOUNTING POLICIES
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.
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.
7
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
Payment" (Statement 123). 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.
Allowance for Credit Loss - The allowance for credit losses is management's
estimate of incurred losses in our customer and commercial accounts receivables.
Management performs detailed review of individual portfolios to determine if an
impairment has occurred and to assess the adequacy of the allowance for credit
losses, based on historical and current trends and other factors affecting
credit losses. When receivables are past due for a period exceeding 2 years, a
100% allowance for credit losses is established without an individual analysis
of the customer. A 100% allowance for credit losses is established, in an amount
determined to be uncollectible, for the customer whom is not discontinuing
operations or is facing financial issues that could result in discontinuance of
business based on the assumptions management believes are reasonably likely to
occur in future.
On December 31, 2005, the allowance for credit losses was $1,048,068 of
$2,071,528 in accounts receivables and on December 31, 2004, the allowance for
credit losses was $970,421 of $1,565,712 of accounts receivables. The allowance
for credit losses in 2005 saw an increase of $77,647 (8%) compared to 2004. The
$970.421 allowance was established for credit losses as of December 31, 2004,
for 100% credit losses of more than 2 years. The increasing of allowances for
credit losses as of December 31, 2005 was primarily due to receivables which
occurred in 2003. We established a 100% allowance for credit losses for the
receivables of more than 2 years and for customers who have an impairment of
capital assets, are discontinuing business operations or are suffering from bad
cash flow and liquidity issues. The accounts receivables older than 2 years were
incurred because of national economic issues in the Korean market with changing
many management situations, with bankrupt companies and bad cash flow of many
companies in Korea beginning in 2000. Our credit losses ratio is moderately high
but we expect a decrease of credit losses ratio in future as most Korean
companies have restructured to establish more stable organizations.
8
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3
(Statement No. 154). Statement No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Statement No.
154 requires retrospective application of any change in accounting principle to
prior periods' financial statements. Statement No. 154 is effective for the
first fiscal period beginning after December 15, 2005. We do not expect the
implementation of Statement No. 154 to have a significant impact on our
consolidated financial statements.
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 Chief 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 Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that 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 Chief 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 to 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, that is not in the ordinary course of
business or otherwise material to the financial condition of our business. 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.
Not applicable.
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
-------------------------------------------------------------------------
4.1 Standby Equity Distribution Agreement, dated August 4, 2004,
between Cornell Capital Partners, L.P. and the Company
(Incorporated by reference to the Company's registration
statement on Form SB-2 (File No. 333-119002), filed with the
Securities and Exchange Commission on September 15, 2004)
4.2 $240,000 principal amount Compensation Debenture, due August
4, 2007, issued to Cornell Capital Partners, L.P., in
connection with the Standby Equity Distribution Agreement
(Incorporated by reference to the Company's registration
statement on Form SB-2 (File No. 333-119002), filed with the
Securities and Exchange Commission on September 15, 2004)
4.3 Convertible Note in the principal amount of $40,000 issued
to Sang Yong Oh (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on October 21, 2005)
4.4 Convertible Note in the principal amount of $400,000 issued
to Tai Bok Kim (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on October 21, 2005)
4.5 Convertible Note in the principal amount of $9,640 issued to
Meung Jun Lee (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
9
4.6 Convertible Note in the principal amount of $28,930 issued
to Jin Yong Kim (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.7 Convertible Note in the principal amount of $48,300 issued
to Su Jung Jun (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.8 Convertible Note in the principal amount of $48,300 issued
to Se Jung Oh (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.9 Convertible Note in the principal amount of $48,300 issued
to Sun Kug Hwang (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.10 Convertible Note in the principal amount of $192,864 issued
to Woo Young Moon (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on November 21, 2005)
4.11 Convertible Note in the principal amount of $336,000 issued
to Joo Chan Lee (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.12 Convertible Note in the principal amount of $483,000 issued
to Sang Ho Han (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.13 Convertible Note in the principal amount of $483,000 issued
to Jun Ro Kim (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.14 Convertible Note in the principal amount of $483,000 issued
to Tai Bok Kim (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on November 21, 2005)
4.15 Convertible Note in the principal amount of $2,082,500
issued to Tai Bok Kim (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on December 20, 2005)
4.16 Convertible Note in the principal amount of $280,000 issued
to Joo Chan Lee (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.17 Convertible Note in the principal amount of $281,065 issued
to Sang Yong Oh (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.18 Convertible Note in the principal amount of $246,400 issued
to JungMi Lee (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.19 Convertible Note in the principal amount of $59,172 issued
to Sung Min Chang (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on December 20, 2005)
4.20 Convertible Note in the principal amount of $246,400 issued
to Eun Suk Shin (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.21 Convertible Note in the principal amount of $492,800 issued
to Overnet Co., Ltd. (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on December 20, 2005)
4.22 Convertible Note in the principal amount of $98,620 issued
to Yeun Jae Jo (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.23 Convertible Note in the principal amount of $985,950 issued
to Equinox Partners Inc. (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on December 20, 2005)
4.24 Convertible Note in the principal amount of $788,950 issued
to Kei Wook Lee (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 20, 2005)
4.25 Convertible Note in the principal amount of $492,800 issued
to Seok Kyu Hong (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 30, 2005)
10
4.26 Convertible Note in the principal amount of $197,200 issued
to Moon Soo Park (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on December 30, 2005)
10.1 Distribution Agreement dated March 15, 2006 among Cintel
Corp. and InterSpace Computers, Inc. (Incorporated by
reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on May 3, 2006)
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
11
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 __, 2006 By: /s/ Sang Don Kim
-------------------------------
Sang Don Kim
Chief Executive Officer
Dated: November __, 2006 By: /s/ Kyo Jin Kang
-------------------------------
Kyo Jin Kang
Principal Financial Officer and
Principal Accounting Officer
12