CHMS 10QSB NOV. 20 2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
Quarterly
Report Pursuant to Section 13 or 15(d) of
The
Securities Exchange Act of 1934
For
the quarterly period ended: September 30, 2006
Commission
file number 0-26559
CIK
No. 0001082603
CHINA
MOBILITY SOLUTIONS, INC.
|
(Exact
name of registrant as specified in this charter)
|
|
|
N/A
|
(Former
Name of Registrant)
|
Florida
|
|
330-751560
|
(State
of other jurisdiction
of
incorporation or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
#900
- 789 West Pender Street, Vancouver, B.C. Canada
|
|
V6C
1H2
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s
telephone number, including area code:
|
|
(604)
632-9638
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements
for
at least the past 90 days.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No
[X]
As
of
November 20, 2006, there were 20,011,792 shares of $0.001 par value common
stock
outstanding.
CHINA
MOBILITY SOLUTIONS, INC.
(FORMERLY
XIN NET CORP.)
INDEX
TO QUARTERLY REPORT
ON
FORM 10-QSB
September
30, 2006
PART
I. FINANCIAL INFORMATION
PAGE
ITEM
1.
Financial Statements
Consolidated
Balance Sheets F-1
Consolidated
Statements of Operations F-2
Consolidated
Statements of Cash Flows F-3
Notes
to
Consolidated Financial Statements F-4
ITEM
2.
Management’s Discussion and Analysis 18
ITEM
3.
Controls and Procedures 22
PART
II. OTHER INFORMATION
ITEM
1.
Legal Proceedings 23
ITEM
2.
Unregistered Sales of Equity Securities and Use of Proceeds 23
ITEM
3.
Defaults Upon Senior Securities 23
ITEM
4.
Submission of Matters to a Vote of Security Holders
24
ITEM
5.
Other Information 24
ITEM
6.
Exhibits 24
SIGNATURE 25
PART
1. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
The
financial statements have been adjusted with all adjustments, which, in the
opinion of management, are necessary in order to make the financial statements
not misleading.
For
financial information, please see the financial statements and the notes
thereto, attached hereto and incorporated herein by this reference.
The
financial statements have been prepared by China Mobility Solutions, Inc.
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted as allowed by such rules and regulations, and management believes that
the disclosures are adequate to make the information presented not misleading.
These financial statements include all of the adjustments which, in the opinion
of management, are necessary to a fair presentation of financial position and
results of operations. All such adjustments are of a normal and recurring
nature. These financial statements should be read in conjunction with the
audited financial statements at December 31, 2005, included in the Company’s and
Form 10-KSB/A.
Cautionary
and Forward Looking Statements
In
addition to statements of historical fact, this Form 10-QSB contains
forward-looking statements. The presentation of future aspects of China Mobility
Solutions, Inc. (the “Company”) found in these statements is subject to a number
of risks and uncertainties that could cause actual results to differ materially
from those reflected in such statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management’s
analysis only as of the date hereof. Without limiting the generality of the
foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” or “could” or the negative variations thereof or comparable
terminology are intended to identify forward-looking statements.
These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause the Company’s actual results to be materially
different from any future results expressed or implied in those statements.
Important facts that could prevent the Company from achieving any stated goals
include, but are not limited to, the following:
Some
of
these risks might include, but are not limited to, the following:
|
(a)
|
failure
of the Company to repay the subordinated convertible debentures which
are
in default;
|
|
(b)
|
volatility
or decline of the Company’s stock
price;
|
|
(c)
|
potential
fluctuation in quarterly results;
|
|
(d)
|
failure
of the Company to earn revenues or
profits;
|
|
(e)
|
inadequate
capital to continue or expand its business, inability to raise additional
capital or financing to implement its business
plans;
|
|
(f)
|
failure
to commercialize its technology or to make
sales;
|
|
(g)
|
rapid
and significant changes in markets;
|
|
(h)
|
litigation
with or legal claims and allegations by outside
parties;
|
|
(i)
|
insufficient
revenues to cover operating costs.
|
There
is
no assurance that the Company will be profitable, the Company may not be able
to
successfully develop, manage or market its products and services, the Company
may not be able to attract or retain qualified executives and technology
personnel, the Company’s products and services may become obsolete, government
regulation may hinder the Company’s business, additional dilution in outstanding
stock ownership may be incurred due to the issuance of more shares, warrants
and
stock options, or the exercise of warrants and stock options, and other risks
inherent in the Company’s businesses.
The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB
filed by the Company for December 31, 2005 and any Current Reports on Form
8-K
filed by the Company, as well as the Company Registration Statement on Form
SB-2
declared effective on August 7, 2006.
China
Mobility Solutions, Inc. and Subsidiaries
|
Consolidated
Balance Sheets
|
(Expressed
in US Dollars)
|
|
|
September
30,
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
|
(Unaudited)
|
|
(Audited)
|
ASSETS
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
4,617,226
|
$
|
6,138,609
|
Accounts
receivable
|
|
3,182
|
|
5,870
|
Prepaid
expenses and other current assets
|
|
15,146
|
|
235,165
|
Due
from related parties
|
|
36,157
|
|
33,249
|
Total
Current Assets
|
|
4,671,711
|
|
6,412,893
|
Property
and Equipment, net of accumulated depreciation
|
|
7,096
|
|
6,248
|
of
$42,662 and 40,481, respectively
|
|
|
|
|
Other
Assets
|
|
|
|
|
Deposit
paid in connection with contemplated acquisition of Beijing Topbiz
(Note
2)
|
|
950,000
|
|
-
|
Investment
|
|
1
|
|
1
|
Goodwill
|
|
4,802,520
|
|
4,802,520
|
Other
assets
|
|
673
|
|
701
|
Total
Assets
|
$
|
10,432,001
|
$
|
11,222,363
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
$
|
652,753
|
$
|
362,013
|
Deferred
revenue
|
|
2,160,262
|
|
3,053,282
|
Convertible
debentures (Note 3)
|
|
3,325,000
|
|
3,350,000
|
Total
current liabilities
|
|
6,138,015
|
|
6,765,295
|
|
|
|
|
|
Commitments
and Contingencies
|
|
-
|
|
-
|
Stockholders'
Equity
|
|
|
|
|
Common
stock, $0.001 par value; authorized 500,000,000 shares,
|
|
|
|
|
issued
and outstanding: 20,011,792 and 20,011,792 shares,
respectively
|
|
20,012
|
|
20,012
|
Additional
paid-in capital
|
|
18,492,826
|
|
18,442,826
|
Accumulated
deficit
|
|
(14,006,965)
|
|
(13,804,409)
|
Accumulated
other comprehensive income (loss)
|
|
(211,887)
|
|
(201,361)
|
Total
stockholders' equity
|
|
4,293,986
|
|
4,457,068
|
Total
Liabilities and Stockholders' Equity
|
$
|
10,432,001
|
$
|
11,222,363
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue
|
|
|
|
|
|
|
|
|
Mobile
marketing services
|
$
|
1,383,263
|
$
|
1,190,328
|
$
|
4,275,287
|
$
|
3,376,829
|
Tuition
fee
|
|
35,670
|
|
53,100
|
|
64,960
|
|
160,408
|
|
|
1,418,933
|
|
1,243,428
|
|
4,340,247
|
|
3,537,237
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
Mobile
marketing services
|
|
316,959
|
|
368,552
|
|
913,128
|
|
903,022
|
Tuition
fee
|
|
400
|
|
16,596
|
|
7,292
|
|
43,614
|
|
|
317,359
|
|
385,148
|
|
920,420
|
|
946,636
|
Gross
Profit
|
|
1,101,574
|
|
858,280
|
|
3,419,827
|
|
2,590,601
|
Selling,
general, and administrative expenses
|
|
958,027
|
|
1,209,981
|
|
3,003,970
|
|
2,893,064
|
Income
(loss) from Operations
|
|
143,547
|
|
(351,701)
|
|
415,857
|
|
(302,463)
|
Other
Income
|
|
|
|
|
|
|
|
|
Interest
income
|
|
14,787
|
|
24,211
|
|
63,280
|
|
60,625
|
Interest
expense on convertible debentures
|
|
(80,975)
|
|
(24,412)
|
|
(199,725)
|
|
(24,414)
|
Costs
relating to convertible debentures:
|
|
|
|
|
|
|
|
|
Fair
value of warrants issued
|
|
-
|
|
(6,891,470)
|
|
-
|
|
(6,891,470)
|
Intrinsic
value of conversion feature
|
|
-
|
|
(1,052,863)
|
|
-
|
|
(1,052,863)
|
Costs
associated with offering
|
|
-
|
|
(572,859)
|
|
-
|
|
(572,859)
|
Late
registration penalty fees
|
|
(79,968)
|
|
-
|
|
(481,968)
|
|
-
|
Other
income (expense) - net
|
|
(146,156)
|
|
(8,517,393)
|
|
(618,413)
|
|
(8,480,981)
|
Income
(loss) before Income Taxes
|
|
(2,609)
|
|
(8,869,094)
|
|
(202,556)
|
|
(8,783,444)
|
Income
tax expense
|
|
-
|
|
-
|
|
-
|
|
-
|
Income
(loss) before minority interest
|
|
(2,609)
|
|
(8,869,094)
|
|
(202,556)
|
|
(8,783,444)
|
Minority
interest
|
|
-
|
|
(6,141)
|
|
-
|
|
(138,469)
|
Net
income (loss)
|
|
(2,609)
|
|
(8,875,235)
|
-
|
(202,556)
|
|
(8,921,913)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
11,307
|
|
97,536
|
|
(10,526)
|
|
92,942
|
Comprehensive
income (loss)
|
$
|
8,698
|
$
|
(8,777,699)
|
$
|
(213,082)
|
$
|
(8,828,971)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.00)
|
$
|
(0.49)
|
$
|
(0.01)
|
$
|
(0.52)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares used to compute net income per
share
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
20,011,792
|
|
17,929,279
|
|
20,011,792
|
|
16,996,285
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $0.001 par value
|
|
Additional
|
|
|
|
Accumulated
other
|
|
|
|
|
paid-in
|
|
Accumulated
|
|
comprehensive
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
deficit
|
|
income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
15,826,792
|
$
|
15,827
|
$
|
8,770,378
|
$
|
(4,640,956)
|
$
|
(183,532)
|
$
|
3,961,717
|
Issuance
of common stock for cash on
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options on February
|
|
|
|
|
|
|
|
|
|
|
|
24,
2005 at $0.30
|
495,000
|
|
495
|
|
148,005
|
|
-
|
|
-
|
|
148,500
|
Issuance
of common stock for services
|
|
|
|
|
|
|
|
|
|
|
-
|
rendered
|
600,000
|
|
600
|
|
350,700
|
|
-
|
|
-
|
|
351,300
|
Issuance
of common stock for cash on
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options on September
|
|
|
|
|
|
|
|
|
|
|
|
1,
2005 at $0.40
|
500,000
|
|
500
|
|
199,500
|
|
-
|
|
-
|
|
200,000
|
Issuance
of common stock for cash on
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options on September
|
|
|
|
|
|
|
|
|
|
|
|
1,
2005 at $0.35
|
2,590,000
|
|
2,590
|
|
903,910
|
|
-
|
|
-
|
|
906,500
|
Stock-based
compensation
|
-
|
|
-
|
|
126,000
|
|
-
|
|
-
|
|
126,000
|
Fair
value of new Series "A" warrants issued
|
-
|
|
-
|
|
3,254,305
|
|
-
|
|
|
|
3,254,305
|
Fair
value of new Series "B" warrants issued
|
-
|
|
-
|
|
3,637,165
|
|
-
|
|
-
|
|
3,637,165
|
Intrinsic
value of the conversion feature of the
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debenture
|
-
|
|
-
|
|
1,052,863
|
|
-
|
|
-
|
|
1,052,863
|
Net
loss for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
-
|
|
-
|
|
-
|
|
(9,163,453)
|
|
-
|
|
(9,163,453)
|
Foreign
currency translation adjustment
|
-
|
|
-
|
|
-
|
|
-
|
|
(17,829)
|
|
(17,829)
|
Balance
at December 31, 2005
|
20,011,792
|
$
|
20,012
|
$
|
18,442,826
|
$
|
(13,804,409)
|
$
|
(201,361)
|
$
|
4,457,068
|
Unaudited:
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of 200,000 warrants issued for
|
|
|
|
|
|
|
|
|
|
|
|
service
rendered
|
-
|
|
-
|
|
50,000
|
|
-
|
|
-
|
|
50,000
|
Net
loss for the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
-
|
|
-
|
|
-
|
|
(202,556)
|
|
-
|
|
(202,556)
|
Foreign
currency translation adjustment
|
-
|
|
-
|
|
-
|
|
-
|
|
(10,526)
|
|
(10,526)
|
Balance
at September 30, 2006
|
20,011,792
|
$
|
20,012
|
$
|
18,492,826
|
$
|
(14,006,965)
|
$
|
(211,887)
|
$
|
4,293,986
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
2006
|
|
2005
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Cash
Flows from Operating Activities
|
|
|
|
|
Net
loss
|
$
|
(202,556)
|
$
|
(8,921,913)
|
Adjustments
to reconcile net income (loss)
|
|
|
|
|
to
net cash provided by (used for) operating activities:
|
|
|
|
|
Depreciation
|
|
2,209
|
|
1,933
|
Stock-based
compensation
|
|
50,000
|
|
317,650
|
Fair
value of warrants issued with convertible debentures
|
|
-
|
|
6,891,470
|
Intrinsic
value of conversion feature of the convertible debentures
|
|
-
|
|
1,052,863
|
Foreign
currency translation adjustment
|
|
(10,526)
|
|
92,942
|
Minority
interest
|
|
-
|
|
138,469
|
Changes
in operating assets and liabilities
|
|
|
|
|
Accounts
receivable
|
|
2,688
|
|
28,356
|
Prepaid
expenses
|
|
220,019
|
|
(139,680)
|
Due
from related parties
|
|
(2,908)
|
|
(2,709)
|
Accounts
payable and other accrued liabilities
|
|
290,740
|
|
1,982,049
|
Deferred
revenue
|
|
(893,020)
|
|
362,760
|
Net
cash provided by (used for) operating activities
|
|
(543,354)
|
-
|
1,804,190
|
Cash
Flows from Investing Activities
|
|
|
|
|
Purchases
of remaining interest of Quicknet
|
|
-
|
|
(4,000,000)
|
Deposit
paid in connection with contemplated acquisition of Beijing
Topbiz
|
|
(950,000)
|
|
-
|
Purchase
of property and equipment
|
|
(3,029)
|
|
(2,346)
|
Net
cash provided by (used for) investing activities
|
|
(953,029)
|
|
(4,002,346)
|
Cash
Flows from Financing Activities
|
|
|
|
|
Issuance
of common stock for cash
|
|
-
|
|
1,115,000
|
Issuance
of convertible debentures for cash
|
|
-
|
|
3,350,000
|
Repayment
of convertible debentures
|
|
(25,000)
|
|
-
|
Net
cash provided by (used for) financing activities
|
|
(25,000)
|
|
4,465,000
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
-
|
|
(12,943)
|
Increase
(decrease) in cash and cash equivalents
|
|
(1,521,383)
|
|
2,253,901
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
6,138,609
|
|
5,380,622
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
$
|
4,617,226
|
|
7,634,523
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
Interest
paid
|
$
|
222,725
|
$
|
2
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
CHINA
MOBILITY SOLUTIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(
Unaudited )
1.
Basis of Presentation
The
accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
However, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have
been
omitted or condensed pursuant to the rules and regulations of the Securities
and
Exchange Commission (“SEC”). In the opinion of management, all adjustments of a
normal recurring nature necessary for a fair presentation have been included.
The results for interim periods are not necessarily indicative of results for
the entire year. These condensed consolidated financial statements and
accompanying notes should be read in conjunction with the Company’s annual
consolidated financial statements and the notes thereto for the year ended
December 31, 2005 included in its Annual Report on Form 10-KSB.
The
unaudited condensed consolidated financial statements include China Mobility
Solutions, Inc. and its subsidiaries. All inter company transactions and
accounts have been eliminated in consolidation.
Certain
items have been reclassified to conform to the current period presentation.
These reclassifications had no effect on reported consolidated net income
(loss).
2.
Beijing Topbiz Technology Development Corp., Ltd.
On
August
8, 2006, the Company, through its wholly owned subsidiary, Infornet Investment
Limited (“Infornet”) and Mr. Xin Wei, a citizen and resident of the People’s
Republic of China (“China”) and President of a subsidiary of the Company (“Wei”)
(Infornet and Wei together being referred to as the “Purchasers”), QiFang Niu
and XiaoXia Chen, both citizens and residents of the China (together being
referred to as the “Sellers”) and Beijing
Topbiz Technology Development Corp., Ltd.
(“Topbiz”), a company organized and existing under the laws of China, entered
into a Share Purchase Agreement (the “Agreement”) providing for the acquisition
by the Purchasers of control of Topbiz from the Sellers.
Under
the
Agreement, Infornet will directly acquire 49% of the capital stock of Topbiz,
and indirectly acquire control through Mr. Wei of an additional 11% of Topbiz,
giving it effective control of 60% of Topbiz. The Company will pay the Sellers
on a pro rata basis US$3,700,000 in cash and issue to them on a pro rata basis
8,081,818 new investment shares in an offering which is intended to be exempt
from registration pursuant to Regulation S under the Securities Act of 1933,
as
amended. This acquisition structure was chosen to comply with China’s foreign
ownership rules which permit the Company, at this point in time, to have a
direct ownership stake in Topbiz of up to 49%. Mr. Wei has agreed to execute
and
deliver to Infornet a Stock Option Agreement in the form and substance
satisfactory to Infornet, which grants Infornet, among other things, the option
to purchase his 11% ownership stake that he will acquire under the Agreement
for
an aggregate price of $100, upon the satisfaction of certain conditions
precedent.
The
parties intend that the transactions contemplated by the Agreement will be
consummated as promptly as practicable, after satisfaction or waiver of certain
conditions of closing in favor of the Purchasers. These include, among other
things, that (i) all representations and warranties of the Sellers contained
in
the Agreement shall be true on and as of the Closing Date, (ii) all covenants
and agreements of the Sellers to be performed on or before the Closing Date
shall be duly performed, (iii) audited financial statements of Topbiz from
inception to March 31, 2006, shall have been completed, and (iv) the Stock
Option Agreement shall have been executed and delivered by Mr. Wei.
Topbiz
develops and customizes short messaging system, or SMS, platforms for banks
in
China. The 8,081,818 shares issued in connection with the acquisition will
be
subject to a one-year restriction on transfer to a U.S. person pursuant to
Regulation S.
As
of
September 30, 2006, $950,000 has been paid by the Company as a deposit. The
remainder of the $3,700,000 purchase price is expected to be paid $1,350,000
in
December 2006 and $1,400,000 in February 2007. Closing is expected to occur
in
January 2007.
3.
Convertible debentures
On
August
15, 2005, the Company completed an offering of 134 units ("Units") for
$3,350,000. Each Unit was sold for $25,000, consisting of $25,000 principal
amount of senior convertible debentures (the "Debentures"), and one
new
Series “A” Warrant and one new Series “B” Warrant. The Debentures were initially
convertible at $0.35 per share for 71,429 shares of common stock of the Company;
maturing on August 15, 2006 and accruing interest at a rate of not less than
6%
per annum equal to the sum of 2% per annum plus the one-month London Inter-Bank
Offer Rate (“LIBOR”). The Debentures are subject to redemption at 125% of the
principal amount plus accrued interest commencing six months after August 7,
2006.
Each
Unit
also included: (i) new Series “A” Warrants exercisable at $0.44 per share to
purchase 71,429 shares of Common Stock of the Company until February 15, 2008;
and (ii) new Series “B” Warrants exercisable at $0.52 per share to purchase
71,429 shares of Common Stock until February 15, 2009. The new Series “A” and
new Series “B” Warrants are subject to redemption by the Company at $0.001 per
Warrant at any time commencing six months and twelve months, respectively,
from
August 7, 2006, provided the average closing bid price of the common stock
of
the Company equals or exceeds 175% of the respective exercise prices for 20
consecutive trading days.
On
January 18, 2006, the Company received a letter (the “Default Notice”) from
the attorney for Southridge Partners, LP, (the “Lender”), the holder
of $500,000 principal amount of the Company's Senior Convertible
Debentures (the “Debenture”) stating that the Company was in default
of certain transaction agreements (the “Transaction Agreements”) issued in
connection with the Debenture by virtue of the Company's issuance of registered
shares of stock to employees and consultants under a Form S-8 registration
statement and the filing of the Form S-8 prior to the date of effectiveness,
August 7, 2006, of the Company’s SB-2 Registration Statement required under the
Registration Rights Agreement (one of the Transaction
Agreements).
The
Company denied that it was in default of the Transaction Agreements. However,
in
order to avoid costly litigation, the parties entered into a waiver/settlement
agreement on May 4, 2006 (the “Waiver/Settlement Agreement”).
In
accordance with the terms of the Waiver/Settlement Agreement, the initial
conversion price of the Debenture was reduced from $.35 per share to $.30 per
share, the new Series “A” Warrant exercise price was reduced from $.44 to $.38
per share and the new Series “B” Warrant exercise price was reduced from $.52 to
$.45 per share. In addition, the number of shares of the Company’s common stock
exercisable upon conversion of each $25,000 principal amount of Debenture and
upon exercise of the new Series “A” and new Series “B” Warrants included in each
Unit was increased from 71,429 shares to 83,333 shares for each of the
Debenture, Class A Warrants and Class B Warrants, or an aggregate of 250,000
shares per unit. Except for the holder of $300,000 of the Debentures discussed
in the third succeeding paragraph, these revised terms will apply to all other
Debentures (totaling $3,025,000).
The
Lender waived the S-8 Default set forth in the Default Notice and the Company
agreed not to file any additional S-8 Registration Statements prior to 45 days
after August 7, 2006.
As
of
September 30, 2006, the Company had not repaid $3,325,000 of the Debentures
due
on August 15, 2006. The Company has paid all interest on the Debentures accrued
through August 15, 2006. The Company had applied to the regulatory authority
in
China to approve converting a subsidiary's funds into U.S. dollars and repay
the
Debentures and was denied. The Company has been advised that the Beijing Rule
of
Liquidation is the sole means of assuring repayment of the Debentures. In
October 2006, the Company began the process of submitting an application for
such liquidation to the regulatory authority. The liquidation will take between
180 to 270 days. Part of the reason for the delay is the requirement of the
liquidator to appoint an auditor to do the appraisal of an evaluation of the
assets of the Company and to submit such appraisal to the regulatory authority
for approval. The Company does not believe it will affect its subsidiary's
business operations as reorganized.
The
holder of an aggregate of $300,000 of the Debentures has agreed to extend the
extend the due date to August 15, 2007 with an interest rate of 10% per annum
starting from August 15, 2007 and the exercise price of the new Series “A”
Warrants and new Series “B” Warrants being reduced to $0.15 and $0.20 per share
respectively. Other terms remain the same.
The
Company received letters (the “Default Letters”) from the attorneys for two
holders of an aggregate $875,000 principal amount of Debentures stating that
the
Company was in default under the Debentures as a result of its failure to pay
principal plus interest thereon. The Company has paid all interest on the
Debentures accrued through
August
15, 2006. Interest accrued on the Debentures though maturity, at the rate of
not
less than 6% per annum equal to the sum of 2% per annum plus the one month
LIBOR
rate. From the maturity date of August 15, 2006, except for the extended
$300,000 Debenture discussed in the preceding paragraph, interest on the other
$3,025,000 outstanding principal amount of Debentures and unpaid accrued
interest accrues at the rate of 12% per annum.
The
Registration Rights Agreement provided that the Company would register the
common stock underlying the Units by December 31, 2005 and, for each month
late,
the Company would be obligated to pay the Debenture holders penalty fees equal
to 2% of the outstanding principal amount. The Company’s registration statement
on Form SB-2 was declared effective by the Securities and Exchange Commission
on
August 7, 2006. Accordingly, the Company has recorded $79,968 and $481,968
as an
expense, in the statement of operations for the three months and nine months
ended September 30, 2006 respectively.
Interest
payable of $59,888 and late registration penalty fees of $337,968 are included
in accounts payable and accrued liabilities at September 30, 2006.
4.
Share Purchase Warrants
On
May 5,
2006, the Company granted 200,000 Series “C” warrants at an exercise price of
$0.45 each to a consultant for their investor relations services expiring on
May
5, 2010. The fair value of the warrants granted was estimated at $0.25 by using
the Black-Scholes Option Pricing Model with the following weighted average
assumptions: dividend yield of 0%, expected volatility of 144%, risk-free
interest rates of 4.31%, and expected lives of four years.
During
the nine-month period ended September 30, 2006, 10 Series “B” warrants which
entitle the holders to purchase a common share of the Company at $2.25 each
expired on March 31, 2006.
As
of
September 30, 2006, 122 new Series “A” warrants were outstanding which entitle
the holders to purchase 83,333 common shares of the Company at $0.38 until
February 15, 2008. 122 new Series “B” warrants were outstanding which entitle
the holders to purchase 83,333 common shares of the Company at $0.45 until
February 15, 2009. 12 amended new Series “A” warrants were outstanding which
entitle the holders to purchase 83,333 common shares of the Company at $0.15
each until February 15, 2008. 12 amended new Series “B” warrants were
outstanding which entitle the holders to purchase 83,333 common shares of the
Company at $0.45 until February 15, 2009. 200,000 Series “C” warrants were
outstanding which entitle the holders to purchase 200,000 common shares of
the
Company at $0.45 each expiring on May 5, 2010.
5.
Stock Options
The
Company filed S-8 for its 2006 non-qualified Stock Option Plan with Securities
Exchange Commission on November 3, 2005. The total number of shares of the
Company available for grants of stock options and common stock under the Plan
shall be 4,000,000 common shares. Stock options may be granted to non-employees
and directors of the Company or other persons who are performing or who have
been engaged to perform services of special importance to the management,
operation or development of the Company. All stock options granted hereunder
must be granted within ten years from the earlier of the date of this Plan
is
adopted or approved by the Company’s shareholders. No stock option granted to
any employee or 10% shareholder shall be exercisable after the expiration of
ten
years from the date such non qualifying stock option (“NQSO”) is granted. The
Company, in its discretion, may provide that an option shall be exercisable
during such ten year period or during any lesser period of time. At the
discretion of the Company, through the delivery of fully paid and non-assessable
common shares, with an aggregate fair market value on the date the NQSO is
exercised equal to the option price, provided such tendered shares have been
owned by the Optionee for at least one year prior to such exercise.
Options
outstanding at September 30, 2006 were 660,000 with an option exercise price
of
$0.30 per share. No options were granted, exercised, canceled or forfeited
during the nine-month period ended September 30, 2006. The weighted average
remaining contractual life is 0.81 years.
Prior
to
January 1, 2006, the Company accounted for stock-based awards under the
intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”,
and related Interpretations. The intrinsic value method of accounting resulted
in compensation expense for stock options to the extent that the exercise prices
were set below the fair market price of the Company’s stock at the date of
grant.
As
of
January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
prospective method, which requires measurement of compensation cost for all
stock-based awards at fair value on the date of grant and recognition of
compensation over the service period for awards expected to vest. The fair
value
of stock options is determined using the Black-Scholes valuation model, which
is
consistent with the Company’s valuation techniques previously utilized for
options in footnote disclosures required under SFAS No. 123, “Accounting for
Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock
Based Compensation Transition and Disclosure”.
Since
the
Company did not issue stock options to employees during the nine months ended
September 30, 2006, there is no effect on net loss or earnings per share had
the
Company applied the fair value recognition provisions of SFAS No. 123(R) to
stock-based employee compensation. When the Company issues shares of common
stock to employees and others, the shares of common stock are valued based
on
the market price at the date the shares of common stock are approved for
issuance.
6.
Segment and Geographic Data
The
Company’s reportable segments are geographic areas and two operating segments,
the latter comprised of mobile communications and ESL education. Summarized
financial information concerning the Company’s reportable segments is shown in
the following table. The “Other” column includes corporate related items, and,
as it relates to segment profit (loss), income and expenses not allocated to
reportable segments.
A.
By geographic
areas |
|
China |
Canada |
Other |
Total |
|
|
|
|
|
|
|
|
Three
months ended September
30, 2006 |
|
|
|
|
Revenue
from continuing
operations |
$
1,383,263 |
$
35,670 |
$
- |
$
1,418,933 |
Operating
income
(loss) |
|
279,157 |
(36,229) |
(99,381) |
143,547 |
Total
assets |
|
|
5,404,209 |
91,945 |
4,935,847 |
10,432,001 |
Depreciation |
|
|
- |
849 |
- |
849 |
Interest
income |
|
|
7,920 |
39 |
6,828 |
14,787 |
Interest
expense |
|
|
- |
40 |
80,935 |
80,975 |
Investment
in equity method
investee |
- |
- |
1 |
1 |
|
|
|
|
|
|
|
|
Three
months ended September
30, 2005 |
|
|
|
|
Revenue
from continuing
operations |
$
1,190,328 |
$
53,100 |
$
- |
$
1,243,428 |
Operating
income
(loss) |
|
89,897 |
465 |
(442,063) |
(351,701) |
Total
assets |
|
|
9,984,876 |
128,825 |
2,706,439 |
12,820,140 |
Depreciation |
|
|
- |
765 |
1,444 |
2,209 |
Interest
income |
|
|
24,202 |
9 |
- |
24,211 |
Interest
expense |
|
|
- |
- |
24,412 |
24,412 |
Investment
in equity method
investee |
- |
- |
1 |
1 |
A.
By geographic
areas |
|
China |
Canada |
Other |
Total |
|
|
|
|
|
|
|
|
Nine
months ended September
30, 2006 |
|
|
|
|
Revenue
from continuing
operations |
$
4,275,287 |
$
64,960 |
$
- |
$
4,340,247 |
Operating
income
(loss) |
|
1,127,498 |
(110,114) |
(601,527) |
415,857 |
Total
assets |
|
|
5,404,209 |
91,945 |
4,935,847 |
10,432,001 |
Depreciation |
|
|
- |
2,209 |
- |
2,209 |
Interest
income |
|
|
21,993 |
718 |
40,569 |
63,280 |
Interest
expense |
|
|
- |
59 |
199,666 |
199,725 |
Investment
in equity method
investee |
- |
- |
1 |
1 |
|
|
|
|
|
|
|
|
Nine
months ended September
30, 2005 |
|
|
|
|
Revenue
from continuing
operations |
$
3,376,829 |
$
160,408 |
$
- |
$
3,537,237 |
Operating
income
(loss) |
|
351,823 |
(28,237) |
(626,049) |
(302,463) |
Total
assets |
|
|
9,984,876 |
128,825 |
2,706,439 |
12,820,140 |
Depreciation |
|
|
- |
1,925 |
8 |
1,933 |
Interest
income |
|
|
60,605 |
20 |
- |
60,625 |
Interest
expense |
|
|
- |
- |
24,414 |
24,414 |
Investment
in equity method
investee |
- |
- |
1 |
1 |
|
|
|
|
|
Mobile |
ESL |
|
|
B.
By operating
segments |
|
|
communications |
education |
Other |
Total |
|
|
|
|
|
|
|
|
|
For
the three months ended
September 30, 2006 |
|
|
|
Revenue
from external
customers |
|
$
1,383,263 |
$
35,670
|
$
- |
$
1,418,933
|
Intersegment
revenue |
|
|
- |
- |
- |
- |
Interest
revenue |
|
|
7,091 |
39 |
7,657 |
14,787 |
Interest
expense |
|
|
- |
- |
80,975 |
80,975 |
Depreciation |
|
|
|
- |
449 |
400 |
849 |
Segment
operating profit
(loss) |
|
276,125 |
(4,856) |
(127,722) |
143,547 |
Segment
assets |
|
|
3,549,630 |
57,952 |
6,824,419 |
10,432,001
|
|
|
|
|
|
|
|
|
|
For
the three months ended
September 30, 2005 |
|
|
|
Revenue
from external
customers |
|
$
1,190,328 |
$
53,100
|
$
- |
$
1,243,428
|
Intersegment
revenue |
|
|
- |
- |
- |
- |
Interest
revenue |
|
|
5,310 |
9 |
18,892 |
24,211 |
Interest
expense |
|
|
- |
- |
24,412 |
24,412 |
Depreciation |
|
|
|
- |
569 |
1,640 |
2,209 |
Segment
operating profit
(loss) |
|
7,221 |
7,697 |
(366,619) |
(351,701) |
Segment
assets |
|
|
2,772,366 |
111,022
|
9,936,752 |
12,820,140
|
|
|
|
|
|
Mobile |
ESL |
|
|
|
B.
By operating
segments |
|
|
communications |
education |
Other |
Total |
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
September 30, 2006 |
|
|
|
|
Revenue
from external
customers |
|
$
4,275,287 |
$
64,960 |
$
- |
$
4,340,247
|
|
Intersegment
revenue |
|
|
- |
- |
- |
- |
|
Interest
revenue |
|
|
19,944 |
718 |
42,618 |
63,280 |
|
Interest
expense |
|
|
- |
- |
199,725 |
199,725 |
|
Depreciation |
|
|
|
- |
1,333 |
876 |
2,209 |
|
Segment
operating profit
(loss) |
|
1,121,594 |
(39,067) |
(666,670) |
415,857 |
|
Segment
assets |
|
|
3,549,630 |
57,952 |
6,824,419 |
10,432,001
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
September 30, 2005 |
|
|
|
|
Revenue
from external
customers |
|
$
3,376,829 |
$
160,408
|
$
- |
$
3,537,237
|
|
Intersegment
revenue |
|
|
- |
- |
- |
- |
|
Interest
revenue |
|
|
14,280 |
20 |
46,325 |
60,625 |
|
Interest
expense |
|
|
- |
- |
24,414 |
24,414 |
|
Depreciation |
|
|
|
- |
1,646 |
287 |
1,933 |
|
Segment
operating profit
(loss) |
|
268,309 |
21,288 |
(592,060) |
(302,463) |
|
Segment
assets |
|
|
2,772,366 |
111,022 |
9,936,752 |
12,820,140
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The
information presented here should be read in conjunction with China Mobility
Solutions, Inc.’s consolidated financial statements and related notes. In
addition to historical information, the following discussion and other parts
of
this document contain certain forward-looking information. When used in this
discussion, the words “believes,” “anticipates,” “expects,” and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected due to a number of factors beyond
the
Company’s control. The Company does not undertake to publicly update or revise
any of its forward-looking statements even if experience or future changes
show
that the indicated results or events will not be realized. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Readers are also urged to carefully review and
consider the Company’s discussions regarding the various factors, which affect
its business, included in this section and elsewhere in this
report.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, accounts receivable and
allowance for doubtful accounts, intangible and long-lived assets, and income
taxes. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at
the
time the estimate is made, and if different estimates that reasonably could
have
been used or changes in the accounting estimate that are reasonably likely
to
occur could materially change the financial statements. We believe the following
critical accounting policies reflect our more significant estimates and
assumptions in the preparation of our consolidated financial
statements:
Contingencies
- We may be subject to certain asserted and unasserted claims encountered in
the
normal course of business. It is our belief that the resolution of these matters
will not have a material adverse effect on our financial position or results
of
operations, however, we cannot provide assurance that damages that result in
a
material adverse effect on our financial position or results of operations
will
not be imposed in these matters. We account for contingent liabilities when
it
is probable that future expenditures will be made and such expenditures can
be
reasonably estimated.
Income
Taxes - We record a valuation allowance to reduce our deferred tax assets to
the
amount that is more likely than not to be realized. We have considered future
market growth, forecasted earnings, future taxable income, and prudent and
feasible tax planning strategies in determining the need for a valuation
allowance. We currently have recorded a full valuation allowance against net
deferred tax assets as we currently believe it is more likely than not that
the
deferred tax assets will not be realized.
Valuation
Of Long-Lived Assets - We review property, plant and equipment and other assets
for impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Our asset impairment review assesses
the fair value of the assets based on the future cash flows the assets are
expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset
plus
net proceeds expected from disposition of the asset (if any) are less than
the
carrying
value of the asset. When an impairment is identified, the carrying amount of
the
asset is reduced to its estimated fair value. Deterioration of our business
in a
geographic region could lead to impairment adjustments when identified. The
accounting effect of an impairment loss would be a charge to income, thereby
reducing our net profit.
RESULTS
OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE PERIOD
ENDED SEPTEMBER 30, 2005
The
information presented here should be read in conjunction with China Mobility
Solutions Inc.’s consolidated financial statements and related notes. In
addition to historical information, the following discussion and other parts
of
this document contain certain forward-looking information. When used in this
discussion, the words “believes,” “anticipates,” “expects,” and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected due to a number of factors beyond
the
Company’s control. The Company does not undertake to publicly update or revise
any of its forward-looking statements even if experience or future changes
show
that the indicated results or events will not be realized. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Readers are also urged to carefully review and
consider the Company’s discussions regarding the various factors, which affect
its business, included in this section and elsewhere in this
report.
Business
Segments
During
the quarter, the Company had revenues in two segments:
Mobile
marketing services
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$1,383,263
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Windsor
- ESL Education
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$35,670
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The
cost of revenue in each segment was:
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Mobile
marketing services
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$316,959
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Windsor
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$400
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The
gross
profit from each of the business segments was:
Mobile
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$1,066,304
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Windsor
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$35,270
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Need
for Additional Financing:
The
Company has not repaid $3,350,000 of Senior Convertible Debentures (the
Debentures”) which matured on August 15, 2006. It has received extensions on
repayment for $300,000 of the Debentures. While it has sufficient cash on hand
to repay the Debentures, as described elsewhere herein, it has not received
approval from the People’s Republic of China to make payment. The Debentures
were sold in August 2005 and Management expected that they would be converted
into equity to fund the Company’s business plan. At such time as the Company is
able to repay the Debentures it will need to seek additional funds in order
to
implement its business plan. No commitments to provide additional funds have
been made by management or other stockholders. Accordingly, there can be no
assurance that any additional funds will be available to the Company when it
is
needed.
The
Company believes, however, it has sufficient capital to meet its short-term
cash
needs, including the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934. However, if losses occur
it
may have to seek loans or equity placements to cover longer term cash needs
to
continue operations.
If
future
revenue declines or operations are unprofitable, it will be forced to develop
another line of business, or to finance its operations through the sale of
assets it has, or enter into the sale of stock for additional capital, none
of
which may be feasible when needed. The Company has no specific management
ability, nor financial resources or plans to enter any other business as of
this
date.
From
the
aspect of whether it can continue toward the business goal of maintaining and
expanding the businesses in Canada and grow the new business of SMS services
in
China, it may use all of its available capital without generating a
profit.
The
effects of inflation have not had a material impact on its operation, nor is
it
expected to in the immediate future.
Market
Risk:
The
Company does not hold any derivatives or investments that are subject to market
risk. The carrying values of any financial instruments, approximate fair value
as of those dates because of the relatively short-term maturity of these
instruments which eliminates any potential market risk associated with such
instruments.
Future
Trends:
For
the
Education Services side, we have operated for over a year now, the competition
is very fierce in the market. The Canadian government has tighten its budget
on
English training for new immigrants, which leads to reduced government funding
for Windsor, this will have negative effects to the revenue of Windsor Education
Academy. The Canadian government also adopts more strict system to choose
schools that can be funded by the government and every school needs to
re-register with the government. There is no assurance that Windsor Education
Academy will continue receiving government funding in the coming
years.
ITEM
3. CONTROLS AND PROCEDURES
Quarterly
Evaluation of Controls
As
of the
end of the period covered by this quarterly report on Form 10-QSB, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls") as defined in Rules 13a -15(e) or 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
evaluation ("Evaluation") was performed by our Chief Executive Officer and
Principal Accounting Officer, Angela Du, ("CEO") and Ernest Cheung, our
Principal Financial Officer ("CFO"). In this section, we present the conclusions
of our CEO and CFO based on and as of the date of the Evaluation, with respect
to the effectiveness of our Disclosure Controls and Procedures.
Based
upon the Evaluation, our CEO and CFO determined that our disclosure controls
and
procedures are effective to ensure that information required to be disclosed
by
the issuer in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within time periods specified
in
the Commission’s rules and forms. Our CEO and CFO have concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by an issuer in the reports it files or submits under
the Exchange Act is accumulated and communicated to the issuer’s management
including the CEO and CFO, to allow timely decisions regarding required
disclosure.
There
have been no changes in the Company’s internal controls over financial reporting
identified in connection with the Evaluation that occurred during the Company’s
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect the Company’s internal controls over our financial
reports.
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There
have been no changes since the filing of our Form 10-KSB for December 31, 2005,
in the lawsuit brought by Sino-I Technology Limited against the Company.
As
set
forth below under Item 3, the Company is in default on repayment of its Senior
Convertible Debentures due August 15, 2006 (the “Debentures”). On September 18,
2006, Southridge Partners, L.P. (“Plaintiff”) commenced a lawsuit against the
Company in the Supreme Court of the State of New York, New York County (No.
603266). The action is a motion for summary judgment in lieu of complaint based
on the Company’s Debentures in the amount of $500,000 in favor of Plaintiff
which was due on August 15, 2006, with interest at 12% per annum.
No
director, officer or affiliate of China Mobility Solutions, Inc., and no owner
of record or beneficial owner of more than 5.0% of the securities of the
Company, or any associate of any such director, officer or security holder
is a
party adverse to the Company or has a material interest adverse to it in
reference to pending litigation.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
[None]
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
The
Company disclosed in a Current Report on Form 8-K for August 31, 2006, that
it
had not repaid $3,350,000 of Senior Convertible Debentures due August 15, 2006
(the “Debentures”). The Company stated that it had sufficient cash on hand and
had applied to the banking authorities (State Administration of Foreign Exchange
(“SAFE”)) in the People’s Republic of China to convert its subsidiaries’ funds
into U.S. dollars and repay the Debentures.
The
Company’s operating subsidiary in China has advised the Company that its
application to SAFE to withdraw the funds from China has been denied. On October
25, 2006, the Company retained the law firm of Wyatt & Wang in Beijing to
assist it comply with the Beijing Rule of Liquidation of companies with foreign
investment (the “Rule of Liquidation”). The Company has been advised that the
Rule of Liquidation is the sole means of assuring repayment of the Debentures.
The Company does not believe it will affect its subsidiaries’ business
operations as reorganized. The Company has begun the process to submit an
application for such liquidation to the Bureau of Ministry of Commerce
(“BOMOC”). The liquidation will take between 180 to 270 days. Part of the reason
for the delay is the requirement of the liquidator to appoint an auditor to
do
the appraisal of an evaluation of the assets of the Company and to submit such
appraisal to the BOMOC for its approval.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
The
following are filed as Exhibits to this Quarterly Report. The numbers refer
to
the Exhibit Table of Item 601 of Regulation S-K:
Number Description
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31.1
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Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant
to
Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002.
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Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf of the undersigned thereunto
duly authorized.
CHINA MOBILITY SOLUTIONS, INC.
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CHINA MOBILITY SOLUTIONS, INC.
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/s/ Angela
Du |
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/s/ Ernest
Cheung
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Name:
Angela Du Title: Chief Executive Officer More Title: Principal
Accounting Officer
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Name:
Ernest Cheung Title: Principal Financial Officer More
Title |