CHMS 10KSB MAY17, 2007
UNITED
STATES
SECURITIES
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
[X] ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For
the
fiscal year ended December 31, 2006
[
] TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For
the
transition period from
to
Commission
file number 0-26559
CIK
No. 0001082603
CHINA
MOBILITY SOLUTIONS, INC.
(Name
of
Small Business Issuer in its Charter)
Florida
330-751560
(State
or Other Jurisdiction of Incorporation or Organization) (I.R.S.
Employer Identification No.)
#407-1270
Robson Street, Vancouver, B.C.
(Address
of Principal Executive Offices)
V6E
3Z6
(Zip
Code)
Issuer’s
telephone number, including area code: (604)
632-9638
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common
Stock $.001 Par Value
Check
whether the Issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act
[ ]
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
past 90 days. Yes
[_] No [X]
Check
if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[ ] No [X]
State
issuer's revenues for its most recent fiscal year: $ 93,041.00.
Aggregate
market value of the voting and non-voting stock held by non-affiliates as of
May
16, 2007: $ 80,047 at $.04 per share.
Number
of
outstanding shares of the Registrant's $.001 par value common stock, as of
May
16, 2007: 61,650,295.
Transitional
Small Business Disclosure Format: Yes
[_] No [X]
TABLE
OF CONTENTS
PART
I
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3
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12
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12
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12
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PART
II
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13
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14
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29
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30
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31
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PART
III
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32
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34
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37
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38
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39
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40
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42
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60
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PART
I
(a) General
Description and Development of Business.
On
January 16, 2007, application for liquidation (the “Liquidation”) of the
operating subsidiaries of China Mobility Solutions, Inc. (the “Company”) in the
Peoples’ Republic of China (“PRC”) was approved by the Haidian District, Beijing
Bureau of Commerce. The Liquidation application was made in October, 2006,
upon
the advice of PRC counsel that the Beijing Rule of Liquidation was the sole
means available to the Company to insure the repayment of the $3,350,000 (less
any amount that has been converted) principal amount of convertible debentures
(“Debentures”) which matured on August 15, 2006.
In
October 2006, the Company was notified by the PRC State Administration of
Foreign Exchange (“SAFE”) that its application to convert certain cash held by
Beijing Quicknet Technology Development Limited (“Quicknet”) and Shiji Yingfu
(the “PRC Subsidiaries”) into U.S. dollars and repay the Debentures was denied.
As part of the Liquidation, the PRC Subsidiaries were ordered to discontinue
operations and set up a liquidation committee. Their accounting responsibilities
were transferred from the Company to a PRC accounting firm approved by the
PRC
regulatory authority. As reflected in the financial statements included in
this
Report, the operations of the PRC Subsidiaries for the years ended December
31,
2006 (which only includes these operations to September 30, 2006) and 2005
are
reflected as discontinued operations.
Upon
the
Liquidation of the PRC Subsidiaries and the repayment of outstanding Debentures,
the Company does not know whether the PRC subsidiaries will continue to operate
as subsidiaries of the Company in new entities, although it is not currently
expected they will.
In
view
of the foregoing, as a result of the Liquidation, the Company’s sole operations
are those of Windsor
Education Academy Inc., a British Columbia based school specializing in English
as a Second Language courses for foreign students. This business had total
revenues of $93,000 for 2006. Accordingly, we intend to seek to expand our
business through acquisitions or mergers with other entities. Any decision
to
make an acquisition or merge will be based upon a variety of factors, including,
among others, the purchase price and other financial terms of the transaction,
the business prospects of the target company and the extent to which any
acquisition/merger would enhance our prospects. We will continue to try to
complete the acquisition of Topbiz, as described below. While we have had
discussions with various potential acquisitions targets, we presently have
no
agreements, understandings or arrangements for any other acquisitions or
mergers.
On
September 6, 1996, the Company was incorporated under the laws of the State
of
Florida under the name of Placer Technologies, Inc. It conducted an initial
public offering of 200,000 shares @ $0.25 per share to achieve $50,000 in
capital. In December 1996, pursuant to a Rule 15c2-11 filing, the Company
obtained approval to have its Common Stock quoted on the OTCBB, which is a
national quotation service maintained by the NASD.
The
Company's initial primary service consisted of developing web home pages for
small businesses in the U.S.A. It generated minimal revenues in
1996.
On
April
2, 1997, the Company acquired a 100% interest in Infornet Investment Limited
("Infornet"), a Hong Kong corporation. In August 1997 Infornet entered into
a
joint venture agreement with Xin Hai Technology Development Ltd. ("Xin Hai").
Xin Hai was an experienced internet-related services provider, but the business
suffered loses and was sold and discontinued in 2001.
On
June
11, 1997, the Company purchased a 100% interest in Infornet Investment Corp.,
a
British Columbia corporation. Infornet Investment Corp. is the subsidiary that
manages daily operations of the Company.
On
July
24, 1998, the Company changed its name from Placer Technologies, Inc. to Xin
Net
Corp.
In
June
2004, the Company changed its name to China Mobility Solutions, Inc. concurrent
with a one-for-three reverse split.
On
June
23, 2004, the Company consummated the acquisition of a 49% interest in Quicknet,
a company organized under the laws of the Peoples’ Republic of China, pursuant
to a share purchase agreement. The Company issued 6,120,000 shares of its common
stock as payment. On
September 30, 2005, the Company indirectly, through an affiliate, acquired
control of the remaining outstanding shares of common stock of Quicknet, and
paid US$2,000,000 on September 30, 2005 and an additional US$2,000,000 on or
about December 31, 2005. See the discussion under the heading “Quicknet
Acquisition” set forth below.
On
August
8, 2006, the Company and President of a subsidiary of the Company consummated
the acquisition of a 49% interest in Beijing
Topbiz Technology Development Corp., Ltd., a company organized and existing
under the laws of the People’s Republic of China (“Topbiz”), pursuant
to a share purchase agreement.
Topbiz
develops and customizes short messaging system, or SMS, platforms for banks
in
China. Topbiz generated US$2.67 million in revenue and US$785,000 in net profit
in 2005, and had US$ 1.25 million cash-on-hand as of December 31, 2005. All
such
figures have been audited in accordance with U.S. generally accepted accounting
principles.
As
of
September 30, 2006, $950,000 had been paid by the Company. According to the
Topbiz Agreement, the Company should make a payment of US$1,350,000 three months
after closing date which is before end of November, 2006. However, since the
Company had started the liquidation process by then, it could not make such
payment on time. The Company and Topbiz stopped the ownership transferring
process. As of December 31, 2006, the Company and Topbiz had not reached an
amended agreement on the payment schedule.
CORPORATE
OVERVIEW
China
Mobility Solutions’ structure showing its subsidiaries during 2006 prior to the
Liquidation which commenced in January 2007 was as follows, with the
jurisdiction of incorporation of each subsidiary included in
parentheses:
China
Mobility Solutions,
Inc
(Florida,
U.S.A.)
Infornet
Investment Corp.
(100%
Owned)
(BC,
Canada)
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Infornet
Investment Ltd.
(100%
Owned)
(Hong
Kong)
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Windsor
Education Academy Inc.
(100%
Owned)
(BC,
Canada)
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Beijing
ShiJiYingFu Consultant Corp. Ltd.
(100%
Owned)
(Beijing,
China)
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Xinbiz
Corp.
(100%
Owned)
(British
Virgin Islands)
(Dormant)
|
Xinbiz
Ltd.
(100%
Owned by Xinbiz Corp.)
(Hong
Kong)
(Dormant)
|
Beijing
QuickNet Technology Development Corp.
(49%
Owned and 51% Indirectly Owned and Controlled )
(Beijing,
China)
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The
Company incorporated Xinbiz Corp. (British Virgin Islands) on January 14, 2000
and its subsidiary Xinbiz Ltd. (Hong Kong) on March 10, 2000. Both of these
companies are wholly owned subsidiaries. Xinbiz Corp. and Xinbiz Ltd. did not
have any operations in the past three years.
Through
its wholly owned subsidiary, Infornet Investment Ltd. (Hong Kong), the Company
formed a joint venture with Xin Hai Technology Development Ltd. for upgrading
telecommunication technology and services in China. This evolved into an
internet-focused service provider and e-commerce solutions business. However,
the Company decided in May 2001 to focus its business in China on domain name
registration and web-hosting services and to discontinue Internet access
provision services. On June 22, 2001, the Company entered into an agreement
to
sell its ISP assets (Xin Hai). The price for the sale was $700,000 (USD) payable
to the Company in Renminbi at the official exchange rate. As of December 31,
2003, $500,000 had been received for the transaction. A loss provision of
$200,000 was made against the balance of the sales price as the Company
determined that the purchaser will not be able to pay the remaining balance.
Since
the
Company started its Internet-related business in The People’s Republic of China
(“PRC” or “China”), it has seen rapid growth in Internet use in China; but it
has also seen an equal, if not greater, growth in companies entering this arena.
As a result, the industry experienced severely reduced operating margins and
continued losses. Although the Company was considered an early leader in the
domain name registration field, due to the lack of adequate funding, future
growth potential against the many competitors was limited at best. The Company
had struggled for several years to break even and was hoping for required
funding to grow, but the plan was nullified when the funding failed to
materialize. As China becomes more and more open according to the terms of
the
World Trade Organization, the world's largest, well-funded companies have been
given access to the China market and have seriously compromised the Company's
competitive position.
In
February 2003, the Company signed an agreement to sell the Company's China
assets (domain name registration) to a subsidiary of Sino-i.com Limited, a
Hong
Kong Stock Exchange listed company, for a total consideration of RMB 20 million
(approx. US$ 2.4 million). The Company has received the entire purchase price,
and the divestiture was completed in 2004.
Education
Business
In
2002,
the Company redirected its resources to the education and training field. On
January 6, 2003, the Company announced the acquisition of Windsor Education
Academy Inc. (“ Windsor”), a Richmond, British Columbia based school
specializing in English as a Second Language (ESL) courses to foreign students.
Total consideration was CAD$ 200,000 (about US$128,000). Windsor is
government-certified and received a number of ESL students from the Provincial
Government of British Columbia, but all government programs involving Windsor
ended March 31, 2005. Windsor Academy has a campus in Richmond, British
Columbia. They are equipped with personal computers and standard classroom
fixtures. Because of the outbreak of SARS, and its implications for public
health and travel to and from China, the Company could not consummate any other
major acquisitions in China and in Hong Kong during a one-year period beginning
in March 2003 and, therefore decided to maintain the operation of Windsor while
looking for other opportunities. The Company intends to maintain these
operations following the Liquidation as its only operations until it is able
to
make any acquisitions.
Office
Location
China
Mobility Solutions, Inc. currently maintains an office at: #407 - 1270 Robson
Street, Vancouver, BC Canada V6E 3Z6 (telephone number is 1-604-632-9638).
Discontinued
Quicknet Operations
On
June
23, 2004, the Company completed the acquisition of a 49% equity interest from
the shareholders of Beijing Quicknet Technology Development Corp. ("Quicknet"),
located in Beijing, China by signing a Purchase Agreement (the “Quicknet
Purchase Agreement”). As described above, the Liquidation of Quicknet began in
January 2007 and its operations are reflected as discontinued operations.
Management does not believe that the operations of Quicknet will be transferred
to a new entity controlled by the Company following the completion of the
Liquidation. Quicknet was engaged
in the development of software for mobile/wireless communication and for Short
Message Services ("SMS"). The Company acquired the 49% equity interest from
Quicknet shareholders in exchange for the Company’s issuance of 6,120,000 shares
of common stock of the Company at a deemed price of $0.50 per share (2,040,000
post-reverse split shares at a market price of $0.27 per share for a total
of
$550,800). In June 2004, the Company signed a Purchase Agreement (the “Chinaco
Purchase Agreement”) with Beijing Shi Ji Rong Chuang Service & Technology
Co., Ltd., a local China company (“Chinaco”), which then owned 2% of the equity
interest of Quicknet having purchased a 1% interest from each of the two
shareholders of Quicknet, Mr. Bo Yu and Mr. Fang Hu. Under the Chinaco Purchase
Agreement, the Company was granted the right to purchase 100% of the equity
of
Chinaco for nominal consideration, solely when Chinese law permits such sale.
Chinaco is owned by two senior officers of the Company who have Chinese
citizenship. Due to current government restrictions on foreign ownership of
telecommunication companies in China, the Company was not permitted to acquire
the additional 2% of the equity interest of Quicknet that is still held by
Chinaco. At present, foreign investors such as the Company can only own up
to
49% of telecommunications and related businesses in China. The 2% Chinaco
interest will only be transferred to the Company at such time as Chinese law
permits increased ownership of telecommunications and related businesses by
foreign investors such as the Company. Chinese law does not currently permit
such transfer, therefore, Chinaco has granted an unconditional, irrevocable
proxy, without time limit, to the Company. Through the above-described proxy,
the Company can appoint all directors and officers of Quicknet and therefore
directly and indirectly controls 51% of the equity interest of Quicknet through
its own equity ownership and its control of Chinaco.
Under
the
Quicknet Purchase Agreement, the Company had an option to acquire the remaining
49% equity interest in Quicknet through Chinaco from the Quicknet Shareholders
within the first year for $4,000,000. The Company also had an option to acquire
this remaining 49% equity interest in Quicknet within the second year for
$5,000,000. The Quicknet Purchase Agreement provided that the Company could
pay
these amounts by 50% in shares of the common stock of the Company and 50% in
cash. The final percentage of shares versus cash could be negotiated between
both parties. The Company exercised its right to purchase the remaining 49%
interest in August 2005 (the “Option Exercise”), by having Chinaco purchase a
24.5% interest from each of the two shareholders of Quicknet, Mr. Bo Yu and
Mr.
Fang Hu, for a total of 49% interest
for the
agreed-upon purchase price of US$4,000,000. The purchase price had been paid
in
the form of cash. On September 30, 2005, the Company paid US$2,000,000, and
paid
another US$2,000,000 before December 31, 2005.
As
previously mentioned, pursuant to the Chinaco Purchase Agreement, the Company
was granted the right to acquire 100% of the equity of Chinaco, if and when
Chinese law permits. The Company directly owns 49% of Quicknet and through
Chinaco, indirectly controls a combined total of 51% equity interest, and thus
controls a total 100% of Quicknet. The
Company has the right to appoint all of the directors of Beijing
Quicknet.
Until
such time, if ever, that Chinese law permits the transfer of a controlling
interest in Quicknet, the Company will maintain control of Quicknet under its
Quicknet Purchase Agreement, Chinaco Purchase Agreement, and August 2005 Option
Exercise. However, currently, the Company will be unable to directly own the
remaining 51% interest held by Chinaco.
The
Company raised (a) US$1,255,000 through issuing common stock and (b)
US$3,350,000 through issuing senior convertible debentures and Class A Warrants
and Class B Warrants
in 2005 in an offering exempt from registration pursuant to Regulation D under
the Securities Act of 1933, as amended. A portion of the proceeds of these
offerings were used to complete the Quicknet Purchase Agreement.
Discontinued
Internet Services
Up
until
late 2002, the Company’s business was focused on domain name registration, web
hosting and web design services under the ChinaDNS banner. It operated the
website www.chinadns.com, the first in the PRC to offer online site
registration. In October 1999, ChinaDNS was approved as an Official Agent of
Network Solutions, Inc.
Due
to
the continued loss on operations ($254,035 in 2002) in 2003, the Company entered
into an Agreement to sell the domain name registration business to China
Enterprise, an ASP, for about $2,400,000, a sale which was completed in 2004.
We
are treating the DNS business as discontinued operations at this time, as China
Enterprise is in full control of the assets.
CURRENT
BUSINESS
Education
and Training
The
Company is currently offering English as a Second Language (ESL) and related
courses through Windsor Education Academy at the Richmond
campus.
PRODUCTS,
SERVICES, MARKETS AND METHODS OF DISTRIBUTION
Mobile
Solutions: Quicknet in China - Discontinued Operations
(1) Products
and Services:
Mobile
Marketing
The
first
mobile solution launched by the Company was mobile marketing. Mobile marketing
is the use of the mobile medium as a communications and entertainment channel
between a brand and an end-user. Mobile marketing is the only personal channel
enabling spontaneous, direct, interactive and/or targeted communications, any
time, any place. Mobile marketing can be used in a wide variety of
ways:
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For
customer acquisition
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As
a sales promotion tool
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To
support product launches
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To
raise brand awareness
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For
internal communications
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As
a redemption / coupon tool
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As
an effective business-to-business communications
vehicle
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As
an additional revenue stream
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To
be able to offer time / location specific
offers
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As
a channel for delivering ring tones and
logos
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China
had
almost 400 million mobile phone subscribers as of the end of 2005, and
management believes there will continue to be increasing demand from enterprises
to reach this large market by using mobile phones as a new media for their
marketing.
Mobile
Email
China
Mobility Solutions launched its mobile email system in June 2005. We developed
the mobile email system with push-based technology that delivers email to the
recipient’s cell phone. The “push” technology means that email does not have to
be retrieved but is automatically delivered.
The
email
system is appropriate for companies hoping to offer their customers a quality
cell phone-based email system, and for use within companies to improve
communications between employees.
Since
the
debut of our newly developed mobile email system, we have completed a successful
road show in June and July of 2005. We have also discussed possible bundle
services with several PC manufacturers and mobile phone manufacturers, and
signed a contract with Lenovo to distribute our mobile email
system.
Mobile
Business Automation
China
Mobility’s Office Automation product was launched in August 2005. The system
provides staff with enhanced access to the information they need when they
need
it, helps to eliminate paperwork, and changes/streamlines many business
processes.
Our
office automation solution benefits clients in the areas of
CRM,
sales force management, communications and inventory.
Our
technology also facilitates the sending of messages and notices to employees
and
customers. The tool is especially useful for companies with field-based
salespeople because it allows the salespeople to access information in the
Company’s central database while at the client’s site. Through SMS, salespeople
can have access to useful information like current rates, technical
specifications, client information, and inventory levels. They can also order
products, book meetings, coordinate with other salespeople, and make reports
through SMS. The office automation solution is designed to give sales reps
a
competitive edge through instant response to information needs, to help them
close sales and generally be more productive in the field. Managers are able
to
approve verifications and other enquiries that are submitted by employees via
their cell phones. Companies are able to send out service information, accept
customer inquiries and reply to customer questions via SMS.
Some
of
the advantages of our office automation product are:
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It
enables sales representatives to deliver information at point-of-contact
in the field, via SMS;
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The
user-company can configure the mobile field sales solution to model
their
unique sales needs with two-way
communications;
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The
solution can integrate critical customer information from back office
records or legacy systems, giving the field sales team relevant
information to complete an order;
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It
can receive up-to-the-minute input from the field, providing real-time
information for decision-making support from the
office;
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Applications
can support hundreds of simultaneous users and require no in-house
program
development.
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The
office automation tool also allows a company to communicate easily and
effectively with its salespeople while they are in the field. Companies can
send
memos to employees to coordinate meetings, announce social events, or manage
work schedules. It also allows salespeople to communicate among themselves
more
efficiently and for a lower cost than cellular phone conversations.
Our
office automation product allows companies to improve internal communications
in
all areas, which can improve efficiency, reduce costs, increase revenues,
improve employee productivity and improve customer satisfaction.
(2) Method
of Distribution and Marketing: Mobile Solutions
The
Company used four outlets to approach the market for its mobile business
solutions: agents, mobile carriers, in-house sales staff and sales support
branches. The Company also used strategic partnership with industry leaders,
print media, on-line advertisement, SMS campaigns, events and seminars as
marketing tools.
Education
and Training
(1) Educational
Products and Services
Windsor
provides ESL (English as a Secondary Language) and related courses in B.C.
Canada. Windsor Education received a number of ESL students from the Provincial
Government of British Columbia under government programs, but all government
programs involving Windsor ended March 31, 2005.
In
the
past several years, supplementary education has become a multi-billion dollar
business in China, the most popular being Foreign Schools, English Training,
Data Processing, and Accounting. Started several years ago, this trend is still
increasing and with the integration of China into the world community as well
as
the growth in personal disposable income. Windsor plans to capitalize from
this
growth by providing North American courses into Chinese market.
(2) Method
of Distribution and Marketing: Education
Windsor
Education Academy uses the printed media as well as recruitment agents to
attract students. Word of mouth is also an important endorsement.
EMPLOYEES
OF SUBSIDIARIES
At
the
end of September 31, 2006 (the date upon which Quicknet operations were
considered discontinued), Quicknet had approximately 55 employees. About 31%
were technical support, 36% were in sales and marketing, 14% were R&D and
the rest were administrative personnel. The actual number of employees
changed during the year.
At
the
end of December 31, 2006, Windsor had six employees, consisting of three full
and part time teachers and three administrative personnel. The key to success
is
the ability to attract students. The number of employees will change as the
students change. There is no collective bargaining unit at the
academy.
DEPENDENCE
ON CLIENT BASE
For
the
mobile solutions business, we signed contracts with a number of clients for
varying types of marketing. The Company relied on its agents, mobile carriers,
in-house sales staff and supporting sales branches, as well as media and other
marketing channels to increase its client base.
For
the
Education Services, there are approximately several dozen students every month.
Windsor is relying on the printed media, word of mouth, recruiting agents and
other marketing channels to increase the number of students.
Backlog
of Orders: None.
Government
Contracts: Windsor Education received a number of ESL students from the
Provincial Government of British Columbia under government programs, but there
is no commitment beyond the individual student's referral to our subsidiary.
All
government programs involving Windsor ended March 31, 2005.
COMPETITIVE
CONDITIONS
Mobile
Solutions
The
Chinese economy has been among the fastest growing in the world for the past
several years. China's economy grew 9.5% in 2004 with growth at the same rate
in
2005 and 8% in 2006.
China
has one of the largest and fastest-growing telecommunications markets in the
world, and the mobile phone sector in particular has become the world's number
one, with approximately 446 million subscribers by the end of 2006. Mobile
solutions, which use mobile phones as a new media, have created a large market
in China. There are two types of markets in this field: the individual
market and the corporate market. Competition in the individual market is fiercer
than the corporate market since the individual market is very saturated and
there are a large number of large and small competitors, thus has become less
lucrative. Being early in the corporate market and possessing a database of
nearly 500,000 corporate customers from its previous operations, the Company
will have more growth potential than if the Company targeted the highly
competitive consumer mobile market.
Education
Services
In
Windsor's business, the supplementary education and training market is very
fragmented, there are very few large schools and numerous small ones,
established mostly in larger cities worldwide. There are many keys to a school's
success, such as: the quality of its curriculum and graduates, teachers and
facilities, certifications and diplomas offered, location and
accessibility, marketing and advertising, variety of programs offered, etc.
The Company is striving to maintain its current level, exploring more
opportunities from government projects, seeking cooperates with other schools
in
mainland China. However, the Company is focusing on its mobile solution
business, rather than education services
COMPLIANCE
WITH RELATED LAWS AND REGULATIONS
On
January 16, 2007, application for liquidation (the “Liquidation”) of the
operating subsidiaries of China Mobility Solutions, Inc. (the “Company”) in the
Peoples’ Republic of China (“PRC”) was approved by the Haidian District, Beijing
Bureau of Commerce. The Liquidation application was made in October 2006, upon
the advice of PRC counsel that the Beijing Rule of Liquidation was the sole
means available to the Company to insure the repayment of the $3,350,000 (less
any amount that has been converted) principal amount of convertible debentures
(“Debentures”) which matured on August 15, 2006.
In
October 2006, the Company was notified by the PRC State Administration of
Foreign Exchange (“SAFE”) that its application to convert certain cash held by
Beijing Quicknet Technology Development Limited (“Quicknet”) and Shiji Yingfu
(the “PRC Subsidiaries”) into U.S. dollars and repay the Debentures was denied.
As part of the Liquidation, the PRC Subsidiaries were ordered to discontinue
operations and set up a liquidation committee. Their accounting responsibilities
were transferred from the Company to a PRC accounting firm approved by the
PRC
regulatory authority. As reflected in the financial statements included in
this
Report, the operations of the PRC Subsidiaries for the years ended December
31,
2006 (which only includes these operations to September 30, 2005) and 2005
are
reflected as discontinued operations.
Upon
the
Liquidation of the PRC Subsidiaries and the repayment of outstanding Debentures,
the Company does not know whether the PRC subsidiaries will continue to operate
as subsidiaries of the Company in new entities, although it is not currently
expected they will.
In
China,
the Company relies on the advice of Chinese legal counsel to maintain compliance
with all laws, rules, regulations and government policies in China. The telecom
industry is subject to extensive government regulation, which regulations have
been changing rapidly, and there is no assurance that the Company will not
be
adversely impacted by such regulations in the future.
On
the
Education Services side, Windsor Education Academy Inc. is governed by the
Laws
of the Province of British Columbia, Canada. The Company is fully licensed
to
conduct its business in the Province. The Company is unable to assess or predict
at this time what effect the regulations or legislation could have on its
activities in the future.
(a) Local
Regulations
The
Company cannot determine to what extent its future operations and earnings
may
be affected by new legislation, new regulations or changes in existing
regulations on a local level in Canada.
(b) National
Regulations
The
Company cannot determine to what extent its future operations and earnings
may
be affected by new legislation, new regulations or changes in existing
regulations on a national level.
The
value
of the Company’s investments in the PRC may be adversely affected by significant
political, economic and social uncertainties in the PRC. Any changes in policies
by the government of the PRC could adversely affect the Company by, among other
factors, changes in laws, regulations or the interpretation thereof,
confiscatory taxation, restrictions on currency conversion, the expropriation
or
nationalization of private enterprises, or political relationships with other
countries.
(c) Parents
and Subsidiaries as of December 31, 2006.
Parent:
CHINA
MOBILITY SOLUTIONS, INC., a Florida corporation
Subsidiaries:
INFORNET
INVESTMENT CORP., a British Columbia corporation (100% owned)
INFORNET
INVESTMENT LTD., a Hong Kong corporation (100% owned)
XIN
BIZ
CORP., a BVI corporation (100% owned) (Dormant)
XIN
BIZ
LIMITED, a Hong Kong corporation (100% owned subsidiary of XIN BIZ Corp.)
(Dormant)
WINDSOR
EDUCATION ACADEMY, INC., a British Columbia corporation (100% owned)
BEIJING
SHIJIYINGFU CONSULTANTING CORP., a Chinese corporation (100% owned subsidiary
of
Infornet Investment Ltd.)
BEIJING
QUICKNET TECHNOLOGY DEVELOPMENT CORP. a Chinese corporation (49% owned
subsidiary of Infornet Investment Ltd. But through contracts and proxy
arrangement, the Company directly and indirectly controls and owns 100% of
Beijing Quicknet.)
The
Company is a minority shareholder of THE LINK GROUP, INC. (formerly called
World
Envirotech, Inc.)
China
Mobility Solutions, Inc. currently maintains a leased office of approximately
600 square feet at: #407- 1270 Robson Street, Vancouver, BC Canada V6E 3Z6
(telephone number is 1-604-632-9638). The term of the lease is one year at
a
monthly rental of $1605 from a non-affiliated landlord. It also leases an office
as its headquarters in Beijing, at Room 601, 6/F, YinHai Building, No.10,
ZhongGuanCun Road, HaiDian District, Beijing, China. 100081. The term of the
lease in Beijing is for one year and six months ending June 30, 2007, at a
monthly rental of approximately $11,000 from a non-affiliated landlord. Windsor
Education Academy currently rents approximately 1000 square feet at 2120 and
2125, 8766 McKim Way, Richmond, BC, Canada. The term of the lease is for one
year ending September 1, 2007 at a monthly rental of $1,650 from a
non-affiliated landlord.
(a)
Real
Estate: None
(b)
Equipment, library, and furniture at December 31, 2006: $11,129.
In
the
ordinary course of business, the Company may be involved in legal proceedings
from time to time. As of the date of this report, the only legal proceedings
to
report were that:
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) for an alleged default on repayment of its Senior
Convertible Debentures due August 15, 2006 (the “Debentures”). The motion for
summary judgment in lieu of complaint was granted 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. The Plaintiff is taking steps
to execute its default judgment.
On
November 25, 2006, Iroquois Management Fund LTD (“Plaintiff”) commenced a
lawsuit against the Company in the Supreme Court of the State of New York,
New
York County (No. 6604397/06). The action is a motion for summary judgment in
lieu of complaint based on the Company’s Debentures in the amount of $375,000 in
favor of Plaintiff which was due on August 15, 2006, with interest at 6% per
annum from June 30, 2005 to August 15, 2006, and with interest at 12% per annum
from August 15, 2006 to the date of entry of judgment, plus costs and
disbursements.
On
February 7, 2005, the Company was sued by Sino-I Technology Limited for $88,270
for an alleged breach of warranty and a claim under a guarantee. The
Company has retained separate counsel to represent it in the action. Counsel
for
the Company submitted a Notice of Motion to the plaintiff’s lawyer on March 7,
2005 and is seeking an extension of response date. The Company intends to
vigorously defend the suit.
No
director, officer or affiliate of China Mobility Solutions, Inc., and no owner
of record or beneficial owner of more than 5% 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.
See
Item
1. “General Description and Development of Business” for information concerning
the Liquidation of certain PRC Subsidiaries of the Company.
None.
PART
II
(a)
The
Company’s common stock is traded on the Over-the-Counter Bulletin Board
maintained by the NASD under the trading symbol “CHMSE.OB” and was previously
traded under the symbol “CHMS.OB.” The following table sets forth high and low
bid prices of the common stock for years ended December 31, 2005 and December
31, 2006 as
quoted
by the NASD over-the-counter-bulletin board
as
follows:
|
Bid (U.S. $)
|
|
|
HIGH
|
LOW
|
2006
|
|
|
|
First
Quarter
|
|
0.35
|
0.25
|
Second
Quarter
|
|
0.36
|
0.20
|
Third
Quarter
|
|
0.22
|
0.11
|
Fourth
Quarter
|
|
0.29
|
0.08
|
|
|
|
|
2005
|
|
|
|
First
Quarter
|
|
0.45
|
0.38
|
Second
Quarter
|
|
0.44
|
0.38
|
Third
Quarter
|
|
0.69
|
0.36
|
Fourth
Quarter
|
|
0.59
|
0.33
|
Quotations,
if made, represent only prices between dealers and do not include retail
markups, markdowns or commissions and accordingly, may not represent actual
transactions.
Because
of the rules and regulations governing the trading of small issuers’ securities,
the Company's securities are presently classified as "Penny Stock", a
classification which places significant restrictions upon broker-dealers
desiring to make a market in these securities. It has been difficult for
management to interest broker-dealers in our securities and it is anticipated
that these difficulties will continue until the Company is able to obtain a
listing on NASDAQ, at which time market makers may trade its securities without
complying with the stringent requirements. The existence of market
quotations should not be considered evidence of an "established public trading
market." The public trading market is presently limited as to the number of
market markers in Company stock and the number of states within which its stock
is permitted to be traded.
Holders
(b)
As of
May 16, 2007, China Mobility Solutions, Inc. had approximately 185 shareholders
of record of its common stock. Management believes that approximately 5000
shareholders held the Company’s common stock in street name.
Dividends
(c)
No
dividends on outstanding common stock have ever been paid. The Company does
presently have any plans regarding payment of dividends in the foreseeable
future.
(d)
Securities Authorized for Issuance under Equity Compensation
Plans
The
following table sets forth, as of December 31, 2006:
Equity
Compensation Plan Information Table
|
(a)
|
(b)
|
(c)
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
Equity
compensation plans approved by security holders
|
3,500,000
|
none
|
410,000
|
Equity
compensation plans not approved by security holders
|
660,000
4,000,000
|
US$0.30
none
|
0
4,000,000
|
Total
|
8,160,000
|
US$0.30
|
4,410,000
|
Material
aspects of the 2006 Non-Qualified Stock Option Plan is disclosed herein under
Item 10 - “Executive Compensation” section.
Recent
Sales of Unregistered Securities and Use of Proceeds.
None
The
Company has not received any proceeds as a result of the registration statement
that went effective on August 7, 2006, which registered shares issuable upon
conversion of Debentures and exercise of the Class A and Class B Warrants,
as
well as placement agent warrants and warrants received as compensation for
services provided.
Purchasers
of Equity Securities by the Small Business Issuer and Affiliated
Purchases
None.
As
more
fully described in Item 1 - General Description and Development of Business,
in
January 2007, the Beijing Bureau of Commerce approved the Liquidation of
the
Company’s operating subsidiaries in China. In connection with the Liquidation,
the accounting responsibilities for the operations of the PRC subsidiaries
were
transferred from the Company to a PRC accounting firm approved by the PRC
regulatory authority. The Company has been unable to obtain reports from
this
accounting firm and has not received a definitive opinion regarding the ultimate
outcome of these liquidations; accordingly, the Company has reduced the carrying
value of the net assets of the PRC subsidiaries to $1 at December 31, 2006
and
has reflected operations of the PRC Subsidiaries for the years ended December
31, 2006 (which only includes these operations to September 30, 2006) and
2005
as discontinued operations.
Since
the
Company was unable to provide evidence and its auditors were unable to apply
other auditing procedures to satisfy themselves as to the carrying value
of the
net assets of the PRC Subsidiaries at December 31, 2006 and the results of
their
operations for the three months ended December 31, 2006, as described in
the
preceding paragraph, the scope of the auditor’s work was not sufficient to
enable him to express, and he did not express, an opinion on the Company’s
financial statements included 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.
Forward-looking
statements
Statements
contained in this report include "forward-looking statements" within the meaning
of such term in Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Exchange Act. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause actual financial or operating results, performances or
achievements expressed or implied by the forward-looking statements not to
occur
or be realized. Forward-looking statements generally are based on our best
estimates of future results, performances or achievements, based upon current
conditions and the most recent results of the companies involved and their
respective industries. Forward-looking statements may be identified by the
use
of forward-looking terminology such as "may," "will," "could," "project,"
"expect," "believe," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions.
Potential
risks and uncertainties include, among other things, such factors
as:
|
·
|
the
Liquidation of our PRC Subsidiaries as set forth in Item
1,
|
|
·
|
our
business strategies and future plans of
operations,
|
|
·
|
general
economic conditions in the United States and elsewhere, as well as
the
economic conditions affecting the industries in which we
operate,
|
|
·
|
the
market acceptance and amount of sales of our products and
services,
|
|
·
|
the
competitive environment within the industries in which we
compete,
|
|
?/FONT>
|
our
ability to raise additional capital, currently needed for expansion,
the
other factors and information discussed in other sections of this
report
and in the documents incorporated by reference in this
report.
|
Persons
reading this report should carefully consider such risks, uncertainties and
other information, disclosures and discussions which contain cautionary
statements identifying important factors that could cause actual results to
differ materially from those provided in the forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
WORKING
CAPITAL NEEDS
On
the
Mobile Solution Services side, during 2006 our working capital needs arose
primarily from: the need for capital to expand existing capacity of Quicknet
services, to open more offices in other major cities, to launch new value-added
services, to acquire other companies that will complement the services offered
by us.
On
the
education services side, the Company will use the working capital to explore
the
local market, launch new courses, set up new market campaign, sign up with
more
agents, both domestic and international agents and provide some marketing
materials and financial support to those agents.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had cash capital of $288,149 at year-end 2006. The Company has no other
capital resources other than the ability to use its common stock to achieve
additional capital raising. Other than cash capital, its other assets would
be
illiquid.
At
the
fiscal year-end it had $322,111 in current assets and current liabilities of
$3,875,049, consisting primarily of $3,325,000 of Debentures which matured
on
August 15, 2006 and were in default. At December 31, 2005, the Company had
current liabilities of $6,765,295, consisting of the $3,350,000 principal amount
of Debentures which were to mature on August 15, 2006, and $3,053,282 deferred
revenues received prior to the services being performed.
The
cash
capital at the end of the period of $288,149 will be used to fund continuing
operations. The Company had a decrease in cash of $5,850,460 for fiscal 2006,
resulting from a decrease of $833,626 of cash used for operating activities
primarily as a result of a net loss of $7,879,445. This was offset, in part,
by
a $6,566,822 loss on the Liquidation of the PRC Subsidiaries and an impairment
of $950,000 of the Company’s deposit paid towards the acquisition of Beijing
Topbiz which has not been completed as a result of the Liquidation. The Company
received $155,245 from operating activities in 2005 as a result of a loss of
$9,163,453 offset, in part, by the fair value of $6,891,486
of warrants issued together with the Debentures and the intrinsic value
$1,052,863 of the conversion feature of the Debentures.
The
Company used ($4,988,472) for investing activities in 2006 primarily as a
result of the PRC subsidiaries placed in Liquidation and the impairment of
Topbiz deposit ($950,000). In 2005 the Company used $4,000,000 for the purchase
of the remaining interest of Quicknet.
The
Company had $25,000 of net cash provided by financing activities in 2006 as
compared with $3,350,000 from the Debentures in 2006 and $1,255,000 for the
issuance of Common Stock.
On
August
15, 2006, $3.35 million principal amount of Debentures matured. The
Company offered to lower the conversion price of the Debentures to $.05 per
share conditioned upon at least 50% in principal amount of Debentures agreeing
to convert all of their Debentures in accordance with the terms and conditions
of a Conversion/Settlement Agreement dated as of February 2, 2007. This
transaction was completed in February 2007 and approximately 58 % of the
Debenture have been converted at $.05 per share. The Debenture holder who
executed the Agreement released the Company from all claims.
The
Company has revenues from its mobile marketing services and other mobile
solutions through Beijing QuickNet and tuition fees from Windsor Education
Academy ("Windsor"). However, capital from additional private placements,
borrowing against assets and/or from warrants being exercised by warrant
holders, may be required to fund future operations. As
of
December 31, 2006, 134 new Series “A” warrants issued in the August 2005
Offering were outstanding which entitle the holders to purchase 71,429 common
shares of the Company at $0.44 each within two years from the Effective Date,
but no later than February 15, 2008. 134 new Series “B” warrants were
outstanding issued in the August 2005 offering which entitle the holders to
purchase 71,429 common shares of the Company at $0.52 each within three years
from the Effective Date but no later than February 15, 2009.
On
August
8, 2006, and as referenced in Item 1(a) above, the Company and President of
a
subsidiary of the Company consummated
the acquisition of a 49% interest in Topbiz,
pursuant
to the Share Purchase Agreement referenced in Exhibit 10.8 hereto. As
of
September 30, 2006, $950,000 had been paid by the Company. According to the
Share Purchase Agreement, the Company should make a payment of US$1,350,000
three months after closing date which is before end of November, 2006. However,
since the Company had started the liquidation process by then, it could not
make
such payment on time. The Company and Topbiz stopped the ownership transferring
process. As of December 31, 2006, the Company and Topbiz had not reached an
amended agreement on the payment schedule. Furthermore, the Company has not
issued any stock under Regulation S under the Securities Act in connection
with
this transaction.
Liquidation
of Quicknet Subsidiary to Repay Debentures in Default
On
August
15, 2006, the Company’s Debentures in the principal amount of $3,350,000
matured. While the Company had sufficient cash on hand to repay the Debentures
in their entirety with accrued interest, the Company's operating subsidiary
in
China, Quicknet was denied the ability to withdraw funds from China, as
described below. The Company received 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. One of such debenture holders obtained a default judgment
against the Company for $500,000 principal amount of Debenture plus interest
and
expenses. The Company had 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, interest on
outstanding principal amount of Debentures and unpaid accrued interest accrues
at the rate of 12% per annum.
The
Company disclosed in a Current Report on Form 8-K for August 31, 2006, that
it
had applied to the banking authorities (State Administration of Foreign Exchange
(“SAFE”)) in 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 had
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 by PRC Counsel that the Rule of Liquidation is the sole means
of assuring repayment of the Debentures. The Company began the process to submit
an application for such liquidation to the Bureau of Ministry of Commerce
(“BOMOC”). On January 16, 2007, the Beijing
Bureau of Commerce approved the Liquidation. As part of the Liquidation, the
PRC
Subsidiaries were ordered to discontinue operations and set up a liquidation
committee. Their accounting responsibilities were transferred from the Company
to a PRC accounting firm approved by the PRC regulatory authority. As reflected
in the financial statements included in this Report, the operations of the
PRC
Subsidiaries for the years ended December 31, 2006 (which only includes these
operations to September 30, 2006) and 2005 are reflected as discontinued
operations.
Upon
the
Liquidation of the PRC Subsidiaries and the repayment of outstanding Debentures,
the Company does not know whether the PRC subsidiaries will continue to operate
as subsidiaries of the Company in new entities, although it is not currently
expected they will.
In
view
of the foregoing, as a result of the Liquidation, the Company’s sole operations
are those of Windsor
Education Academy Inc., a British Columbia based school specializing in English
as a Second Language courses for foreign students. This business had total
revenues of $93,000 for 2006. Accordingly, we intend to seek to expand our
business through acquisitions or mergers with other entities. Any decision
to
make an acquisition or merge will be based upon a variety of factors, including,
among others, the purchase price and other financial terms of the transaction,
the business prospects of the target company and the extent to which any
acquisition/merger would enhance our prospects. We will continue to try to
complete the acquisition of Topbiz, as described below. While we have had
discussions with various potential acquisitions targets, we presently have
no
agreements, understandings or arrangements for any other acquisitions or
mergers. As part
of the
Liquidation, it is necessary 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.
At
such
time as the Company is able to convert the Debentures and/or repay the remainder
though the Liquidation process 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.
Changes
in Financial Condition:
At
December 31, 2006, the Company's assets were $511,150, compared to $11,222,363
at December 31, 2005. The current assets totaled $322,111 at 2006 year-end,
compared to $6,412,893 at 2005 year-end. Net cash provided by continuing
operations was ($833,626) at December 31, 2006, compared to $757,987 at year-end
2005. The Company had $288,149 in cash by the year-end compared to $6,138,609
a
year ago. Total liabilities at year-end 2006 were $3,875,049 compared to
$6,765,295 at 2005 year-end.
These
changes are largely due to the liquidation process of the Company’s subsidiaries
in China as discussed under “Liquidity and Capital Resources”
section.
Need
for Additional Financing:
The
Company believes 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, but it will have to seek
loans or equity placements to cover longer term cash needs to continue
operations and expansion.
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 to allow it to cover operation
expenses.
If
future
revenue declines or operations are unprofitable, the Company will be forced
to
develop another line of business, or to finance its operations through the
sale
of its assets, or enter into the sale of stock for additional capital, none
of
which may be feasible when needed. The Company has neither specific management
ability, nor financial resources or plans to enter any other business as of
this
date.
The
effect of inflation has 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.
RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 AS COMPARED TO THE YEAR
ENDED
DECEMBER 31, 2005.
Revenues.
The Company has revenues of $93,041 from tuition fees in 2006, compared to
$199,280 in 2005 from its subsidiary: Windsor. The gross profit in 2006 was
$85,714 compared to $144,696 in 2005.
Operating
Expenses. The Company incurred operating expenses of $1,048,846 in 2006,
compared to operating expenses of $1,549,730 in 2005.
Loss
from
Continuing Operations. Loss from continuing operations for 2006 was ($2,462,777)
compared to the 2005 operating loss of ($9,456,713). This was caused largely
by
the inclusion of the “Fair Value of Warrants Issued” in the Company’s 2005
Debenture offering.
Net
Loss.
Net Loss to Common Stockholders in 2006 was ($7,879,445) in contrast to a Net
Loss of ($9,163,453) in 2005. This was caused largely by the inclusion of the
“Fair Value of Warrants Issued” in 2005.
Loss
per
Share. Loss per share was ($0.39) in 2006 compared to loss per share of ($0.52)
in 2005. This was caused largely by the inclusion of the “Fair Value of Warrants
Issued” in 2005, which accounts for $6,891,486. Operating loss from continuing
operations in 2006 were ($0.12) per share compared to a loss of ($0.54) per
share in 2005.
Future
Trends:
On
the
Education Services side, we have operated for the past three years and
competition is very fierce in the market. The Canadian government has tightened
its budget on English training for new immigrants, which lead to the termination
of government funding for Windsor, and this change had negative effects on
the
revenue of Windsor Education Academy. The Government-supported ELSA courses
held at Windsor Education Academy ended by March 31, 2005.
Off-Balance
Sheet Arrangements
None.
Recent
Accounting Pronouncements:
Principles
of Consolidation. The accompanying consolidated financial statements include
the
accounts of the Company and its wholly owned and majority-owned subsidiaries
as
outlined in Note 2 to the Company’s Consolidated Financial Statements. All
significant inter-company transactions and balances have been eliminated on
consolidation.
On
October 2002, the FASB issued SFAS No. 147 - "Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which applies to the acquisition of all or part of
a financial institution, except for a transaction between two or more
mutual enterprises. SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair
value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002,
and is not applicable to the Company.
In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting
for Stock-Based Compensation". This statement amends Statement No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value-based method of accounting for stock-based employee
compensation. SFAS No. 148 amends APB Opinion No. 28 "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. The Company will adopt the disclosure provisions and the amendment
to APB No. 28 to be effective for interim periods beginning after December
15,
2002.
In
November 2002, the Emerging Issues Task Force ("EITF") reached a consensus
on
Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables". EITF No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and rights to use assets.
The provisions of EITF No. 00-21 will apply to revenue arrangements entered
into
in the fiscal periods beginning after June 15, 2003. The Company is currently
evaluating the impact EITF No. 00-21 will have on its financial position and
results of operations.
In
January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51". FIN46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN46 is effective
for all new interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN46 must be applied for the first interim or annual period
beginning after June 15, 2003. Adequate disclosure has been made for all off
balance sheet arrangements that it is reasonably possible to consolidate
under FIN46.
The
American Institute of Certified Public Accountants has issued an exposure draft
SOP "Accounting for Certain Costs and Activities Related to Property, Plant
and
Equipment ("PP&E")". This proposed SOP applies to all non-government
entities that acquire, construct or replace tangible property, plant and
equipment including lessors and lessees. A significant element of the SOP
requires that entities use component accounting retroactively for all PP&E
assets to the extent future component replacement will be capitalized. At
adoption, entities would have the option to apply component accounting
retroactively for all PP&E assets, to the extent applicable, or to apply
component accounting as an entity incurs capitalizable costs that replace all
or
a portion of PP&E. The Company cannot evaluate the ultimate impact of this
exposure draft until it becomes final.
Risk
Factors
This
report and other reports filed by us contained certain forward-looking
statements within the meaning of the Private Securities Litigation Reform act
of
1995. Actual results could differ materially from those projected in the
forward-looking statements as a result of certain uncertainties set forth below
and elsewhere in this report, as well as additional risks and uncertainties
of
which we are currently unaware. See Item 6. “Management’s Discussion and
Analysis or Plan of Operation - Forward-Looking Statements”.
Risks
Relating to Our Operations
We
are currently without significant operations.
As
described under “Liquidity and Capital Resources” section, the Company's
application to the banking authorities in China was approved to repay the
Debentures though the Liquidation of its Quicknet operating subsidiary. Upon
the
completion of the Liquidation of the PRC Subsidiaries and the repayment of
outstanding Debentures, the Company does not know whether the PRC subsidiaries
will continue to operate as subsidiaries of the Company in new entities,
although it is not currently expected they will. In view of the foregoing,
as a
result of the Liquidation, the Company’s sole operations are those of Windsor
Education Academy Inc., a British Columbia based school specializing in English
as a Second Language courses for
foreign
students. This business had total revenues of $93,000 for 2006. Such an
occurrence would leave the Company without its principal operating subsidiary
which would substantially impair our viability.
Need
for additional financing.
We
need
additional funds to fully implement our business plan, in addition to the
proceeds obtained from the August 2005 Offering. Management can give no
assurance the funds so obtained will be sufficient to fully implement the
business plan, or that a full implementation of such business plan will result
in the Company’s profitability. If additional funds are raised though the
issuance of equity or debt securities, such additional securities may have
powers, designations, preferences or rights senior to our currently outstanding
securities and, in the case of additional equity securities, the ownership
of
our existing shareholders will be diluted. No assurances can be given that
we
will be able to raise any additional financing. Any inability to obtain required
financing on sufficiently favorable terms could have a material adverse effect
on our business, results of operations and financial condition.
We
had prior operating losses and are
implementing a new business plan.
The
Company had operating losses in 2004, 2005 and 2006 and used the proceeds of
the
Debenture Offering to implement the Company’s Business Plan. As a result of the
Liquidation, we are seeking funding to complete the pending Topbiz Acquisition
or enter into negotiations to acquire another operating company. Therefore,
we
might spend substantial resources on an acquisition without generating any
profit.
The
Company’s proposed operations are subject to all of the risks inherent in the
expansion of an early-stage business enterprise, including higher-than-expected
expenses and uncertain revenues. The likelihood of the success of the Company
must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the expansion
of an early-stage business.
We
have a limited operating history and consequently face significant risks and
uncertainties.
We
initiated our current business strategy in 2003. As a result of our limited
operating history, the ongoing Liquidation and our reporting responsibilities
as
a public company, we may need to expand operational, financial and
administrative systems and control procedures to enable us to further train
and
manage our employees and coordinate the efforts of our accounting, finance,
marketing, and operations departments.
We
lack business diversification.
As
a
result of the Liquidation and the limited nature of our education and training
business, the Company’s prospects for success are dependent upon any future
acquisitions. We expect to finance our future operations through the sale of
assets or the sale of equity or debt securities in order to raise additional
capital, none of which may be feasible when needed. Unless we are able to raise
substantial amounts of additional capital, we will not have the resources to
diversify our operations or benefit from the possible spreading of risks or
offsetting of losses. In view of our default in repayment of the Debentures
and
the Liquidation of our principal operating subsidiary, we may be unable to
get
additional funds when needed.
Lack
of resources to expand Canadian operations.
The
Company purchased its Canadian subsidiary in 1997 and has had limited growth,
to
date. Without additional financing, we would be unable to continue the business
goal of maintaining and expanding our business in Canada. The Company could
not
renew its contract because the Canadian government has tightened its budget
on
English training for new immigrants. This led to reduced government funding
for
Windsor Education Academy and this will have negative effects on the
revenue of Windsor Education Academy. There is no assurance that Windsor
Education Academy will receive government funding in the coming years. The
Company will continue to look for further companies in the Canadian market
area
with the goal of introducing foreign accredited programs into the China market.
Risks
Related to Conducting Business in China
In
the
event we continue to do business in China, through the proposed acquisition
of
Topbiz, the continued operations of Quicknet, or otherwise, we will be subject
to the following risks:
China’s
governmental and regulatory reforms may impact our ability to do business in
China.
Since
1978, the Chinese government has been in a state of evolution and reform. The
reforms have resulted in and are expected to continue to result in significant
economic and social development in China. Many of the reforms are unprecedented
or experimental and may be subject to change or readjustment due to a variety
of
political, economic and social factors. Multiple government bodies are involved
in regulating and administrating affairs in the telecommunications industry,
among which the MII, the National Development and Reform Commission (“NDRC”) and
the State Asset Supervisory Administrative Commission (“SASAC”) play the leading
roles. These government agencies have broad discretion and authority over all
aspects of the telecommunications and information technology industry in China,
including but not limited to, setting the telecommunications tariff structure,
granting carrier licenses and frequencies, approving equipment and products,
granting product licenses, specifying technological standards as well as
appointing carrier executives, all of which may impact our ability to do
business in China.
While
we
anticipate that the basic principles underlying the reforms should remain
unchanged, any of the following changes in China’s political and economic
conditions and governmental policies could have a substantial impact on our
business:
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the
promulgation of new laws and regulations and the interpretation of
those
laws and regulations;
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inconsistent
enforcement and application of the telecommunications industry’s
rules and regulations by the Chinese government between foreign and
domestic companies;
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the
restructuring of telecommunications carriers in
China;
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the
introduction of measures to control inflation or stimulate growth;
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the
introduction of new guidelines for tariffs and service rates, which
affect
our ability to competitively price our products and services;
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changes
in the rate or method of taxation;
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the
imposition of additional restrictions on currency conversion and
remittances abroad; or
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any
actions that limit our ability to develop, manufacture, import or
sell our
products in China, or to finance and operate our business in China.
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For
example, on November 1, 2004, as a continuation of the restructuring of
telecom carriers relating to the initial public offering of China Netcom in
2004, SASAC decided to swap the senior executives of China Mobile, China Unicom,
China Telecom and China Netcom in an effort to ease competition among carriers.
We are not certain whether there may be additional government interference,
including government imposed mergers or spin-offs of the existing carriers.
In
addition to modifying the existing telecommunications regulatory framework,
the
Chinese government is currently preparing a draft of a standard, national
telecommunications law (the “Telecommunications Law”) to provide a uniform
regulatory framework for the telecommunications industry. We do not yet know
the
final nature or scope of the regulations that would be created if the
Telecommunications Law is passed. Accordingly, we cannot predict whether it
will
have a positive or negative effect on us or on some or all aspects of our
business.
Under
China’s current regulatory structure, the communications services that we offer
in China must meet government and industry standards. In addition, a value
added
service provider license must be obtained. Without a license, we cannot provide
the current mobile solution services in China. Moreover, we must ensure that
the
quality and content of the services will comply with related rules and
regulations. Although we already have this license, it requires an annual
renewal from the related government.
MII
and/or other related authorizations might perform spot checks to track and
supervise the quality and content of our services. Any determination that our
services fail to comply with applicable rules and regulations could result
in a
revocation of our license, which would have a material adverse effect on our
business.
China’s
changing economic environment may impact our ability to do business in
China.
Since
1978, the Chinese government has been reforming the economic system in China
to
increase the emphasis placed on decentralization and the utilization of market
forces in the development of China’s economy. These reforms have resulted in
significant economic growth. However, any economic reform policies or measures
in China may from time to time be modified or revised by the Chinese government.
While we may be able to benefit from the effects of some of these policies,
these policies and other measures taken by the Chinese government to regulate
the economy could also have a significant negative impact on economic conditions
in China, which would result in a negative impact on our business.
China’s
economic environment has been changing as a result of China’s entry, in
December of 2001, into the World Trade Organization (the “WTO”). Entry into
the WTO required that China reduce tariffs and eliminate non-tariff barriers,
including quotas, licenses and other restrictions by early 2005, and we cannot
predict the impact of these changes on China’s economy. Moreover, although
China’s entry into the WTO and the related relaxation of trade restrictions may
lead to increased foreign investment, it may also lead to increased competition
in China’s markets from other foreign companies. If China’s entry into the WTO
results in increased competition or has a negative impact on China’s economy,
our business could suffer. In addition, although China is increasingly according
foreign companies and foreign investment enterprises established in China the
same rights and privileges as Chinese domestic companies as a result of its
admission into the WTO, special laws, administrative rules and regulations
governing foreign companies and foreign investment enterprises in China may
still place foreign companies at a disadvantage in relation to Chinese domestic
companies and may adversely affect our competitive position.
Uncertainties
with respect to the Chinese legal system may adversely affect
us.
We
conduct our business in China primarily through our subsidiary incorporated
in
China. Our subsidiary is generally subject to laws and regulations applicable
to
foreign investment in China. Accordingly, our business will be affected by
China’s developing legal system. Since 1978, many new laws and regulations
covering general economic matters have been promulgated in China, and government
policies and internal rules promulgated by governmental agencies may not be
published in time, or at all. As a result, we may operate our business in
violation of new rules and policies without having any knowledge of their
existence. In addition, there are uncertainties regarding the interpretation
and
enforcement of laws, rules and policies in China. The Chinese legal system
is based on written statutes, and prior court decisions have limited
precedential value. Because many laws and regulations are relatively new and
the
Chinese legal system is still evolving, the interpretations of many laws,
regulations and rules are not always uniform. Moreover, the relative
inexperience of China’s judiciary in many cases creates additional uncertainty
as to the outcome of any litigation, and the interpretation of statutes and
regulations may be subject to government policies reflecting domestic political
changes. Finally, enforcement of existing laws or contracts based on existing
law may be uncertain and sporadic, and it may be difficult to obtain swift
and
equitable enforcement, or to obtain enforcement of a judgment by a court of
another jurisdiction. Any litigation in China may be protracted and result
in
substantial costs and diversion of resources and management’s attention.
We
are subject to risks relating to currency rate fluctuations and exchange
controls.
Because
most of our sales are made in China and denominated in Renminbi, and as the
Renminbi is no longer fixed against the US Dollar and the Renminbi-US Dollar
exchange rate could float, resulting in depreciation or appreciation relative
to
the U.S. dollar, any such currency rate fluctuations could adversely affect
our
sales and subject as to volatility in our financial reporting.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Because
substantially all of our revenues are denominated in RMB, the Chinese currency,
any restrictions on currency exchange may limit our ability to use revenues
generated in RMB to fund any business activities we may have outside China
or to
make dividend payments in U.S. dollars. The principal regulation governing
foreign currency exchange in China is the Foreign Currency Administration Rules
(1996), as amended. Under these rules, RMB are freely convertible for trade
and
service-related foreign exchange transactions, but not for direct investment,
loan or investment in securities outside China unless the prior approval of
the
State Administration of Foreign Exchange is obtained. Although China's
government regulations now allow greater convertibility of RMB for current
account transactions, significant restrictions still remain. For example,
foreign exchange transactions, including principal payments in respect of
foreign currency-denominated obligations, remain subject to significant foreign
exchange controls and the approval of the State Administration of Foreign
Exchange. These limitations could affect our ability to obtain foreign exchange
for capital expenditures. We cannot be certain that China's regulatory
authorities will not impose more stringent restrictions on the convertibility
of
RMB, especially with respect to foreign exchange transactions.
Our
business benefits from certain tax incentives, and changes to these tax
incentives could adversely affect our operating results.
The
Chinese government has provided various tax incentives to domestic high
technology companies, including our Chinese subsidiaries, in order to encourage
the development of technology companies. There have been various tax reform
proposals in China, and if any of these incentives are reduced or eliminated
by
government authorities in the future, the effective tax rates of our
subsidiaries in China and our effective tax rates on a consolidated basis could
increase significantly. Any such change could adversely affect our operating
results.
Recent
Chinese regulations relating to acquisitions of Chinese companies by foreign
entities may limit our ability to acquire such companies and adversely affect
our business and prospects.
China's
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by
Chinese residents intends to acquire a Chinese company, such acquisition will
be
subject to strict examination by the relevant foreign exchange authorities.
The
public notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the Chinese residents of
a
Chinese company's assets or equity interests to foreign entities, such as us,
for equity interests or assets of the foreign entities.
In
April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a Chinese company
by
an offshore company controlled by Chinese residents has been confirmed by a
Foreign Investment Enterprise Certificate prior to the promulgation of the
January notice, the Chinese residents must each submit a registration form
to
the local SAFE branch with respect to their respective ownership interests
in
the offshore company, and must also file an amendment to such registration
if
the offshore company experiences material events, such as changes in the share
capital, share transfer, mergers and acquisitions, spin-off transaction or
use
of assets in China to guarantee offshore obligations. The April notice also
provides that failure to comply with the registration procedures set forth
therein may result in a restriction on the Chinese company's ability to
distribute profits to its offshore parent company. Pending the promulgation
of
detailed implementation rules, the relevant government authorities are reluctant
to commence processing any registration or application for approval required
under the SAFE notices. We have requested our relevant shareholders to complete
the SAFE registration procedures as soon as
practicable.
As
it is
uncertain how the SAFE notices will be interpreted or implemented, we cannot
predict how they will affect our business operations or future strategy. For
example, we may be subject to more stringent review and approval process with
respect to our foreign exchange activities, such as remittance of dividends
and
foreign-currency-denominated borrowings, which may adversely affect our results
of operation and financial condition. In addition, if we decide to acquire
a
Chinese company, we cannot assure you that we or the owners of such company,
as
the case may be, will be able to complete the necessary approval, filings and
registrations for the acquisition. This may restrict our ability to implement
our acquisition strategy and adversely affect our business and prospects.
Securities
Risks
Authorized
share capital as an anti-takeover device.
At
the
Company’s last shareholders meeting, Management obtained approval to increase
the number of authorized shares of Common Stock from 50 million to 500 million
shares. The reason for that change was that Management did not believe it had
sufficient shares for future growth, including potential acquisitions. However,
the Board of Directors will still have the authority to issue such authorized
but previously unissued shares without further shareholder approval. This may
have the effect of delaying or preventing a change of control without further
action by shareholders. As the increase in the Company’s authorized capital will
enable the Company to issue a significant number of additional shares of Common
Stock, the interests of the public shareholders are subject to a significant
level of dilution in the future. As a result, the reduction in the debenture
Conversion Price to $0.05 per share, and the issuance of a substantial number
of
shares upon conversion by such debenture holders the number of shares of Common
Stock increased from approximately 20 million at December 31, 2006 to 61 million
as of May 16, 2007, resulting in significant dilution to existing common
shareholders.
Restrictions
on transferability will prevent investors in the Offering from selling
securities.
The
Offering of the Units was made pursuant to Sections 4(2) and 4(6) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act, solely to Accredited Investors and Qualified Institutional Buyers. The
initial Registration Statement on Form SB-2 was declared effective on August
7,
2006. However, we may be prohibited by SEC rules from registering all of the
additional Shares of Common Stock issuable as a result of the
Conversion/Settlement Agreements on the registration statement filed with the
SEC on February 12, 2007. Such registration statement, which may only cover
portions of those additional shares of Common Stock issuable as a result of
the
Conversion/Settlement Agreements, as well as any other registration statements
in the future registering those remaining portions of additional shares of
Common Stock issuable as a result of the same, have not yet been declared
effective. No registration statement will be declared effective by the SEC
as
long as the Company’s auditors disclaim an opinion on the Company’s
financial statements as currently exists in this report. Until such time as
all
of the shares can be registered, such underlying securities cannot be sold,
transferred, pledged, assigned, hypothecated or otherwise disposed of without
registration under the Securities Act and such state laws, unless in the opinion
of counsel satisfactory to the Company, any such sale, transfer, assignment,
pledge or hypothecation will not violate the registration requirements under
the
Securities Act or state securities laws. As a result, an investor must bear
the
economic risk of an investment in the Company for an indefinite period of time.
The
holders of Debentures and Warrants may have rescission
rights.
The
Company entered into the Settlement Agreement on May 4, 2006. The Settlement
Agreement provided for an increase in the number of shares of Common Stock
issuable upon conversion of the Debentures and exercise of the Warrants. Thus,
there are now more shares issuable than were contemplated during the original
offer. The Company believed that the offer (there was no issuance) of such
additional shares was exempt from registration under the Securities Act and
under applicable state securities laws pursuant to
Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
The offer was made some 9 or 10 months after the original sale to the same
investors. The Company did not offer securities to any new investors, nor was
it
receiving proceeds from the issuance of additional shares. The offer was not
made voluntarily, but solely in response to threatened litigation. In addition,
after the initial filing of the initial Registration Statement, and on or about
November 3, 2005, the Company issued warrants to purchase 200,000 shares of
Common Stock to Crystal Research Associates LLC for services rendered. The
Company believed that the issuance of the Warrants was exempt from registration
under Section 4(2) of the Securities Act and was not offering the underlying
Common Stock to any new investors.
All
of
the above described additional shares of Common Stock issuable by the Company
have been removed from the initial Registration Statement. Notwithstanding
the
foregoing, questions have been raised by the SEC as to the availability of
the
claimed exemptions. In the event the Company is found to have offered such
shares in transactions for which exemption from registration was not available,
such shares may have been offered in violation of the registration provisions
of
Section 5 of the Securities Act. The owner of the securities found to be offered
in violation of the Securities Act shall be tendered and the purchase shall
be
rescinded, with the purchaser entitled to recover the consideration he paid
for
the securities, plus interest from the date of the payment of consideration
to
the date of the judgment, plus costs and reasonable attorneys fees. The
purchaser must return those securities and any income received on the securities
while he had them. In the event such purchaser already sold the securities
that
are the subject of the violation, his remedy changes to a suit for damages,
which are calculated depending on the state of purchasers residence, as
(consideration paid plus interest, plus costs, plus attorneys’ fees minus income
received on the securities) minus (the value of the securities when sold plus
interest thereon). Remedies vary depending on the state of the investors’
residence. Securities regulators could also impose fines and sanctions on the
Company, making it difficult for the Company to conduct future offerings.
Officers and directors could, likewise, be subject to fines and sanctions,
including being held liable for any rescission offer, if such person knew or
reasonably should have known of the facts that gave rise to the liability.
It is
also possible that a company could be subject to liability under the federal
laws and the laws of each state in which securities were sold. If any of the
aforementioned occurred, it would likely have a material adverse impact on
the
Company’s business or operations. We
have
not yet requested our independent auditor to provide for loss contingencies
associated with possible securities law violations.
Subsequently,
the Company entered into the Conversion/Settlement Agreement on February 12,
2007, further increasing the number of shares of Common Stock issuable upon
conversion of the Debentures and exercise of the Warrants, however the SEC
has
not raised any questions with respect to rescission rights of shares relating
thereto to be registered in the registration statement filed with the SEC on
February 12, 2007.
Since
the
Company entered into the Settlement Agreement and the Conversion/Settlement
Agreement, it has not been threatened by any of its investors or shareholders
with respect to rescission rights, however, notwithstanding the fact that shares
of common stock have been removed from the initial Registration Statement which
was declared effective by the SEC on August 7, 2006, the SEC is not foreclosed
from taking any enforcement action with respect to the filing and the Company
may not assert the declaration of effectiveness as a defense in any proceeding
initiated by the SEC.
The
conversion of debentures and exercise of the warrants from the August 2005
Offering may have a dilutive effect on the price of our Common Stock.
The
purchasers in the August 2005 Offering have the right to convert their
Debentures into an aggregate of approximately 67 million shares of Common Stock
(which does not include Common Stock issuable in repayment of interest and
liquidated damages) if all Debenture holders convert pursuant to the
Conversion/Settlement Agreements, dated February 2007 and exercise their
Warrants for an aggregate of approximately 22,333,332 shares of Common Stock.
The conversion or exercise of these securities will cause dilution to our
shareholders and the sale of the underlying Common Stock (or even the potential
of such exercise or sale) may have a depressive effect on the market price
of
our securities. Further, to the extent that outstanding stock options and
warrants are exercised, dilution to our shareholders will occur. Moreover,
the
terms upon which we will be able to obtain additional equity capital may be
adversely affected, since the holders
of the outstanding options and warrants can be expected to exercise them at
a
time when we would, in all likelihood, be able to obtain any needed capital
on
terms more favourable to us than the exercise terms provided by the outstanding
options and warrants.
If
we do not keep a registration statement current, your ability to sell the
Debenture Shares and Warrant Shares will be limited.
We
must
keep a registration statement effective with the SEC in order for stockholders
to receive registered stock upon the conversion of Debentures and the exercise
of Warrants, as well as to freely sell the shares of common stock underlying
the
Debentures and Warrants. No registration statement will be declared effective
by
the SEC as long as the Company’s auditors disclaim an opinion on the
Company’s financial statements as currently exists in this report. We may not be
able to maintain a registration statement in effect throughout the period during
which the Debentures remain convertible and the Warrants remain exercisable.
Provided a registration statement is kept effective, following any sale made
by
stockholders of their shares underlying the Debentures and Warrants, prospective
purchasers shall receive registered common stock. Maintaining an effective
registration statement requires substantial continuing expenses for legal and
accounting fees and we cannot guarantee our ability to keep the registration
statement effective.
Difficulty
of trading and obtaining quotations for Common Stock.
Our
Common Stock is currently quoted on the Over-the-Counter Bulletin Board
(“OTCBB”) under the symbol “CHMSE.OB” and was previously traded under the symbol
“CHMS.OB.” However, unless our auditors are able to express an opinion on all
financial statements, we do not expect to be able to continue to list on the
OTCBB. Our Common Stock is not actively traded, and the bid and asked prices
for
our Common Stock have fluctuated significantly. As a result, an investor may
find it difficult to dispose of, or to obtain accurate quotations of the price
of, our securities. This severely limits the liquidity of the Common Stock,
and
would likely have a material adverse effect on the market price of the Common
Stock and on our ability to raise additional capital.
Penny
Stock Regulation.
Our
Common Stock is subject to Rule 15g-9 under the Exchange Act. This rule imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and “accredited
investors.” For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently,
the
rule could affect the ability of broker-dealers to sell our securities and
could
affect the ability of purchasers to sell any of our securities in the secondary
market.
Risk
Factors Affecting the Company's Business Operations.
The
Company could be subject to fines, and possible exclusion from participation
in
providing mobile solutions to corporations in China if it continues operations
in the PRC and fails to comply with the laws and regulations applicable to
its
business or if those laws and regulations change.
The
Company is subject to regulations such as compliance and record-keeping
requirements under the Ministry of Information Industry (MII) in China. Through
its subsidiary the Company has a value added service provider license from
MII.
If the Company is deemed to have violated these laws and regulations, the
Company could be subject to fines and/or exclusion from participation in
providing mobile solution services. Changes in the telecommunications law,
new
interpretations of existing laws and regulations may have a dramatic effect
on
the Company’s business and results of operations.
Continued
pressure could reduce the Company's margins and limit the Company’s ability to
maintain or increase its market share.
Certain
competitors of the Company may have or may obtain significantly greater
financial and marketing resources
than the Company. As a result, the Company could encounter increased competition
in the future that may increase pricing pressure and limit its ability to
maintain or increase its market share. There is a great deal of competition
in
the Company’s business, especially to develop alliances with the two major
mobile carriers, China Unicom and China Mobile. Mobile marketing is quickly
growing in popularity. In Asia, eMarketer reports that 39% of mobile phone
users
have received SMS messages from advertisers and this figure points to a strong
and growing trend among advertisers to embrace mobile marketing. Major
competitors who currently are focusing on individual markets may spend more
resources in the business section in the future. Since they have more financial
support and broader influence in this market, the Company might be forced to
decrease price, give out more discounts and increase its costs to keep key
employees. This would decrease the Company’s profit margin.
If
we lost the services of Xiao-qing Du, the Company’s CEO, or Ernest Cheung, the
Company’s Secretary, we might not be able to execute our current business in
accordance with our current plans.
Our
future success depends significantly on the skills, experience and efforts
of
its chief executive officer, Xiao-qing Du, and its Secretary and Director,
Ernest Cheung, and other key personnel. These individuals would be difficult
to
replace. Ms. Du and Mr. Cheung have developed, and are engaged in carrying
out,
the Company’s strategic business plan, a copy of which is attached as an exhibit
to a Form 8-K filed with the Commission on June 30, 2005. The loss of the
services of Ms. Du or Mr. Cheung could seriously harm the Company’s ability to
implement its strategy. A failure to implement the Company’s business strategy
could result in the cessation of the Company’s operations which would have a
material adverse effect on our Company and on your investment. Ms. Du and Mr.
Cheung have employment contracts that are renewable every year. Under British
Columbia law, the Company will be responsible for severance pay for early
termination based on the number of years of employment with the Company. There
is no key person life insurance.
If
the Company is unable to adequately protect or enforce its rights to its
intellectual property, we may lose valuable rights, experience reduced market
share, if any, or incur costly litigation to protect such
rights.
The
Company generally requires its employees, consultants, advisors and
collaborators to execute appropriate confidentiality agreements with it. These
agreements typically provide that all materials and confidential information
developed or made known to the individual during the course of the individual's
relationship with the Company is to be kept confidential and not disclosed
to
third parties except in specific circumstances. These agreements may be
breached, and in some instances, the Company may not have an appropriate remedy
available for breach of the agreements. Furthermore, the Company’s competitors
may independently develop substantial equivalent proprietary information and
techniques, reverse engineer information and techniques, or otherwise gain
access to the Company’s proprietary technology. In addition, the laws of some
foreign countries may not protect proprietary rights to the same extent as
U.S.
law. the Company may be unable to meaningfully protect its rights in trade
secrets, technical know-how and other non-patented technology.
The
Company does not have any patents. If the Company employees develop technology
while employed by the Company, the Company has the title and full right of
this
technology. Employees cannot disclose such technology to a third party. However,
this technology is usually not patentable because other competitors may develop
it as well. The first company to develop such technology has a better chance
to
gain market share.
The
Company may have to resort to litigation to protect its rights for certain
intellectual property, or to determine their scope, validity or enforceability.
Enforcing or defending the Company’s rights is expensive and may distract
management from its development of the business if not properly managed. Such
efforts may not prove successful. There is always a risk that patents, if
issued, may be subsequently invalidated, either in whole or in part, and this
could diminish or extinguish protection for any technology the Company may
license. Any failure to enforce or protect the Company’s rights could cause it
to lose the ability to exclude others from using its technology to develop
or
sell competing products.
The
Company may be sued by third parties who claim that the Company’s product
infringes on their intellectual property rights. Defending an infringement
lawsuit is costly and the
Company may not have adequate resources to defend. Any settlement or judgment
against us could harm our future prospects.
The
Company may be exposed to future litigation by third parties based on claims
that its technology, product or activity infringes on the intellectual property
rights of others or that the Company has misappropriated the trade secrets
of
others. This risk is compounded by the fact that the validity and breadth of
claims covered in technology patents in general and the breadth and scope of
trade secret protection involves complex legal and factual questions for which
important legal principles are unresolved. Any litigation or claims against
the
Company, whether or not valid, could result in substantial costs, could place
a
significant strain on the Company’s financial and managerial resources, and
could harm the Company’s reputation. In addition, intellectual property
litigation or claims could force the Company to do one or more of the following:
|
·
|
Cease
selling, incorporating or using any of the Company’s technology and/or
product that incorporates the challenged intellectual property, which
could adversely affect the Company’s revenue;
|
|
·
|
Obtain
a license from the holder of the infringed intellectual property
right,
which may be costly or may not be available on reasonable terms,
if at
all; or
|
|
·
|
Redesign
the Company’s product, which would be costly and time
consuming.
|
The
financial statements are included in this report following Item 14. Please
see
pages F-1 through F-18.
On
August
21, 2006, we engaged Michael T. Studer, C.P.A., P.C., an independent registered
firm of Certified Public Accountants, as our principal independent accountant
with the approval of our company's board of directors. Moen and Company LLP
(“Moen”) resigned on July 21, 2006 as our independent registered public
accounting firm. Moen advised us they ceased doing business on July 21, 2006.
Moen was the Company's independent auditor and examined the financial statements
of the Company for the fiscal years ended December 31, 2004 and 2005.
The
reports of Moen on the consolidated financial statements of the Company as
of
and for the years ended December 31, 2004 and 2005 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
During
the years ended December 31, 2004 and 2005 through the date of resignation
there
were no disagreements with Moen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which
disagreements, if not resolved to the satisfaction of Moen, would have caused
Moen to make reference to the subject matter of the disagreement in its reports
on the Company's consolidated financial statements for such periods.
During
China Mobility's most recent fiscal year ended December 31, 2005 and the
subsequent interim period from January 1, 2006 - August 21, 2006, China Mobility
did not consult with Michael T. Studer, C.P.A., P.C. with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on
China Mobility's financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
The
Company has requested that Moen furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
above statements. A copy of such letter is referenced herein as Exhibit 16.1
As
of the
end of the period covered by this Annual Report on Form 10-KSB, 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 same 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.
As
a
non-accelerated issuer, the Company is not required to provide management’s
assessment and report on the Company’s internal control over financial
reporting. However, in our Form 10-QSB for the period ended March 31, 2005,
we
determined that there were material weaknesses in our internal controls in
our
operations in China, that needed to be addressed by management.
The
changes which we were in the process of implementing during the fourth quarter
to our internal controls over financial reporting could materially affect or
are
reasonably likely to materially affect those controls. These changes were
completed during the fourth quarter. Management does not believe such material
weakness in our internal controls did, in fact, affect our disclosure controls
and procedures.
The
Company has implemented document control procedures for its subsidiary QuickNet
in its manual. These include:
A. Expenditure
controls/approvals and documentation by Board Committee for the subsidiary
in
China, Beijing QuickNet; and
B. Subscription
accounting and tracking for its subsidiary in China, Beijing
QuickNet.
The
Company has completed the implementation of such changes to our internal
controls and procedures based on the model framework created by the Committee
of
Sponsoring Organizations of the Treadway Commission (or “COSO”).
There
were changes in the Company’s document control procedures as stated above for
its subsidiary Quick Net that were completed during the Company’s fourth fiscal
quarter. However, no other changes in the Company’s internal controls over
financial reporting identified in connection with the Evaluation occurred during
the Company’s fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect the Company’s internal controls over our
financial reports.
None.
PART
III
(a) The
following table furnishes the information concerning Company directors and
officers as of the date of this report. The directors of the Registrant are
elected every year and serve until their successors are elected and
qualify.
Name
|
Age
|
Title
|
Term
|
Xiao-qing
Du
|
37
|
President
and Director
|
Annual
|
Ernest
Cheung
|
57
|
Director
and Secretary
|
Annual
|
Bryan
Ellis
|
37
|
Director
|
Annual
|
John
Gaetz
|
57
|
Director
|
Annual
|
The
following table sets forth the portion of their time the directors devote to
the
Company:
Ernest
Cheung
|
20%
|
Angela
Du
|
100%
|
Bryan
Ellis
John
Gaetz
|
10%
20%
|
The
term
of office for each director is one (1) year, or until his/her successor is
elected at the Company annual meeting and is qualified. The term of office
for
each of the officers is at the discretion of the Board of
Directors.
(b) Identification
of Certain Significant Employees.
Strategic
matters and critical decisions are handled by Company directors and executive
officers: Xiao-qing Du and Ernest Cheung. Day-to-day management is delegated
to
Xiao-qing Du, partly in China and partly in Canada, and Xin Wei in China. Wei
is
an employee of the wholly owned subsidiary, Infornet Investment Corp. Xin Wei
occupies the position of President of the Chinese subsidiary for strategy,
planning and business development.
(c) Family
Relationships. Xiao-qing Du and Xin Wei are husband and wife.
(d) Business
Experience.
The
following is a brief account of the business experience during the past five
years of each of the Company’s directors and executive officers, including
principal occupations and employment during that period and the name and
principal business of any corporation or other organization in which such
occupation and employment were carried on.
Xiao-Qing
Du, President
and Director, age 37.
Ms.
Du
has been President and Director of our Company since 2003. She received a
Bachelor of Science in International Finance in 1992 from East China Normal
University. She received a Master of Science in Finance and Management Science
in 1996 from the University of Saskatchewan, Canada. She was Business Manager
of
China Machinery & Equipment I/E Corp. (CMEC) from 1992 to 1994. Since 1997,
she has been President of Infornet Investment Corp., the Company's wholly owned
subsidiary in Canada. She was President of China Mobility from 1997 to 1999.
She
ran the operations in China of the domain name service and
web-hosting business.
Ernest
Cheung, Secretary
and Director, age 57.
Mr
Cheung
has been Secretary of the Company since May 1998. He received a B.A. in Math
in
1973 from University of Waterloo, Ontario. He received an MBA in Finance and
Marketing from Queen's University, Ontario in 1975. From 1991 to 1993 he was
Vice President of Midland Walwyn Capital, Inc. of Toronto, Canada, now known
as
Merrill Lynch Canada. From 1992 until 1995 he served as Vice President and
Director of Tele Pacific International Communications Corp. He has also served
as President for Richco Investors, Inc. since 1995. He has been a director
of
the Company since 1996. He is currently a Director of Agro International
Holdings, Inc., since 1997, Spur Ventures, Inc., since 1997, Richco Investors,
Inc., since 1995 and Drucker Industries, Inc., since 1997. In 2000, he became
President and a Director of China NetTV Holdings, Inc. In 2002, he became a
Director of The Link Group, Inc. (formerly World Envirotech, Inc.).
Mr.
Cheung is, or has been, an officer or director in the following public
companies:
Name
of Issuer
|
Symbol
|
Market
|
Position
|
From
|
To
|
Business
|
Agro
International Holdings Inc.
|
AOH
|
CDNX
|
President
|
Jan-97
|
Current
|
Agriculture
|
China
NetTV Holdings Inc.*
|
CTVH
|
OTCBB
|
President
|
May-00
|
2003
|
Set-Top
Box Technology
|
Drucker,
Inc.*
|
DKIN
|
OTCBB
|
Secretary
|
Apr-97
|
2003
|
Oil
& Gas
|
ITI
World Investment Group Inc.
|
IWI.A
|
CDNX
|
|
Jun-98
|
Current
|
Beverage
Distribution
|
NetNation
Communications Inc.
|
NNCI
|
Nasdaq
Small Cap.
|
|
Apr-99
|
Current
|
Domain
Name Registration
|
Richco
Investors Inc.
|
YRU.A
|
CDNX
|
President
|
May-95
|
Current
|
Financial,
Management, Capital Market Services
|
Spur
Ventures Inc.
|
SVU
|
CDNX
|
|
Mar-97
|
Current
|
Fertilizer
|
The
Link Group Inc.*
|
LNKG
|
OTCBB
|
Secretary
|
Dec-01
|
Current
|
Internet
Surveillance
|
China
Mobility Solutions, Inc.*
|
THE
COMPANY
|
OTCBB
|
Secretary
|
Mar-97
|
Current
|
China
Internet
|
*
Reporting Companies in U.S.
He
has
held a Canadian Securities license but is currently inactive. He has been a
Director and Secretary of the Registrant since January 1997.
Bryan
Ellis,
Director, age 37.
Bryan
D.
Ellis joined the Company as a Director on December 8, 2005. He is General
Manager of the Bertelsmann Book Club in Shanghai, China. Bryan has worked at
Bertelsmann for the past 7 years in numerous senior management positions,
including Senior Vice President of Marketing Services for Bookspan, Vice
President of International Product Development for BOL.com and Vice President
of
Technology Strategy for the Bertelsmann e-Commerce Group. Before joining
Bertelsmann, Bryan worked as a consultant for McKinsey & Company in their
New York office for 3 years. He received both his Bachelor's Degree
and Master's Degree in International Relations from Johns Hopkins University,
and received an executive business school diploma from Harvard Business
School.
John
Gaetz,
Director, age 57.
Mr.
Gaetz
currently is founder and president of Presidents Corporate Group; a company
structured to provide governance, administration and management services for
public companies. Previous positions included a two-year term as founder and
president of West Coast Stock Transfer Inc, a six-year term as Vice President
and CFO of UltraGuard Water Systems Inc; a public company engaged in development
and marketing ultraviolet based disinfection
products and twenty five years spent in various financial and senior management
positions with the Harnischfeger Corporation, a major mining, construction
and
defense equipment manufacturer.
(e) Committees
of the Board of Directors
Nominating
Committee.
The
Board of Directors does not have a nominating committee. Therefore, the
selection of persons or election to the Board of Directors was neither
independently made nor negotiated at arm's length.
Compensation
Committee.
The
Company established a Compensation Committee on October 5, 1999, which currently
consists of three directors, Angela Du, Ernest Cheung and Grey Ye, the last
being an independent director. The Compensation Committee is responsible for
reviewing general policy matters relating to compensation and benefits of
directors and officers and determining the total compensation of its officers
and directors.
Audit
Committee.
On
August 31, 1999, the Board of Directors established an Audit Committee, which
currently consists of three directors, XiaoQing Du, Ernest Cheung and John
Gaetz. The Audit Committee is charged with recommending the engagement of
independent accountants to audit Company financial statements, discussing the
scope and results of the audit with the independent accountants, reviewing
the
functions of Company management and independent accountants pertaining to its
financial statements and performing other related duties and functions as are
deemed appropriate by the Audit Committee and the Board of Directors.
Qualified
Financial Expert. Ernest Cheung is a qualified financial expert as a chartered
accountant and an MBA with twenty years' experience in public companies.
(f) Resolution
of Conflicts of Interest
As
mentioned earlier, some officers and directors will not devote more than a
portion of their time to the affairs of the Company. There will be occasions
when the time requirements of Company business conflicts with the demands of
their other business and investment activities. Such conflicts may require
that
the Company attempt to employ additional personnel. There is no assurance that
the services of such persons will be available or that they can be obtained
upon
terms favorable to the Company.
There
is
no procedure in place that would allow Company officers or directors to resolve
potential conflicts in an arms-length fashion. Accordingly, they will be
required to use their discretion to resolve conflicts in a manner that they
consider appropriate.
Code
of
Ethics. On
March
30, 2006, our Board of Directors adopted a Code of Ethics which applies to
all
officers, directors and employees. We will provide a copy of the Code of Ethics,
without charge, to any person who sends a written request to the secretary
of
China Mobility Solutions (#407-1270
Robson Street, Vancouver, B.C. Canada V6E 3Z6).
A copy
of the Code of Ethics was previously filed as an exhibit to the Form 10-KSB
filed on April 18, 2006. The Company intends to disclose any waivers or
amendments to the Code of Ethics in a Report on Form 8-K rather than from its
Website.
The
following table shows information concerning all compensation paid for services
to the Company in all capacities during the year ended December 31, 2006, as
to
the Chief Executive Officer and each of the other two most highly compensated
executive officers of the Company who served in such capacity at the end of
the
last fiscal year (the "Named Executive Officers") whose total annual salary
and
bonus exceeded $100,000:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option
Awards
|
Stock
Awards
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Under-
lying
Unexercised Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Share or Units of Stock That Have Not Vested
|
Market
Value of Shares or Units of Stock That Have Not
Vested
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
|
Xiao-qing
Du,
|
None
|
None
|
|
|
|
|
|
|
|
Summary
Compensation Table
Name
and Principal Position (a)
|
Year
(b)
|
Salary
($) (c)
|
Bonus
($) (d)
|
Stock
Awards ($) (e)
|
Option
Awards ($) (f)
|
Non-Equity
Incentive Plan Compensation ($) (g)
|
Nonqualified
Deferred Compensation Earnings ($) (h)
|
All
Other Compensation ($) (i)
|
Total
($) (j)
|
Xiao-qing
Du, President and CEO
|
12/31/06
|
$30,000
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Director
Compensation
Name
(a)
|
Fees
Earned or Paid in Cash
(b)
|
Stock
Awards ($)
(c)
|
Option
Awards ($)
(d)
|
Non-Equity
Incentive Plan Compensation ($)
(e)
|
Nonqualified
Deferred Compensation Earnings ($)
(f)
|
All
Other Compensation ($)
(g)
|
Total
($)
(h)
|
Xiao-qing
Du
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Ernest
Cheung
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Bryan
Ellis
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Directors
who are also officers of China Mobility Solutions, Inc. receive no cash
compensation for services as a director. However, the directors will be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
attendance at board and committee meetings. The Company has granted options
to
directors under its Stock Incentive Plan adopted subsequent to December 31,
2006.
Stock
purchase options:
On
November 12, 1999 the Company granted options to purchase shares at $3.90 per
share to entities/persons who contributed to the Company in 1999, which are
not
expired, as follows:
(a) 87,333
options to Gemsco Management Ltd., beneficially Maurice Tsakok, for designing
and implementing the Company's corporate website, advising on technological
matters, researching the technology sector and for services as a Director;
(b) 87,333
options to Farmind Link Corp. for their role as advisor on strategic issues,
technology market trends, and financial and capital market issues;
(c) 87,333
options to Sinhoy Management Ltd., beneficially Marc Hung, for their
contributions to the general management of our company, investor relations,
technological matters and for services as a Director;
(d) 70,667
options to Lancaster Pacific Investment, Ltd. for their contributions in the
areas of regulatory matters, Chinese market conditions and strategies
aimed at penetrating that market;
(e) 16,667
options to Ernest Cheung in consideration of services rendered as Secretary
and
Director;
(f) 6,667
options to Yonderiche International Consultants Ltd. in consideration of
services rendered in matters regarding Chinese government policies and
regulations.
As
of
December 31, 2006, there were 1,758,333 Series “A” and Series “B” warrants
outstanding. Series “A” has an exercise price of $0.38, Series “B” has an
exercise price of $0.45.
SUMMARY
DESCRIPTION OF EMPLOYEE BENEFIT PLANS
2007
Incentive Plan
The
Company has adopted the 2007 Incentive Plan (the “2007 Plan”) on February 19,
2007 and filed a Registration Statement on Form S-8 with the Commission on
March
5, 2007, to register shares awarded and shares underlying options granted under
the 2007 Plan. The Compensation Committee of the Board of Directors issues
common stock and awards options to employees, directors, officers, consultants,
advisors and other persons associated with our Company. The 2007 Plan is
intended to provide a method whereby our Company would be stimulated by the
personal involvement of our employees, directors, officers, consultants,
advisors and other persons in our business and reward such involvement, thereby
advancing the interests of our Company and all of its shareholders. A total
of
8,000,000 shares of common stock and shares of common stock underlying options
were authorized under the 2007 Plan. The stock options granted under the 2007
Plan shall be non-qualified stock options (“NQSO’s”).
No Stock
Option granted to any employee or 10% Shareholder shall be exercisable after
the
expiration of ten years from the date such NQSO is granted. The Committee,
in
its discretion, may provide that an Option shall be exercisable during such
ten
year period or during any lesser period of time. Both
incentive stock options and non-qualified stock options must be granted at
an
exercise price of not less than the fair market value of shares of Common Stock
at the time the option is granted and incentive stock options granted to 10%
or
greater stockholders must be granted at an exercise price of not less than
110%
of the fair market value of the shares on the date of grant. To date, no shares
have been awarded.
2006
Non-Qualified Stock Option Plan
The
Company adopted a 2006 Non-Qualified Stock Compensation Plan on November 2,
2005, and filed a Registration Statement on Form S-8 with the Commission on
November 3, 2005, to register shares awarded and shares underlying options
granted under the Plan. The Compensation Committee of the Board of Directors
issues common stock and awards options to employees, directors, officers,
consultants, advisors and other persons associated with our Company. The 2006
Plan is intended to provide a method whereby our Company would be stimulated
by
the personal involvement
of our employees, directors, officers, consultants, advisors and other persons
in our business and reward such involvement, thereby advancing the interests
of
our Company and all of its shareholders. A total of 4,000,000 shares of common
stock and shares of common stock underlying options were authorized under the
2006 Plan. To date, no shares have been awarded.
Section
16(a) Beneficial Ownership Reporting Compliance with Section 16(a) of the
Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires
the
Company's Officers and Directors, and persons who own more than ten percent
of a
registered class of the Company's equity securities, file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors, and stockholders of greater than ten percent are required by
regulation to furnish to the Company copies of all Section 16 forms they file.
Based solely on the Company’s review of the copies of such forms received by it
and written representations from the Company’s reporting persons, the Company
believes that all of the Company’s reporting persons have filed their respective
Section 16(a) forms for the year ended December 31, 2006.
Persons
and groups owning in excess of five percent of our Common Stock are required
to
file certain reports with the SEC disclosing such ownership pursuant to the
Exchange Act. Based upon such reports, as of April 10, 2007 management knows
of
no persons other than those identified below who were beneficial owners of
more
than five percent of the outstanding shares of Common Stock.
The
following table sets forth information with respect to the beneficial ownership
of our issued and outstanding stock by each director, the Chief Executive
Officer of the Company, the other named executive officers, all executive
officers and directors as a group and beneficial owners of more than five
percent of the 61,650,295
shares outstanding at May 17, 2007:
Name
of Beneficial Owner
|
Title
of Class
|
Total
Number of Securities Owned Beneficially
|
Percent
of Class (1)
|
Xiao-qing
Du (1)
|
Common
Stock
|
0
|
*
|
Ernest
Cheung(1)
|
Common
Stock
|
308,334
(2)
|
1.5%
|
John
Gaetz(1)
|
Common
Stock
|
0
|
*
|
Bryan
Ellis(1)
|
Common
Stock
|
0
|
*
|
Total
number of shares owned by directors and executive officers as a group
(4
persons)
|
Common
Stock
|
308,334
|
1.5%
|
*
Less
than 1% of the issued and outstanding shares.
(1)
|
Except
as otherwise noted each person’s business address is c/o the Company, Ste.
407-1270 Robson Street, Vancouver BC V6E
3Z6.
|
(2)
Ernest Cheung has options to purchase 165,000 shares at $0.30 per share, all
of
which are currently exercisable. Ernest Cheung is President of Development
Fund
II of Nova Scotia,
Inc. which owns 63,333 common shares included in the above table.
Termination
of Employment and Change of Control Arrangements:
None.
Wages
and benefits
- The
Company paid $58,886 as wages and benefits to Xiao-qing Du, the President,
Chief
Executive Officer, and a director of the Company during the year ended December
31, 2006.
Exhibit
No.
|
Description
of Exhibit
|
Location
|
3.1
|
Certificate
of Incorporation, as amended.
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
August 26, 2005, file #000-26559.
|
3.2
|
Bylaws,
as amended
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
August 16, 2001, file #000-26559.
|
4.1
|
Form
of Senior Convertible Debenture
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 18, 2005, file #000-26559.
|
4.2
|
Form
of Class A Warrants.
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 18, 2005, file #000-26559.
|
4.3
|
Form
of Class B Warrants.
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 18, 2005, file #000-26559.
|
10.1
|
Form
of Debenture Purchase and Warrant Agreement
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 18, 2005, file #000-26559.
|
10.2
|
Business
Plan
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
June 30, 2005, file #000-26559.
|
10.3
|
Option
Written Notice
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 5, 2005, file #000-26559.
|
10.4
|
Legal
Letter
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 5, 2005, file #000-26559.
|
10.5
|
Amendment
to Share Purchase Agreement
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 5, 2005, file #000-26559.
|
10.6
|
Placement
Agency Agreement, dated as of June 30, 2005, by and between China
Mobility
Solutions, Inc. and Meyers Associates, L.P. (10)
|
Incorporated
herein by reference from Exhibit to Amendment No. 2 to the Registration
Statement filed on May 9, 2006, file # 333-128323.
|
10.7
|
Waiver/Settlement
Agreement, dated as of May 4, 2006, by and between Southridge Partners,
LP
and China Mobility Solutions, Inc.
|
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
May 10, 2006, file #000-26559.
|
10.8
|
Share
Purchase Agreement, dated August 8, 2006, by and between Vendors,
Infornet
Investment Limited, Xin Wei, and Beijing Topbiz Technology Development
Corp. LTD.
|
Incorporated
herein by reference from Exhibits to the Registrant’s Current Report on
Form 8-K (File No. 000-26559), filed on August 11,
2006.
|
10.9
|
Form
of Conversion/ Settlement Agreement, dated as of February 2, 2007,
by and
between China Mobility Solutions, Inc. and Debenture
holders.
|
Incorporated
by reference from Exhibits to the Registrants’ Form SB-2 filed on February
12, 2007, file #333-140641.
|
|
|
|
|
|
|
10.12
|
2005
Stock Option Plan
|
Incorporated
herein by reference from Exhibit to the Registration Statement on
Form S-8
filed on May 5, 2005, file # 333-124654.
|
10.13
|
2006
Non-Qualified Stock Compensation Plan
|
Incorporated
herein by reference from Exhibit to the Registration Statement on
Form S-8
filed on November 3, 2005, file # 333-129419.
|
10.14
|
2007
Incentive Plan
|
Incorporated
herein by reference from Exhibit to the Registration Statement on
Form S-8
filed on March 5, 2007, file # 333-141062.
|
14.1
|
Code
of Ethics
|
Incorporated
herein by reference from Exhibit to Annual Report on Form 10-KSB
filed on
April 18, 2006, file #000-26559.
|
16.1
|
Letter
from Moen & Company, LLP to Securities and Exchange
Commission.
|
Incorporated
herein by reference from Exhibit in Current Report on Form 8-K filed
on
August 25, 2006, file #000-26559.
|
21.1
|
Subsidiaries
of Registrant
|
Incorporated
herein by reference from Exhibit to Annual Report on Form 10-KSB
filed on
April 18, 2006, file #000-26559.
|
|
|
|
|
|
|
|
|
|
|
|
|
Moen
and
Company ("Moen") was the Company's principal auditing accountant firm and
examined the financial statements of the Company for the fiscal year ended
December 31, 2005. Michael Studer, C.P.A. (“Studer”) was engaged as the
Company’s principal auditing accountant and examined the financial statements of
the Company for the fiscal year ended December 31, 2006.
Audit
Fees.
Moen
expects aggregate fees of approximately $45,150 for professional services
rendered for the audit of the Company’s annual financial statements for the
fiscal year ended December 31, 2005.
Studer
expects expects aggregate fees of approximately $50,000 for professional
services rendered for the audit of the Company’s annual financial statements for
the fiscal year ended December 31, 2006.
Tax
Fees.
There
were no fees for professional services by principal accountant for tax
compliance, tax advice or tax planning in 2006.
All
Other Fees.
Moen
was
not paid any other fees for professional services during the fiscal years ended
December 31, 2005 and Studer was not paid any other fees for professional
services during the fiscal years ended December 31, 2006.
The
Company's Board acts as the audit committee and had no "pre-approval policies
and procedures" in effect for the auditors' engagement for the audit year 2005
and 2006.
All
audit
work was performed by the auditors' full time employees.
To
the
Board of Directors and Stockholders of
China
Mobility Solutions, Inc.
I
was
engaged to audit the accompanying consolidated balance sheet of China Mobility
Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and the
related consolidated statements of operations, changes in stockholders’ equity
(deficiency), and cash flows for the year then ended. These financial statements
are the responsibility of the Company’s management. The consolidated financial
statements of China Mobility Solutions, Inc. as of December 31, 2005 were
audited by another auditor whose report dated March 31, 2006 expressed an
unqualified opinion on those statements.
As
more
fully described in Note 2 to the consolidated financial statements, applications
were submitted to a People’s Republic of China (“PRC”) regulatory authority to
liquidate two of the Company’s PRC wholly owned subsidiaries (the “PRC
subsidiaries”) pursuant to PRC’s Beijing Rule of Liquidation. In connection
therewith, the accounting responsibilities for the operations of the PRC
subsidiaries were transferred from the Company to a PRC accounting firm approved
by the PRC regulatory authority. The Company has been unable to obtain reports
from this accounting firm and has not received a definitive opinion regarding
the ultimate outcome of these liquidations;
accordingly, the Company has reduced the carrying value of the net assets of
the
PRC subsidiaries to $1 at December 31, 2006 and has reflected operations of
the
PRC Subsidiaries for the years ended December 31, 2006 (which only includes
these operations to September 30, 2006) and 2005 as discontinued
operations.
Since
the
Company was unable to provide evidence and I was not able to apply other
auditing procedures to satisfy myself as to the carrying value of the net assets
of the PRC Subsidiaries at December 31, 2006 and the results of their operations
for the three months ended December 31, 2006, as described in the preceding
paragraph, the scope of my work was not sufficient to enable me to express,
and
I do not express, an opinion on these financial statements.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As more fully described in Note
1,
the Company’s financial position raises substantial doubt concerning its ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments which may result from the outcome of this
uncertainty.
|
|
|
|
|
|
|
Michael
T. Studer CPA P.C. |
Date: May
14,2007 |
By: |
/s/ Michael
T. Studer CPA P.C. |
Freeport,
New York |
Michael
T. Studer CPA P.C. |
|
Title |
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
288,149
|
$
|
6,138,609
|
Accounts
receivable
|
|
3,373
|
|
5,870
|
Prepaid
expenses and other current assets
|
|
4,615
|
|
235,165
|
Due
from related parties
|
|
25,973
|
|
33,249
|
Net
assets of subsidiaries in liquidation
|
|
1
|
|
-
|
Total
Current Assets
|
|
322,111
|
|
6,412,893
|
|
|
|
|
|
Property
and Equipment, net of accumulated depreciation of $51,442 and
40,481,
respectively
|
|
11,129
|
|
6,248
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
Deposit
paid in connection with contemplated acquisition of Beijing
Topbiz,
|
|
|
|
|
less
allowance for doubtful recoverability
|
|
50,000
|
|
-
|
Investment
|
|
1
|
|
1
|
Goodwill
|
|
127,124
|
|
4,802,520
|
Other
assets
|
|
785
|
|
701
|
Total
Assets
|
$
|
511,150
|
$
|
11,222,363
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
$
|
537,200
|
$
|
362,013
|
Deferred
revenue
|
|
12,849
|
|
3,053,282
|
Convertible
debentures
|
|
3,325,000
|
|
3,350,000
|
Total
current liabilities
|
|
3,875,049
|
|
6,765,295
|
|
|
|
|
|
Commitments
and Contingencies
|
|
-
|
|
-
|
Stockholders'
Equity (Deficiency)
|
|
|
|
|
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
|
|
-21,683,854
|
|
-13,804,409
|
Accumulated
other comprehensive income (loss)
|
|
-192,883
|
|
-201,361
|
Total
stockholders' equity (deficiency)
|
|
-3,363,899
|
|
4,457,068
|
Total
Liabilities and Stockholders' Equity (Deficiency)
|
$
|
511,150
|
$
|
11,222,363
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
2006
|
|
2005
|
|
|
|
|
|
Revenue
|
|
|
|
|
Tuition
fees
|
$
|
93,041
|
$
|
199,280
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
Tuition
fees
|
|
7,327
|
|
54,584
|
Gross
Profit
|
|
85,714
|
|
144,696
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
1,048,846
|
|
1,549,730
|
Income
(loss) from Operations
|
|
(963,132)
|
|
(1,405,034)
|
|
|
|
|
|
Other
income (Expense)
|
|
|
|
|
Interest
income
|
|
43,980
|
|
4,057
|
Interest
expense on convertible debentures
|
|
(161,657)
|
|
(77,887)
|
Costs
relating to convertible debentures:
|
|
|
|
|
Fair
value of warrants issued
|
|
-
|
|
(6,891,486)
|
Intrinsic
value of conversion feature
|
|
-
|
|
(1,052,863)
|
Late
registration penalty fees
|
|
(481,968)
|
|
(33,500)
|
Impairment
of deposit paid in connection with
|
|
|
|
|
contemplated
acquisition of Beijing Topbiz
|
|
-900,000
|
|
-
|
Other
income (expense) - net
|
|
(1,499,645)
|
|
(8,051,679)
|
Income
(loss) before Income Taxes
|
|
(2,462,777)
|
|
(9,456,713)
|
|
|
|
|
|
Income
tax expense
|
|
-
|
|
-
|
Income
(loss) from continuing operation
|
|
(2,462,777)
|
|
(9,456,713)
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
1,150,154
|
|
293,260
|
Gain
(loss) on liquidation of PRC subsidiaries
|
|
(6,566,822)
|
|
-
|
Total
|
|
(5,416,668)
|
|
293,260
|
Net
income (loss)
|
$
|
(7,879,445)
|
$
|
(9,163,453)
|
|
|
|
|
|
Net
income (loss) per share
|
|
|
|
|
Continuing
operations
|
$
|
(0.12)
|
$
|
(0.54)
|
Discontinued
operations
|
|
(0.27)
|
|
0.02
|
Total
|
$
|
(0.39)
|
$
|
(0.52)
|
|
|
|
|
|
Weighted
average number of common shares used to compute net income (loss)
per
share
|
|
|
|
|
Basic
and Diluted
|
|
20,011,792
|
|
17,633,162
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
(Expressed
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $0.001
|
|
Additional
|
|
|
|
Accumulated
other
|
|
|
|
par
value
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of 200,000 Series "C" warrants issued for
|
|
|
|
|
|
|
|
|
|
|
|
services
rendered
|
-
|
|
-
|
|
50,000
|
|
-
|
|
-
|
|
50,000
|
Net
loss for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
|
Foreign
currency translation adjustment
|
-
|
|
-
|
|
-
|
|
-
|
|
8,478
|
|
8,478
|
Balance
at December 31, 2006
|
20,011,792
|
$
|
20,012
|
$
|
18,492,826
|
$
|
|
$
|
(192,883)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
China
Mobility Solutions, Inc. and Subsidiaries
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Consolidated
Statements of Cash Flows
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(Expressed
in US Dollars)
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Year
Ended December 31,
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2006
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2005
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(Unaudited)
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(Unaudited)
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Cash
Flows from Operating Activities
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Net
loss
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$
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(7,879,445)
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$
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Adjustments
to reconcile net income (loss)
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to
net cash provided by (used for) operating activities:
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Depreciation
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3,213
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2,705
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Impairment
of deposit paid in connection with
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contemplated
acquisition of Beijing Topbiz
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900,000
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-
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Stock-based
compensation
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50,000
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126,000
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Fair
value of warrants issued with convertible debentures
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-
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6,891,486
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Intrinsic
value of conversion feature of the convertible debentures
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-
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1,052,863
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Shares
issued for services
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-
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279,475
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Foreign
currency translation adjustment
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8,478
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(17,829)
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Minority
interest
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-
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138,469
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Loss
on liquidation of PRC subsidiaries
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6,566,822
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-
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Changes
in operating assets and liabilities
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Accounts
receivable
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28,690
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Prepaid
expenses and other current assets
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230,550
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(115,007)
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Due
from related parties
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3,530
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(14,927)
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Accounts
payable and other accrued liabilities
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202,054
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5,189
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Deferred
revenue
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(921,325)
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941,584
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Net
cash provided by (used for) operating activities
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Cash
Flows from Investing Activities
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Purchase
of remaining interest of Quicknet
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-
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-4,000,000
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Deposit
paid in connection with contemplated acquisition of Beijing
Topbiz
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(950,000)
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-
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Purchase
of property and equipment
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(4,811)
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(2,368)
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Cash
and cash equivalents of subsidiaries placed in liquidation
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(4,033,661)
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-
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Net
cash provided by (used for) investing activities
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(4,988,472)
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(4,002,368)
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Cash
Flows from Financing Activities
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Issuance
of common stock for cash
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-
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1,255,000
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Issuance
of convertible debentures for cash
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-
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3,350,000
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Repayment
of convertible debentures
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-25,000
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-
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Net
cash provided by (used for) financing activities
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-25,000
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4,605,000
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Effect
of exchange rate changes on cash
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(3,362)
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110
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Increase
(decrease) in cash and cash equivalents
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Cash
and cash equivalents, beginning of period
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6,138,609
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5,380,622
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Cash
and cash equivalents, end of period
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$
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$
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Supplemental
disclosures of cash flow information:
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Cash
paid for:
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Interest
paid
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$
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174,239
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$
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51,087
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Income
taxes paid
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$
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-
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$
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-
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See
notes to consolidated financial statements.
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NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Business
China
Mobility Solutions, Inc. (“CHMS”) is a holding company which was incorporated in
Florida on September 12, 1996. In 2005 and 2006, CHMS had the following
wholly-owned subsidiaries:
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(1)
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Beijing
Quicknet Technology Development Corp. (“Quicknet”), a corporation
organized under the laws of the People’s Republic of China (“PRC” or
“China”) - engaged in the sale of wireless communication services to PRC
customers; placed in liquidation during the three months ended December
31, 2006 (see Note 2).
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(2)
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Beijing
Shiji Yingfu Investment Management Consulting Limited (“Shiji Yingfu”), a
PRC corporation organized to act as an investment vehicle - inactive
in
2005 and 2006; placed in liquidation during the three months ended
December 31, 2006 (see Note 2).
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(3)
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Windsor
Education Academy Inc. (“Windsor”), a corporation organized under the laws
of British Columbia, Canada - provides English as a Secondary Language
(“ESL”) training programs in Vancouver,
Canada.
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(4)
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Infornet
Investment Limited (“Infornet HK”), a Hong Kong corporation - executed an
agreement on August 8, 2006 to acquire control of Beijing Topbiz
Technology Development Corp, Ltd. (“Topbiz”), a PRC corporation that
develops and customizes short messaging system platforms for PRC
banks
(see Note 4).
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(5)
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Infornet
Investment Corp. (“Infornet Canada”), a Canadian corporation - inactive in
2005 and 2006.
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(6)
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Xinbiz
(HK) Limited, a Hong Kong corporation - inactive in 2005 and
2006.
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(7)
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Xinbiz
Corp., a British Virgin Islands corporation - inactive in 2005 and
2006.
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Summary
of Significant Accounting Policies
Principles
of consolidation
- The
accompanying consolidated financial statements include the accounts of CHMS
and
its wholly owned subsidiaries (collectively, the “Company”). All significant
inter-company transactions and balances have been eliminated on consolidation.
Basis
of presentation -
The
financial statements have been prepared on a “going concern” basis, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. However, at December 31, 2006, the Company had
negative working capital of $3,552,938 and a stockholders’ deficiency of
$3,363,899. These factors create substantial doubt as to the Company’s ability
to continue as a going concern. The Company is seeking to improve its financial
condition by making a business acquisition using its common stock. However,
there is no assurance that the Company will be successful in accomplishing
this
objective. The financial statements do not include any adjustments that might
be
necessary should the Company be unable to continue as a going
concern.
Use
of
estimates
- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration
of credit risk
- The
Company maintains Renminbi cash balances in banks in China and U.S. Dollar
cash
balances in Canadian bank, that are not insured. Revenues were derived in
geographic locations outside the United States.
Cash
and cash equivalents
- Cash
equivalents consists of term deposits with original maturities of three months
or less.
Investments
- The
Company determines the appropriate classification of marketable debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. All marketable debt securities are classified as
held-to-maturity and are carried at amortized cost, which approximates fair
value. Investments are written down by a charge to operations for any impairment
in value.
Accounts
receivable and allowance for doubtful accounts
-
Accounts receivable are recorded net of allowances for doubtful accounts and
reserves for returns. In the normal course of business, the Company extends
credit to customers that satisfy predefined credit criteria. The Company is
required to estimate the collectibility of its receivables. Reserves for returns
are based on historical return rates and sales patterns. Allowances for doubtful
accounts are established through the evaluation of accounts receivable agings
and prior collection experience to estimate the ultimate realization of these
receivables.
Property
and equipment
-
Property and equipment, stated at cost, is depreciated using the declining
balance method as follows:
Furniture
& fixtures
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20%
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Declining
balance method
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Machinery
& equipment
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20%
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Declining
balance method
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Computer
equipment
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30%
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Declining
balance method
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Library
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100%
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Declining
balance method
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Goodwill
-
Goodwill is the excess of the acquisition cost of businesses over the fair
value
of the identifiable net assets acquired. Goodwill acquired has to be evaluated
for impairment on an annual basis going forward according to Statement of
Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible
Assets”. The standard requires a two-step process to be performed to analyze
whether or not goodwill has been impaired. Step one requires that the fair
value
be compared to book value. If the fair value is higher than the book value,
no
impairment is indicated and there is no need to perform the second step of
the
process. If the fair value is lower than the book value, step two must be
evaluated. Step two requires a hypothetical purchase price allocation analysis
to be done to reflect a current book value of goodwill. The current value is
then compared to the carrying value of goodwill. If the current fair
value
is
lower than the carrying value, an impairment must be recorded. Annually, the
goodwill is tested for impairment in the fourth quarter.
Long-lived
assets
- The
Company records impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amount.
Revenue
recognition
- The
Company’s revenues for 2006 and 2005 consisted of revenues from SMS, education
and training services. In accordance with Securities and Exchange Commission
(“SEC”), Staff Accounting Bulletin No. 104, “Revenue
Recognition”
and the
Emerging Issue Task Force (“EITF”) Issue No. 00-21, “Revenue
Arrangements with Multiple Deliveries”, the
Company recognizes revenue when the following criteria are met: persuasive
evidence that an arrangement exists; delivery has occurred or services have
been
rendered; the price to the customer is fixed or determinable; and collectability
is reasonably assured. If all of the above criteria have been met, revenues
are
principally recognized upon shipment of products or when services have been
rendered. Revenues derived from communications services, education and training
are recognized as the services are performed. Amounts received from customers
in
advance of the period in which service is rendered are deferred and recorded
on
the balance sheet as a liability under “deferred revenue.”
Cost
recognition
- Cost
of service includes direct costs to produce products and provide services.
Deferred
revenue and deferred cost
-
Deferred revenue for 2006 and 2005 consist primarily of communications services,
education and training revenue received prior to the period in which service
is
rendered.
Capitalized
software costs
-
The
Company accounts for the development cost of software intended for sale in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86,
“Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed”.
SFAS
No. 86 requires product development costs to be charged to expense as incurred
until technological feasibility is attained. Technological feasibility is
attained when the Company’s software has completed system testing and has been
determined viable for its intended use. Accordingly, the Company did not
capitalize any development costs during the period.
Advertising
costs
-
Advertising costs are expensed as incurred. These expenses include production,
media and other promotional and sponsorship costs. Total advertising costs
charged to operations amounted to $5,030 for 2006 and $4,613 for 2005. Total
advertising costs included in discontinued operations amounted to $532,125
for
2006 and $949,107 for 2005.
Income
taxes
- The
Company accounts for income taxes under the provisions of SFAS No. 109,
“Accounting
for Income Taxes”.
Under
SFAS No. 109, deferred income tax assets and liabilities are computed for
differences between the financial statements and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary, to reduce deferred income tax assets to the amount
expected to be realized.
Foreign
currency translations
- The
assets and liabilities of the Company’s foreign operations are generally
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
foreign currency translation adjustments are reflected as a separate component
of stockholders’ equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the
functional currency, except those transactions which operate as a hedge of
an
identifiable foreign currency commitment or as a hedge of a foreign currency
investment position, are included in the results of operations as incurred.
Fair
value of financial instruments
- For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable and current liabilities, the carrying amounts
approximate fair value due to their short maturities.
Business
segment information
- The
Company discloses information about its reportable segments in accordance with
SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information”.
The
Company’s reportable segments are geographic areas. The accounting policies of
the operating segments are the same as those for the Company.
Earnings
per share
- Basic
earnings or loss per share are based on the weighted average number of common
shares outstanding. Diluted earnings or loss per share is based on the weighted
average number of common shares outstanding and dilutive common stock
equivalents. Basic earnings/loss per share is computed by dividing income/loss
(numerator) applicable to common stockholders by the weighted average number
of
common shares outstanding (denominator) for the period. All earnings or loss
per
share amounts in the financial statements are basic earnings or loss per share,
as defined by SFAS No. 128, “Earnings
Per Share”.
Diluted
earnings or loss per share does not differ materially from basic earnings or
loss per share for all periods presented. Convertible securities that could
potentially dilute basic earnings per share in the future such as options and
warrants are not included in the computation of diluted earnings per share
because to do so would be antidilutive. All per share and per share information
are adjusted retroactively to reflect stock splits and changes in par
value.
Stock-based
compensation
- 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 year ended December
31, 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.
The
Company recognizes compensation cost for fixed stock awards with pro rata
vesting on the straight line basis over the vesting period.
Had
the
Company adopted SFAS No.123 (a) at January 1, 2005, the Company’s pro-forma net
loss and pro-forma net loss per share would have been
Net
loss from continuing operations
|
|
As
reported
|
$
(9,456,713)
|
Stock-based
employee compensation cost, net of tax
|
(301,600)
|
Pro-forma
|
$
(9,758,313)
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Loss
per share - continuing operations:
|
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As
reported
|
$
(0.54)
|
Pro-forma
|
$
(0.55)
|
|
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|
The
fair
values of the options granted in 2005 were from $0.13 to $0.14 each, which
were
estimated on the date of grant using the Black-Scholes option pricing model
with
weighted average assumptions for grants as follows:
|
2005
|
Risk
free interest rate
|
2.78%
|
Expected
life of options inyear
|
I
year
|
Expected
volatility
|
132%
|
Dividend
per share
|
$0.00
|
Asset
Retirement Obligations
-
Statement of Financial Accounting Standards No. 143,“Accounting
for Asset Retirement Obligations”,
addresses financial accounting and reporting for obligations associated with
the
retirement of tangible long-lived assets and related asset retirement costs.
It
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is recorded, the entity capitalizes the costs of the liability by increasing
the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount
or
incurs a gain or loss upon settlement.
SFAS
No.
143 applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development, and normal
operation of a long-lived asset, except for certain obligations of
leases.
Accounting
for convertible securities with beneficial conversion features
-
According to Emerging Issue Task Force (“EITF”) Issue 98-5, the beneficial
conversion features embedded in convertible securities should be valued at
the
issue date. Embedded beneficial conversion features should be recognized and
measured as follows: (a) Allocate a portion of the proceeds equal to the
intrinsic value of the embedded beneficial conversion feature to additional
paid-in-capital. The intrinsic value is calculated as the difference between
the
conversion price and the fair value of the common stock or other securities
into
which the security can be converted at the date when the investors have
committed to purchase the convertible securities based on the terms specified,
multiplied by the number of shares into which the security can be converted.
(b)
If the intrinsic value of the beneficial conversion feature is greater than
the
proceeds from the sale of the convertible instrument, the discount assigned
to
the beneficial conversion feature should not exceed the amount of the proceeds
allocated to the convertible instruments. A discount, if any, is amortized
beginning on the security’s issuance date to the earliest conversion
date.
Pursuant
to paragraph 12 of SFAS No. 133, the convertible debenture contains a conversion
option, an anti-dilution provision and a redemption provision that may be
considered as embedded derivative instruments as they may affect some of the
cash flows required by the contract in a manner similar to a derivative
instrument.
The
host
contract itself does not embody a claim to the residual interest in the Company
and, thus, the economic characteristics and risks of the host contract should
be
considered that of a debt instrument (paragraph 60 of SFAS No. 133) and
classified under liability section of the balance sheet (paragraph 16 of SFAS
No. 133).
The
conversion option of the debenture allows the holder to convert the debt into
equity shares at any time within a specified period at a specified conversion
price. The conversion option is equivalent to a call option granted by the
Company to the debenture holders to purchase the shares of the Company at a
specified price within a specified time. The conversion option should not be
separated from the host contract according to paragraph 61(k) of SFAS No. 133
as
a separate option with the same terms would not be considered to be a derivative
for the issuer. Embedded beneficial conversion features should be recognized
and
measured according to EITF 98-5.
Section
8
(Adjustments to Conversion Price”) of the convertible debenture agreement is an
anti-dilution provision that may result in the conversion ratio not being fixed.
However, section 8 of the convertible debenture agreement is purely for the
purpose of protecting the interest of the debenture holders against potential
actions taken by Company resulting
in the dilution of their equity interest in the Company when they convert their
debentures into equity shares within the specified period of time. The
anti-dilution provision is in the nature of an embedded derivative indexed
to
the Company’s own stock and would be classified in the shareholders’ equity if
it was a freestanding derivative, this provision is not considered a derivative
for the purpose of SFAS No. 133 (paragraph 3 of EITF 05-2).
The
redemption provision allows the Company to redeem the debentures at 125% of
the
principal amount plus accrued interest after six months of the effective date
of
the registration statement. The redemption option can be viewed as a call option
available to the Company. Through the four steps analysis outlined in DIG B-16,
the redemption provision of the debenture is considered to be clearly and
closely related to the economic characteristics and risks of the debt host
contract as the amount to be paid upon settlement is not based on changes in
an
index or the repayment of the contractual amount is not contingently exercisable
(paragraph 61(d) of SFAS No. 133). The redemption provision thus should not
be
separated from the host contract for separate consideration.
The
warrants are detached from the convertible debenture with no put option feature.
There is no liquidated damage or cash penalty payable to the warrant holder
if
the Company cannot register the shares underlying the warrants. If an effective
registration statement is not available for the resale of warrant shares, the
warrant holders can still exercise the warrants to get the unregistered shares
at a lower exercise price calculated. As the registration of the shares
underlying the warrants is out of the control of the Company, the warrant
contracts should be classified as a permanent equity instrument according to
paragraph 14 of EITF 00-19. The provision should not be regarded as a derivative
instrument as it is in the nature of indexed to the Company’s own stock and
classified under the shareholders’ equity on the balance sheet (paragraph 11 of
SFAS No. 133).
Comprehensive
income
- The
Company has adopted SFAS No. 130, “Reporting
Comprehensive Income”,
which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. The Company includes items of other
comprehensive loss by their nature, such as foreign currency translation
adjustments, in a financial statement and displays the accumulated balance
of
other comprehensive loss separately from accumulated deficit in the equity
section of the balance sheet. The Company discloses total comprehensive loss,
its components and accumulated balances on its statement of stockholders’
equity.
Capital
structure
- The
Company discloses its capital structure in accordance with SFAS No. 129,
“Disclosure
of Information about Capital Structure”,
which
established standards for disclosing information about an entity’s capital
structure.
Related
party transactions
-
A
related
party is generally defined as (i) any person that holds 10% or more of the
Company痵 securities and their immediate families, (ii) the Company’s management,
(iii) someone that directly or indirectly controls, is controlled by, or is
under common control with the Company, or (iv) anyone who can significantly
influence the financial and operating decisions of the Company. A transaction
is
considered to be a related party transaction when there is a transfer of
resources or obligations between related parties.
Reclassification
of Prior Year
-
Certain prior year amounts have been reclassified in order to conform to the
current year presentation. These changes had no effect on previously reported
results of operations or total stockholders’ equity.
Recent
Accounting Pronouncements
- The
Financial Accounting Standards issued the following new pronouncements, none
of
which is expected to have a significant effect on the financial
statements:
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting
for Uncertainties in Income Taxes”,
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 is effective for financial statements as of
December 15, 2006. The
adoption of FIN 48 is expected to have no impact on the Company's financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair
Value Measurements”.
SFAS
157 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements but does not require any
new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company has not yet determined the impact of applying
SFAS 157.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans?/EM>).
SFAS
158 requires an employer to recognize the overfunded or underfunded status
of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. SFAS 158 is effective for financial statements as of
December 31, 2006. The
adoption of SFAS No. 158 is expected to have no impact on the
Company's financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The
Fair Value Option for Financial Assets and Financial
Liabilities”.
SFAS
159 permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective
for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company has not yet determined the impact of adopting SFAS 159 on the
Company’s financial position.
NOTE
2 - DISCONTINUED OPERATIONS
On
August
15, 2006, a total of $3,350,000 of convertible debentures became due and
payable. In October 2006, the Company was notified by the PRC State
Administration of Foreign Exchange (“SAFE”) that its application to convert
certain cash held by Quicknet and Shiji Yingfu (the “PRC Subsidiaries”) into
U.S. dollars and repay the debentures was denied. Later, in the three months
ended December 31, 2006, based upon advice of PRC counsel that the Beijing
Rule
of Liquidation was the sole means to repay the outstanding debentures, the
PRC
subsidiaries submitted applications to a PRC regulatory authority to liquidate
pursuant to the Beijing Rule of Liquidation. In connection therewith, the
accounting responsibilities for the operations of the PRC subsidiaries were
transferred from the Company to a PRC accounting firm approved by the PRC
regulatory authority. The Company has been unable to obtain reports from this
accounting firm and has not received a definitive opinion regarding the ultimate
outcome of these liquidations; accordingly, the Company has reduced the carrying
value of the net assets of the PRC Subsidiaries to $1 at December 31, 2006
and
has reflected operations of the PRC Subsidiaries for the years ended December
31, 2006 (which only includes these operations to September 30, 2006) and 2005
as discontinued operations. In the event that the Company receives more than
$1
from the liquidations, it will recognize a gain in such future periods that
the
proceeds are realized.
Income
(loss) from discontinued operations consist of:
|
Year
Ended December 31
|
|
2006
|
2005
|
|
|
|
Revenue
from wireless communications services
|
$
4,275,287
|
$
4,703,348
|
Cost
of revenues
|
913,128
|
1,372,707
|
Gross
profit
|
3,362,159
|
3,330,641
|
Selling,
general, and administrative expenses
|
2,233,803
|
3,118,256
|
Income
(loss) from operations
|
1,128,356
|
212,385
|
Interest
income
|
21,798
|
80,875
|
Income
(loss) from discontinued operations
|
$
1,150,154
|
$
293,260
|
|
|
|
For
the
year ended December 31, 2006, the loss on liquidation of PRC Subsidiaries was
calculated as follows:
Assumed
proceeds from liquidation of PRC Subsidiaries
|
$
1
|
|
|
Carrying
value of net assets of PRC Subsidiaries at
|
|
September
30, 2006:
|
|
Cash
and cash equivalents
|
4,033,661
|
Due
from related parties
|
3,746
|
Goodwill
|
4,675,396
|
Accounts
payable and other accrued liabilites
|
(196,872)
|
Deferred
revenue
|
(2,119,108)
|
Total
|
6,396,823
|
Estimated
costs relating to liquidation of PRC Subsidiaries
|
170,000
|
Loss
on liquidation of PRC Subsidiaries
|
$
(6,566,822)
|
|
|
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment, net consists of:
|
December
31,
|
|
2006
|
2005
|
|
|
|
Equipment
|
$
36,913
|
$
26,986
|
Library
|
12,816
|
9,554
|
Furniture
|
12,842
|
10,189
|
Total
|
62,571
|
46,729
|
Less
: Accumlated depreciation
|
(51,442)
|
(40,481)
|
Net
book value
|
$
11,129
|
$
6,248
|
|
|
|
The
depreciation expense charged to continuing operations for the years ended
December 31, 2006 and 2005 were $3,213 and $2,705, respectively.
NOTE
4 - BEIJING TOPBIZ TECHNOLOGY DEVELOPMENT CORP., INC.
On
August
8, 2006, Infornet HK and Mr. Xin Wei, a citizen and resident of the PRC and
President of a subsidiary of the Company (“Wei”) (Infornet HK and Wei together
being referred to as the “Purchasers”), QiFang Niu and XiaoXia Chen, both
citizens and residents of the PRC (together being referred to as the “Sellers”)
and Beijing Topbiz Technology Development Corp., Ltd. (“Topbiz”), a company
organized and existing under the laws of the PRC, 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 HK 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 Registrant was to pay the
Sellers on a pro rata basis US$3,700,000 in cash ($950,000 on August 8, 2006,
$1,350,000 on November 8, 2006, and $1,400,000 on February 8, 2006) 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.
Infornet
HK paid a $950,000 deposit to the Sellers on August 8, 2006 in contemplation
of
closing of the acquisition.
Infornet
HK has not made any additional payments to the Sellers. Due to the matters
described in Note 2, the Company presently does not have sufficient cash to
make
the remaining payments of $2,750,000 required under the Agreement. Accordingly,
the Company believes that the $950,000 may not be recoverable and recorded
an
impairment charge of $900,000 at December 31, 2006 to reduce the carrying cost
of the deposit from $950,000 to $50,000.
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 were
to be
subject to a one-year restriction on transfer to a U.S. person pursuant to
Regulation S.
NOTE
5 - 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 are 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 includes: (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.
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
December 31, 2006, the Company had not repaid $3,325,000 of Debentures due
on
August 15, 2006. The Company had paid all interest on the Debentures accrued
through November 15, 2006. The Company had applied to the regulatory authority
in China to approve converting its subsidiaries' funds into U.S. dollars and
repay the Debentures and was denied. The Company has been advised that the
Rule
of Liquidation is the sole means of assuring repayment of the Debentures. In
the
three months ended December 31, 2006, the Company submitted applications for
such
liquidations to a PRC regulatory authority. At May 15, 2007, these liquidations
have not been completed.
The
holder of an aggregate of $300,000 of the Debentures has agreed to extend the
due date to December 31, 2007 with an interest rate of 10% per annum starting
from August 15, 2006 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. On September 18, 2006, one of the debenture
holders 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. On January 19, 2007, this motion was granted and
a
judgment in the amount of $545,440 was awarded the Plaintiff.
For
the
years ended December 31, 2006 and 2005, late registration penalty fees were
expensed in the amounts of $481,968 and $33,500, respectively. At December
31,
2006, accounts payable and accrued liabilities include interest payable of
$3,781 and unpaid late registration fees of $473,524.
NOTE
6 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share are computed by dividing net earnings (loss) available
to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include
the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The
following table sets forth the computations of shares and net loss used in
the
calculation of basic and diluted loss per share for the years ended December
31,
2006 and 2005:
|
2006
|
2005
|
|
|
|
Net
loss for the year
|
(7,879,445)
|
(9,163,453)
|
|
|
|
Weighted-average
number of shares outstanding
|
20,011,792
|
17,633,162
|
|
|
|
Effective
of dilutive securities :
|
|
|
Dilutive
options - $0.30
|
|
|
Dilutive
warrants new Series "A" - $0.15
|
|
|
Dilutive
warrants new Series "A" - $0.38
|
|
|
Dilutive
warrants new Series "B" - $0.20
|
|
|
Dilutive
warrants new Series "B" - $0.45
|
|
|
Dilutive
warrants Series "C" - $0.45
|
|
|
Dilutive
potential common shares
|
|
|
|
|
|
Adjusted
weighted-average shares and
|
20,011,792
|
17,633,162
|
assumed
conversions
|
|
|
|
|
|
Basic
income (loss) per share attributable to
|
|
|
common
shareholders
|
$
(0.39)
|
$
(0.52)
|
|
|
|
Diluted
income (loss) per share attributable to
|
|
|
common
shareholders
|
$
(0.39)
|
$
(0.52)
|
|
|
|
The
effect of outstanding options and warrants was not included as the effect would
be anti-dilutive.
NOTE
7 - 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.
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
December 31, 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 $0.20 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.
NOTE
8 - 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 December 31, 2006 were 660,000 with an option exercise price
of
$0.30 per share. No options were granted, exercised, canceled or forfeited
during the year ended December 31, 2006. The weighted average remaining
contractual life is 0.56 years.
NOTE
9 - RELATED PARTY TRANSACTIONS
During
the year ended December 31, 2006, the Company paid $58,886 (2005: $30,866)
to a
director and an officer as wages and benefits.
As
of
December 31, 2006, the Company has an amount of $21,454 (2005: $21,443) due
from a company with a common ex-director without interest or specific terms
of
repayment.
As
of
December 31, 2006, the Company advanced $4,519 (2005: $8,485) to a director
of
the Company for expenses to be incurred on behalf of the
Company.
NOTE
10 - INCOME TAXES
According
to “PRC Joint Venture Enterprises Income Tax Act” which adopted on Sept. 10,
1980 and amended on Sept. 2, 1983:
|
(1)
|
Joint
Venture needs to pay Income Tax if they operate and generate income
from
China;
|
|
(2)
|
Tax
is based on the total revenue after deducting cost of revenue, expenses
and losses;
|
|
(3)
|
Joint
Venture Enterprises has an income tax rate of 30% from central government,
and a 3% income rate from local government, therefore the total income
tax
rate is 33%;
|
|
(4)
|
The
Income Loss can be deducted from future years’ taxable income, but no more
than 5 years;
|
|
(5)
|
Tax
is calculated on a yearly basis.
|
QuickNet
is subject to 33% income tax rate. There is no Value-added tax for QuickNet.
According to “China Value Added Tax Temporary Regulation” which adopted on Jan.
1, 1994, VAT is only for enterprises that distribute commodities, process
commodities, repair commodities and import commodities. QuickNet provides
services; therefore, there is no VAT.
There
are
no current or deferred tax expenses for the years ended December 31, 2006 and
2005, due to the Company's loss position. The Company has fully reserved for
any
benefits of these losses. The deferred tax consequences of temporary differences
in reporting items for financial statement and income tax purposes are
recognized, as appropriate. Realization of the future tax benefits related
to
the deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income within the net operating loss carryforward
period. Management has considered these factors in reaching its conclusion
as to
the valuation allowance for financial reporting purposes. The income tax effect
of temporary differences comprising the deferred tax assets and deferred tax
liabilities on the accompanying consolidated balance sheets is a result of
the
following:
|
2006
|
2005
|
|
|
|
Deferred
tax assets
|
$
1,081,616
|
$
1,081,616
|
Valuation
allowance
|
(1,081,616)
|
(1,081,616)
|
Net
deferred tax assets
|
-
|
-
|
The
net
change in the valuation allowance is principally the result of net operating
loss carryforwards. The Company has available net operating loss carryforwards
of approximately $3,277,623 for tax purposes to offset future taxable income,
which expire through 2025. All of the net operating loss carryforwards were
generated by the parent company. The Company does not file a consolidated tax
return because all of its subsidiaries are foreign corporations. Pursuant to
the
Tax Reform Act of 1986, annual utilization of the Company’s net operating loss
carryforwards may be limited if a cumulative change in ownership of more than
50% is deemed to occur within any three-year period.
A
reconciliation between the statutory federal income tax rate and the effective
income rate of income tax expense for the years ended December 31, 2006 and
2005
is as follows:
|
2006
|
2005
|
|
|
|
Statutory
federal income tax rate
|
33.0%
|
33.0%
|
Valuation
allowance
|
-33.0%
|
-33.0%
|
Effective
income tax rate
|
0.0%
|
0.0%
|
NOTE
11 - SUBSEQUENT EVENTS
On
January 26, 2007, China Mobility Solutions, Inc. (the “Company”) entered into a
Term Sheet with Meyers Associates L.P. (“Meyers”) as Placement Agent for the
Company's issuance of Senior Convertible Debentures (the“Debentures”)
on August 15, 2005. In consideration of the Company's inability to repay the
Debentures, because of the need to obtain regulatory approval from the
banking authorities in the People's Republic of China, the Company agreed to
lower the Conversion Price (as defined) of the Debentures, subject to certain
conditions.
The
conversion/settlement agreements (the “Conversion Agreements”) dated February 2,
2007, provide that the conversion price (the “Conversion Price”) of the
Debentures, as set forth in paragraph 7(d) of the Debentures shall be reduced
to
$.05 per share of Common Stock (“Underlying Common Stock") issuable upon
conversion (the “Conversion”), provided that at least fifty (50%) percent in
principal amount (or $1,675,000) of the initial $3,350,000 of Debentures (the
“Minimum Conversion”) agree to the Conversion. The closing of the Conversion
(the “Closing”) occurred on February 12, 2007. Those Debenture holders who agree
to the Conversion shall also agree to convert all accrued but unpaid penalties
and interest owed by the Company into Common Stock at $.05 per share. Pursuant
to the terms of the May 4, 2006 Waiver/Settlement Agreement entered into between
the Company and Debenture holders the Conversion Price of the Debentures was
reduced to its current price of $.30 per share. A total of 39,522,500 shares
of
common stock was issued to 29 Debenture holders under Conversion Agreements
in
satisfaction of $1,675,000 total principal amount of Debentures and $301,125
unpaid accrued interest and late registration penalty fees.
The
Conversion Agreement provides for the Debenture holders who signed such
agreement to: (i) terminate any and all pending litigation with the Company
to
which they are a party, without prejudice to reinstatement if and only if the
Minimum Conversion is not completed, and/or the Company defaults in its
obligations under the Conversion Agreement; (ii) in any vote of shareholders
not
vote against any nominee to the Board of Directors of the Company and any
proposal designated by current management of the Company which does not effect
the Conversion, and (iii) release and hold harmless the Company and its
officers, directors, employees, representatives and affiliates following the
Closing.
The
Company agreed to make whatever filings are necessary with the SEC, whether
by
way of supplement or post-effective amendment to this registration statement
concerning the Underlying Common Stock, to permit the issuance of common stock
at the reduced Conversion Price of $.05 per share. Notwithstanding the
foregoing, only the original 214,287 shares of Common Stock issuable underlying
each $25,000 Unit, including 71,429 Shares of Common Stock underlying each
Debenture, are registered on this Registration Statement. Accordingly, at the
reduced Conversion Price of $.05 per share an aggregate of 500,000 shares of
Common Stock would be issuable upon conversion of the Debentures and an
additional 166,666 shares of Common Stock issuable upon exercise of warrants
included in the Units. All additional shares of Common Stock not included in
this Registration Statement, as well as those issuable in exchange for any
interest and penalties due under the Debentures at the time of the Closing,
have
been included in a second registration statement filed by the Company on
February 12, 2007.
The
Company shall also provide the Debenture holders with “most favored nation”
status and reduce the Conversion Price to the per share price of any equity
offering made by the Company within 18 months of the Closing Date. The Company
shall issue such number of additional shares to the Debenture holders to reduce
their Conversion Price to that of such subsequent offering.
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
DATE:
May 17, 2007
|
CHINA
MOBILITY SOLUTIONS, INC.
|
|
by: /s/
Xiao-qing Du
|
|
Xiao-qing
Du, President and Chief Executive
Officer
|
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, this report has been signed below by the following persons on behalf
of
the Registrant and in the capacities and on the dates indicated.
/s/
Xiao-qing Du
Xiao-qing
Du
|
President,
Director and Chief Executive Officer (Principal Executive Officer
and
Principal Accounting Officer)
|
May
, 2007
|
|
|
|
/s/
Ernest Cheung
|
Secretary
and Director (Principal Financial Officer)
|
May
, 2007
|
Ernest
Cheung
|
|
|
|
|
|
/s/
John Gaetz
John
Gaetz
|
Director
|
May
, 2007
|