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, 2005
[
] 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.)
|
#900-789
West Pender Street, Vancouver, B.C.
|
V6C
1H2
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(604)
632-9638
(Issuer’s
telephone number, including area code)
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 is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
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 [X] No [ ]
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]
State
issuer's revenues for its most recent fiscal year:
$4,902,628
Aggregate
market value of the voting and non-voting stock held by non-affiliates of
the
registrant as of March 27, 2006: $7,004,084.50 at
$0.35 per share.
Number
of outstanding shares of the Registrant's $.001 par value common stock, as
of
March 27, 2006: 20,011,792.
Transitional
Small Business Disclosure Format: Yes
[ ] No [X]
PART
I
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
11
|
|
|
|
|
|
11
|
|
|
|
|
|
11
|
|
|
|
PART
II
|
|
|
|
|
|
|
12
|
|
|
|
|
|
13
|
|
|
|
|
|
26
|
|
|
|
|
|
27
|
|
|
|
|
|
27
|
|
|
|
|
|
28
|
|
|
|
PART
III
|
|
|
|
|
|
|
28
|
|
|
|
|
|
32
|
|
|
|
|
|
35
|
|
|
|
|
|
36
|
|
|
|
|
|
36
|
|
|
|
|
|
37
|
|
|
|
|
|
38
|
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
(a)
General
Description and Development of Business.
PREVIOUS
HISTORY
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 Beijing
Quicknet Technology Development Corp., a company organized under the laws
of the
Peoples’ Republic of China (“Quicknet”), 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.
CORPORATE
OVERVIEW
China
Mobility Solutions’ structure showing its subsidiaries is 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)
|
Infornet
Investment Ltd.
(100%
Owned)
(Hong
Kong)
|
Windsor
Education Academy Inc.
(100%
Owned)
(BC,
Canada)
|
Beijing
ShiJiYingFu Consultant Corp. Ltd.
(100%
Owned)
(Beijing,
China)
|
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)
|
|
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 the PRC. 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.
Office
Location
China
Mobility Solutions, Inc. currently maintains an office at: #900 - 789 West
Pender Street, Vancouver, BC Canada V6C 1H2 (telephone number is
1-604-632-9638).
Quicknet
Acquisition
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”). Quicknet is 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.
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 exercised the option to purchase the remaining 49% of Beijing Quicknet
in August 2005, within the first year from the Closing Date, 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.
The
Company raised (a) US$1,255,000 through issuing common stocks upon the
exercise of options 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.
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
Mobile
Solutions for Businesses in China
The
Company is focusing on providing mobile solutions to many diverse corporations
across China. With its rapidly growing client base, the Company hopes to
become
one of the largest providers of mobile business solutions in China. The first
product launched was mobile marketing solutions for enterprises, which has
been
in operation since 2003. In the summer of 2005, two new products were launched:
a ‘push’-based mobile email system and an office automation system.
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
(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:
· |
For
customer acquisition
|
· |
As
a sales promotion tool
|
· |
To
support product launches
|
· |
To
raise brand awareness
|
· |
For
internal communications
|
· |
As
a redemption / coupon tool
|
· |
As
an effective business-to-business communications
vehicle
|
· |
As
an additional revenue stream
|
· |
To
be able to offer time / location specific
offers
|
· |
As
a channel for delivering ring tones and
logos
|
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. We intend to continue developing improvements
and extensions of the system and to integrate it into many of our mobile
business solutions.
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:
· |
It
enables sales representatives to deliver information at point-of-contact
in the field, via SMS;
|
· |
The
user-company can configure the mobile field sales solution to model
their
unique sales needs with two-way
communications;
|
· |
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;
|
· |
It
can receive up-to-the-minute input from the field, providing real-time
information for decision-making support from the
office;
|
· |
Applications
can support hundreds of simultaneous users and require no in-house
program
development.
|
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 will use 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 uses 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 December 31, 2005, QuickNet had approximately 94 employees. About
39% are
technical support, 30% are in sales and marketing, 17% are R&D and the rest
are administrative personnel. The actual number of employees changed during
the year and will change according to the expansion of the Company in the
future.
At
the
end of December 31, 2005, 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 have signed contracts with a number of clients
for
varying types of marketing. The Company is relying 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. 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 almost 400 million subscribers by the end of 2005.
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
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
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.)
BUSINESS
SEGMENTS
During
the year, the Company had revenues in two segments:
|
|
|
|
Mobile
marketing services
|
|
$
|
4,703,348
|
|
Tuition
fees
|
|
|
199,280
|
|
The
cost of revenue in each segment was:
|
|
|
|
|
Mobile
marketing services
|
|
$
|
1,372,707
|
|
Tuition
fees
|
|
|
54,584
|
|
The
gross profit from each of the business segments was:
|
|
|
|
|
Mobile
marketing services
|
|
$
|
3,330,641
|
|
Tuition
fees
|
|
|
144,696
|
|
|
|
|
|
|
Total
|
|
$
|
3,475,337
|
|
The
Company also carries deferred revenue of $3,053,282 for its SMS business
in
China and its education and training business.
ITEM
2. DESCRIPTION OF PROPERTIES
China
Mobility Solutions, Inc. currently maintains a leased office of approximately
800 square feet at: #900- 789 West Pender Street, Vancouver, BC Canada V6C
1H2
(telephone number is 1-604-632-9638). The term of the lease is month by month
at
a monthly rental of $800 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, and leases offices
in Shanghai and in Shenzhen. The term of the lease in Beijing is for 1.5
years
ending June 30, 2007 at a monthly rental of about $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 1 year ending August 1, 2007 at a monthly rental of $1500 from
a
non-affiliated landlord.
(a)
Real
Estate: None
(b)
Equipment, library, and furniture at December 31, 2005: $6,248.
ITEM
3. LEGAL PROCEEDINGS
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
Feb.
7, 2005, China Mobility Solutions, Inc. was sued by Sino-I Technology Limited
for $88,270 for breach of warranty and a claim under a guarantee. Our lawyer
submitted a Notice of Motion to the plaintiff's lawyer on March 7, 2005.
There
has been no further response from the plaintiff’s lawyer. Regardless of the
outcome of this motion, 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
6. “Management’s Discussion and Analysis or Plan of Operation” for information
concerning the Company’s receipt of a notice of default from a debenture
holder.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
or
about July 8, 2005, the Company finalized and mailed to shareholders, a
Definitive Proxy Statement on Schedule 14A. At the Company’s Annual Meeting of
Shareholders held on July 28, 2005, for which proxies were solicited pursuant
to
Regulation 14A under the Securities Exchange Act of 1934, as amended, the
following matters were voted upon by shareholders:
1. |
To
elect two directors to hold office until the next annual meeting
of
shareholders and qualification of their respective
successors.
|
Name
of Director
|
Votes
for
|
Votes
Withheld
|
|
|
|
Xiao-qing
(Angela) Du
|
8,753,275
|
54,967
|
Ernest
Cheung
|
8,713,544
|
94,698
|
Greg
Ye
|
8,763,379
|
44,863
|
2. |
To
ratify the appointment of Moen and Company, as Independent Accountants
for
the annual period ending December 31,
2004.
|
For:
8,758,128 Against:
41,080 Abstain:9,034
3. |
To
increase the Company's authorized shares to 500 million shares
of common
stock.
|
For:
8,543,163 Against:
234,778 Abstain:
30,301
4. |
To
adopt the 2005 Stock Option Plan.
|
For:
8,904,561 Against:
213,829 Abstain:
33,752
PART
II
ITEM
5. MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
The
Company’s common stock is traded on the Over-the-Counter Bulletin Board
maintained by the NASD under the trading symbol “CHMS.OB”. The following table
sets forth high and low bid prices of the common stock for years ended December
31, 2004 and December 31, 2005 as follows:
|
|
Bid
(U.S. $)
|
|
|
HIGH
|
LOW
|
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
|
|
|
|
|
2004
|
|
|
|
First
Quarter
|
|
0.27
|
0.10
|
Second
Quarter
|
|
1.01
|
0.09
|
Third
Quarter
|
|
0.65
|
0.16
|
Fourth
Quarter
|
|
0.68
|
0.18
|
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
December 31, 2005, China Mobility Solutions, Inc. had approximately 160
shareholders of record of the common stock. Approximately 5000 shareholders
held
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.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following
table sets forth, as of December 31, 2005:
· |
the
number of shares of the Company's common stock issuable upon exercise
of
outstanding options, warrants and rights, separately identified
by those
granted under
equity incentive plans approved by the Company's stockholders and
those
granted under plans, including individual compensation contracts,
not
approved by the Company's stockholders (column
a),
|
· |
the
weighted average exercise price of such options, warrants and rights,
also
as separately identified (column b),
and
|
· |
the
number of shares remaining available for future issuance under
such plans,
other than those shares issuable upon exercise of outstanding options,
warrants and rights (column c).
|
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
|
8,176,667
|
US$0.30
|
4,410,000
|
Recent
Sales of Unregistered Securities.
During
the year ended December 31, 2005, the Company obtained an aggregate US$1,255,000
from the exercise of options.
Purchasers
of Equity Securities by the Small Business Issuer and Affiliated
Purchases
None.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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:
· |
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,
|
· |
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.
EXECUTIVE
SUMMARY
In
the
summer of 2005, the Company launched two new solutions: a mobile email system
and an office automation system. The Company added two new directors to the
Board of Directors in 2005: Bryan D. Ellis and Greg Ye. On September 30,
2005,
the Company exercised its option to purchase the remaining 49% interest of
Beijing Quicknet Telecommunications Corp. Ltd. (Beijing Quicknet), the Company’s
subsidiary in China. The purchase price of US$4,000,000 (four million U.S.
dollars) was paid in two installments. The Company now directly and indirectly
owns and controls 100% of Beijing Quicknet, and has the right to appoint
all of
the directors. On August 15, 2005, the Company completed a $3.35 million
dollar
senior convertible debenture financing and Class A Warrant
and Class B Warrant
offering. In 2005, the Company issued common shares and raised $1, 255,000.
In
November, 2005 the Company signed a key contract with Lenovo, the world's
third
largest PC manufacturer. According to the agreement, Lenovo will distribute
the
Company’s new mobile email system through Lenovo’s extensive retail sales
network throughout China. China’s mobile phone market is the largest in the
world, and continues to grow at an astonishing rate. There were almost 400
million cellular phone customers in China as of the end of 2005, and more
than 4
million new users were added every month. Currently there are about 1 billion
SMS sent every day in China, accounting for one third of the world's traffic
and
generating about US$400 million revenue annually. With the penetration rate
around 30%, however, there is still considerable room for growth in the Chinese
mobile market. Pacific Growth Equities of San Francisco foresees 500 million
mobile phone users in China by 2007. The Company's mobile marketing, mobile
email, and mobile office automation solutions provide practical and useful
solutions to businesses based on the very effective and highly popular medium
of
mobile phones and SMS. The Company’s SMS marketing services in particular are
targeted to enterprises that want to take advantage of the enormous market
available through SMS marketing.
WORKING
CAPITAL NEEDS
On
the
Mobile Solution Services side, the working capital needs arise 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.
The
Company will focus on Mobile Solution Services and use limited working capital
for the education services.
FUTURE
STRATEGY
The
Company accumulated nearly 500,000 corporate leads from its previous domain
name
registration and web hosting services in China. Completion of the acquisition
of
Beijing Quicknet gives the Company an opportunity to capitalize in this rapidly
growing market, and it also gives the chance for Beijing Quicknet to solicit
these corporate leads to attempt to generate more revenue. Quicknet plans
to
grow organically by launching more products, but may also grow by acquiring
other companies that will complement services offered by us.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had cash capital of $6,138,609 at year-end 2005. 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 $6,412,893
in current assets and current liabilities of $6,765,295, primarily as a result
of deferred revenues received prior to the services being
performed.
The
cash
capital at the end of the period of $6,138,609 will be used to fund continuing
operations. Financing activities have provided more than US$4.6 million in
cash,
and continuing operations have provided more than US$750,000 in cash in
2005.
Net
cash
flows provided by operating activities is $155,245
for the year ended December 31, 2005.
On
September 30, 2005, the Company acquired the remaining 49% of Quicknet, paying
US$2,000,000 on September 30, 2005. Another US$2,000,000 was paid before
December 31, 2005. The Company raised US$1, 255,000 through issuing common
stocks and US$3,350,000 through issuing convertible debentures and warrants
in
2005.
On
August
15, 2005, the Company raised $3,350,000 in a private placement of its
securities, on a “best efforts, all or none” basis (the “August 2005 Offering”)
of 134 units (the “Units”). The August 2005 Offering was for $2 million with an
over-subscription of up to $1,350,000. Each Unit was sold for $25,000,
consisting of $25,000 principal amount of senior convertible debentures (the
“Debentures”), and Class A Warrants and Class B Warrants, to purchase shares of
common stock, $0.001 par value (the “Common Stock”) of the Registrant. The
Debentures are initially convertible at $.35 per share for 71,429 shares
of
Common Stock; mature on August 15, 2006 and accrue 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 the effective date (the “Effective Date”) of the registration statement
concerning the securities sold in the August 2005 Offering.
The
Class
A and Class B Warrants are subject to redemption by the Company at any time
commencing six months and twelve months, respectively, from the Effective
Date,
provided the average closing bid price of the Common Stock equals or exceeds
175% of the respective exercise prices for 20 consecutive trading
days.
If
any
Event of Default occurs and at any time thereafter, the principal amount,
all
accrued but unpaid interest on, and all other amounts payable under the
Debenture may be declared, and upon such declaration shall become, immediately
due and payable without presentment, demand, protest, or other notice of
any
kind, all of which are expressly waived. An Event of Default includes: failure
to pay principal or interest when due; dissolution; an act of bankruptcy;
foreclosures; certain judgments; failure to perform any agreement contained
in
the Debenture and related transaction agreements; default on other indebtedness;
breach of any representation or warranty made in this transaction.
On
January 18, 2006, the Company received a letter (the "Default Letter") from
the attorney for the Holder of $500,000 principal amount of the
Company's Debentures stating that the Company was in default of the
Transaction Agreements issued in connection with the Debentures 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 effectiveness of the Registration Statement required under the Registration
Rights Agreement (one of the Transaction Agreements).
The
Default Letter was withdrawn while the parties tried unsuccessfully through
February 2, 2006 to resolve the dispute. The Company denies that it is in
default of the Transaction Agreements and will vigorously defend any action
which might be brought against it.
Since
no
settlement was reached by January 31, 2006, the Default Letter is in effect
retroactive to when it was received. The Holder declared the entire balance
of
the Debenture immediately due and payable. Accordingly, as of January 17,
2006, the aggregate amount of principal and interest claimed to be owed by
the
Company was $629,868.15, with interest claimed to accrue at the rate of 12%
per
annum, pursuant to Section 1(e) of the Debenture.
The
Company and the debenture holder are in active negotiations to settle this
dispute.
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, 2005, 10 old Series “B” warrants were outstanding which entitle the
holders to purchase a common share of the Company at $2.25 each on or before
March 31, 2006. These warrants expired as of March 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. There
were 660,000 options outstanding at December 31, 2005 at the exercise price
of
$0.30 per share.
Changes
in Financial Condition:
At
December 31, 2005, the Company's assets were $11,222,363 compared to $6,447,030
at December 31, 2004. The current assets totaled $6,412,893
at 2005 year-end, compared to $5,466,574 at 2004 year-end. The current
continuing operations had brought in $4,902,628 revenue by December 31, 2005,
compared to $2,170,766 in year 2004. There was deferred revenue of $3,053,282
at
December 31, 2005 compared to $2,111,698 in 2004. Net cash provided by
continuing operations was $757,987 at December 31, 2005. The Company had
$6,138,609 in cash by the year-end compared to $5,380,622 a year ago. These
changes were caused by the rapidly increase mobile solution market in China.
Total liabilities at year-end 2005 were $6,765,295 compared to $2,452,522
at
2004 year-end.
The
Company raised US$1,255,000 through issuing common stock and US$3,350,000
through issuing convertible debentures and warrants in 2005.Total outstanding
common shares as of December 31, 2005 were 20, 011,792.
On
September 30, 2005, the Company acquired the remaining 49% of Quicknet, and
paid
US$2,000,000 on September 30, 2005. Another US$2,000,000 was paid before
December 31, 2005.
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 no specific management
ability, nor financial resources or plans to enter any other business as
of this
date.
From
the
aspect of whether it can continue toward the business goal of maintaining
and
expanding the business in Canada and develop the business of mobile solution
services in China, it may use all of its available capital.
The
effect of inflation has not had a material impact on its operation, nor is
it
expected to in the immediate future.
Although
the Company is unaware of any major seasonal aspect that would have a material
effect on the financial condition or results of operations, the first quarter
of
each fiscal year is always a financial concern. It is not uncommon for companies
to shut down their operation or operate on a skeletal crew during the Chinese
New Year holiday. Therefore, in effect, the first quarter really has only
two
months for generating revenue.
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, 2005 AS COMPARED TO THE YEAR
ENDED
DECEMBER 31, 2004.
Revenues.
The Company achieved revenues of $4,902,628 in 2005, compared to $2,170,766
in
2004, in the form of net sales of mobile solution services and tuition fees
from
its subsidiaries: QuickNet and Windsor. The gross profit in 2005 was $3,475,337
compared to $1,697,531 in 2004.
Operating
Expenses. The Company incurred operating expenses of $11,454,523
in 2005, compared to operating expenses of $1,939,747 in 2004 due
largely
to the inclusion of the “Fair Value of Warrants Issued”, in our August 2005
Offering, which accounts for $6,891,486.
Advertisement, general expenses and salaries were also increased due to the
increased sales scale.
Loss
from
Continuing Operations. Loss from continuing operations for 2005 was ($9,163,453)
compared to the 2004 operating loss of ($258,772). This was caused largely
by
the inclusion of the “Fair Value of Warrants Issued”.
Net
Income. Net Loss to Common Stockholders in 2005 was ($9,163,453)
in contrast to a Net Income of $3,018,672 in 2004. This was caused largely
by
the inclusion of the “Fair Value of Warrants Issued”.
Earnings
per Share. Loss per share is ($0.52)
in 2005 compared to earnings per share of $0.20 in 2004. This was caused
largely
by the inclusion of the “Fair Value of Warrants Issued”, which accounts for
$6,891,486.
Operating earnings in 2005 were ($0.52) per share compared to a loss of ($0.02)
per share in 2004.
Future
Trends:
In
the
Mobile Solution Service business, the Company cannot assure that any profit
on
revenues can be maintained in the future, because it may have to continue,
through its joint venture business, to advertise and promote its services
and
develop additional value-added services in order to preserve or increase
its
market share. In spite of taking measures to control expenses, operating
losses
may continue. If the Company acquires additional capital, for example through
sale of stock in private placements or through investors exercising warrants,
it
may be able to advertise and promote its services more aggressively and expand
its business more rapidly.
The
Company has experienced growth in revenues in its Quicknet services, and
it
anticipates future growth in revenues although China must always be viewed
as a
highly competitive market where profitability may be difficult to achieve
or
sustain.
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.
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
Need
for additional financing.
We
still
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 and 2005 and is using the proceeds of
the
Offering to implement the Company’s Business Plan. The Business Plan calls for
the Company to act as a link between China’s major mobile carriers, China Unicom
and China Mobile, to provide mobile solutions for corporate customers so
that
clients do not have to develop the technology themselves. The Business Plan
also
calls for the Company to offer business solutions in Office Automation
Solutions, Mobile Banking, Mobile Tax Services and Services for the Police.
The
Company cannot project with certainty, nor does it make any representations
regarding, the amount of revenue that it will be able to generate from this
Business Plan. There is no guarantee that any of these new products will
bring
profit to the Company. We might spend substantial resources on new technology
and products 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.
If
we
fail to establish our mobile solutions brand on a national basis we may not
be
able to increase our revenues sufficiently to remain profitable.
We
must
promote and strengthen our brand of mobile solutions to businesses throughout
China particularly because of the highly competitive nature of our business.
If
we fail to establish a nationwide brand of our services, we will be at a
competitive disadvantage and may lose the opportunity to obtain, and thereafter
maintain, a sufficient number of customers. The development of a nationwide
network will depend largely on the success of our marketing efforts and our
ability to provide consistent, high quality customer experiences. We cannot
be
certain that our promotion activities will be successful, or will result
in
increased revenues. If increased revenues are achieved, there can be no
assurance that these revenues will be sufficient to offset the expenditures
incurred in establishing a nationwide network.
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, our recent growth 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
will lack business diversification.
As
a
result of its discontinuance of its domain name registration, web hosting
and
web design services and the limited nature of our education and training
business, the Company’s prospects for success are dependent upon the future
performance of a single business -- mobile marketing. If our future operations
are unprofitable, we will be forced to develop another line of business and
finance our future operations through the sale of assets or sell equity or
debt
securities in order to raise additional capital, none of which may be feasible
when needed. Unless we are able to raise more money then we did in the August
2005 Offering, we will not have the resources to diversify our operations
or
benefit from the possible spreading of risks or offsetting of losses. This
will
adversely offset our ability to compete against entities that have the resources
to consummate several business combinations or entities operating in multiple
industries or multiple segments of a single industry.
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 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.
The
Debentures issued in the August 2005 Offering were unsecured one debenture
holder has declared a default and we will need to seek additional capital
to
continue our operations and repay the Debentures.
The
Debentures issued in the Offering were unsecured obligations of the Company.
Further, as a company with a new and untested business plan, we may generate
significant financial losses. Our cash resources are not currently adequate
to
fund our future operations, including our obligation to repay the Debentures
issued in the Offering and there can be no assurance that we will ever have
such
resources. As described under “Management’s Discussion and Analysis or Plan of
Operation” one of the Debenture holders has claimed an Event of Default under
the Debentures and declared the principal and interest due under the Debenture
of $629,868.15
as of January 17, 2006. We will vigorously defend any lawsuit that might
be
brought by this or any other debenture holder.
While
we
have the cash on hand to repay this and any other debenture holder, such
repayment would require us to seek additional capital, including through
the
issuance of debt or equity, or through other financing. If we borrow funds,
we
likely will be obligated to make periodic interest or other debt service
payments, and the terms of this debt may impose burdensome restrictions on
our
ability to operate our business. If we seek financing through the sale of
equity
securities, our current stockholders may suffer dilution in their percentage
ownership of common stock. Additionally, we are not certain as to our ability
to
raise additional capital in the future or under what terms capital would
be
available. If we are unable to raise capital when needed, our business will
be
negatively affected and we may not be able to repay the Debentures in accordance
with terms or at all. In such event, the holders of the Debentures will have
no
recourse other than as a general unsecured creditor of the Company.
Seasonal
fluctuations in our operations.
It
is a
fairly common practice in China for companies to shut down their operations
or
operate with nominal operations during the Chinese New Year holiday. This
period
of time generally lasts for approximately three weeks. Therefore, quarterly
comparisons are difficult for the March 31 fiscal quarter when the Company
will
have only two full months for generating revenue in the that fiscal quarter.
Risks
Related to Conducting Business in China
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:
· |
the
promulgation of new laws and regulations and the interpretation
of those
laws and regulations;
|
· |
inconsistent
enforcement and application of the telecommunications industry’s
rules and regulations by the Chinese government between foreign and
domestic companies;
|
· |
the
restructuring of telecommunications carriers in
China;
|
· |
the
introduction of measures to control inflation or stimulate growth;
|
· |
the
introduction of new guidelines for tariffs and service rates, which
affect
our ability to competitively price our products and services;
|
· |
changes
in the rate or method of taxation;
|
· |
the
imposition of additional restrictions on currency conversion and
remittances abroad; or
|
· |
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.
|
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.
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
presidential 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; as such,
the
impact of currency fluctuations of Renminbi thus far has been insignificant
as
it is fixed to the U.S. dollar. However, in the future, China could choose
to
revalue the Renminbi versus the U.S. dollar, or the Renminbi-U.S. dollar
exchange rate could float, and the Renminbi could depreciate or appreciate
relative to the U.S. dollar. In such event, currency rate fluctuations could
adversely affect our sales and subject as to volatility in our financial
reporting.
Securities
Risks
Our
executive officers may have the ability to control almost all matters of
the
Company.
As
of
March 27, 2006, our President and Secretary and their affiliates, beneficially
own approximately 16% of the issued and outstanding shares of common stock
of
the Company. Therefore, management has significant influence over the election
of the Company’s directors and to control the outcome of other issues submitted
to stockholders. This includes their ability to amend the Certificate of
Incorporation, approve a merger or consolidation of the Company with another
company or approve the sale of all or substantially all of the assets of
the
Company without the agreement of the shareholders who purchased Units in
August
2005.
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 shares
without further shareholder approval. This may have the effect of delaying
or
preventing a change of control without further action by shareholders. In
addition, 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 investors in the Offering will be subject to a significant
level of dilution in the future.
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. A
Registration Statement on Form SB-2 was filed on September 14, 2005 with
respect
to the Units and underlying Securities but such Registration Statement has
not
yet been declared effective and thus the Units and 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
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 9,571,486 shares of Common Stock and exercise
their Warrants for an aggregate of 19,142,922 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.
Since
the Debentures may be prepaid and the Warrants may be redeemed by the Company,
investors may not receive all the anticipated benefits from purchasing Units.
Further, the conversion of the Debentures or exercise of Warrants in response
to
a prepayment or redemption notice could cause dilution.
The
Company, at its option, may prepay the Debentures upon not less than 30 days
nor
more than 60 days prior written notice to the Debenture holders at a prepayment
price equal to the principal amount of the Debentures, together with accrued
and
unpaid interest through the date of prepayment. In addition, in the event
that
the closing bid price of our Common Stock is at least 175% of the respective
exercise prices of the Warrants or more for the twenty (20) consecutive trading
days prior to the date of the notice of redemption, the Company may also
redeem
the Warrants at a redemption price of $0.001 per Warrant. Holders will be
entitled to convert their Debentures or exercise their Warrants during the
period from the date of the notice of prepayment or redemption until the
business day immediately prior to the prepayment or redemption date. If a
holder
does not convert its Debentures or exercise the Warrants during that time
period, the applicable security will by prepaid or redeemed by the Company.
Commencing on the date of prepayment or redemption, the Debentures or Warrants
that were not converted or exercised will only represent the right to receive
the Prepayment Price or Redemption Price, as may be applicable.
In
addition, if the Debentures are converted or the Warrants are exercised in
response to a prepayment or redemption notice, then dilution could occur
from
the widespread conversion or exercise of the Debentures or Warrants. Further,
this may cause significant downward pressure on the price of our Common Stock
as
holders that elect to convert or exercise their securities may be able to
resell
the shares of Common Stock issuable upon conversion or exercise of the
Debentures or Warrants in the open market.
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 “CHMS.OB.” 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 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 (Angela) 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
market for our services is rapidly changing and competitive. New products
may be
developed by others which could impair our ability to develop, grow or maintain
our business and be competitive.
The
mobile solutions industry is subject to substantial technological change.
Developments by others may render the Company’s technology and revenues
non-competitive or obsolete, or it may be unable to keep pace with technological
developments or other market factors. Competition from other companies and
others diversifying into the field is expected to increase. Many of these
entities have significantly greater budgets than the Company does, as well
as
substantially more marketing, research and development, financial and managerial
resources. These entities could represent significant competition for the
Company. The Company our resources are limited and we may experience technical
challenges inherent in developing its technology. Competitors have developed
or
are in the process of developing technologies that are, or in the future
may be,
the basis for competition.
ITEM
7. FINANCIAL STATEMENTS
The
response to this item is included as a separate exhibit to this report following
Part III.
Please
see pages F-1 through F-16.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM
8A. CONTROLS AND PROCEDURES
Evaluation
of Controls
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 (i) our disclosure controls
and
procedures ("Disclosure Controls"), and (ii) our internal control over financial
reporting ("Internal Controls"). 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, (i) with respect to the effectiveness of our Disclosure Controls,
and (ii) with respect to any change in our Internal Controls that occurred
during the most recent fiscal year that has materially affected, or is
reasonably likely to materially affect our Internal Controls.
Attached
to this annual report, as Exhibits 31.1 and 31.2, are certain certifications
of
the CEO and CFO, which are required in accordance with the Exchange Act and
the
Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a)
Certifications"). This section of the annual report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a)
Certifications. This information should be read in conjunction with the Rule
13a-14(a)/15d-14(a) Certifications for a more complete understanding of the
topic presented.
Disclosure
Controls and Internal Controls
The
Company adopts the Disclosure Controls and Internal Controls according to
the
definition included in Rule 13a-15(e) of the Exchange Act.
Limitations
on the Effectiveness of Controls
Our
management does not expect that our Disclosure Controls or our Internal Controls
will prevent all error and all fraud. A control system, no matter how well
developed and operated, can provide only reasonable, but not absolute assurance
that the objectives of the control system are met. Further, the design of
the
control system must reflect the fact that there are resource constraints,
and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances so of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision -making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion
of two
or more people, or by management override of the control. The design of a
system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or
because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Scope
of the Evaluation
The
CEO
and CFO's evaluation of our Disclosure Controls and Internal Controls included
a
review of the controls' (i) objectives, (ii) design, (iii) implementation,
and
(iv) the effect of the controls on the information generated for use in this
annual report. In the course of the Evaluation, the CEO and CFO sought to
identify data errors, control problems, acts of fraud, and they sought to
confirm that appropriate corrective action, including process improvements,
was
being undertaken. This type of evaluation is done on an annual basis so that
the
conclusions concerning the effectiveness of our controls can be reported
in our
quarterly reports on Form 10-QSB and annual report on Form 10-KSB. The overall
goals of these various evaluation activities are to monitor our Disclosure
Controls and our Internal Controls, and to make modifications if and as
necessary. Our external auditors also review Internal Controls in connection
with their audit and review activities. Our intent in this regard is that
the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including improvements and corrections) as conditions
warrant.
Among
other matters, we sought in our Evaluation to determine whether there were
any
significant deficiencies or material weaknesses in our Internal Controls,
other
than as identified and discussed below for the year ended December 31, 2005,
which are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether we had identified
any
acts of fraud, whether or not material, involving management or other employees
who have a significant role in our Internal Controls. This information was
important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO
disclose that information to our Board (audit committee), and to our independent
auditors, and to report on related matters in this section of the annual
report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions". These are control issues that could have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness"
is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low
level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in
the
Evaluation, and in each case, if a problem was identified; we considered
what
revisions, improvements and/or corrections to make in accordance with our
ongoing procedures.
Conclusions
Based
upon the Evaluation, our disclosure controls and procedures are designed
to
provide reasonable assurance of achieving our objectives. Our CEO and CFO
have
concluded that our disclosure controls and procedures are effective at that
reasonable assurance level to ensure that material information relating to
the
Company is made known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared, and that
our
Internal Controls are effective at that assurance level to provide reasonable
assurance that our financial statements are fairly presented inconformity
with
accounting principles generally accepted in the United States.
We
made
this effectiveness determination based on all relevant information as of
December 31, 2005, including the fact that a material weakness had previously
been identified in the Form 10Q filed March 31, 2005. We decided that our
disclosure controls and procedures are compliant with the requirements under
the
SEC Exchange Act.
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, including Beijing Quicknet; and
B. Subscription
accounting and tracking for its subsidiary in China, including 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").
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
(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
|
35
|
President
and Director
|
Annual
|
Ernest
Cheung
|
55
|
Director
and Secretary
|
Annual
|
Greg
Ye
|
36
|
Director
|
Annual
|
Bryan
Ellis
|
35
|
Director
|
Annual
|
The
following table sets forth the portion of their time the directors devote
to the
Company:
Ernest
Cheung
|
20%
|
Angela
Du
|
100%
|
Greg
Ye
|
20%
|
Bryan
Ellis
|
10%
|
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 (Angela) 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
(Angela) Du, President
and Director, age 35.
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 55.
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.
Greg
Ye,
Director, age 36.
Mr.
Ye
has been a director since 2005. Mr. Ye brings to the Company 12 years of
management, consulting and investment experience in a broad range of business
and technology disciplines. He is currently in charge of developing and
implementing corporate strategies as Group Director of Strategic Marketing
for
Cadence Design Systems Inc, one of the world's largest software companies,
listed on both the NYSE and NASDAQ. Previously, he worked for Cisco Systems
as a
market development manager and PricewaterhouseCoopers, where he spent six
years
advising high-tech. companies based in the U.S. and Asia. He co-founded a
Silicon Valley based incubator for high-tech companies in China in 1999 and
serves as an advisor for several other high-tech. start-up companies in the
U.S.
Mr. Ye received his MBA from Harvard Business School and his BSEE from Shanghai
Jiao Tong University, China. He is a Certified Public Accountant and a Certified
Management Accountant.
Bryan
Ellis,
Director, age 35.
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.
(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, Angela Du, Ernest Cheung and Grey
Ye, the
last being an independent director. 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 (#900
-
789 West Pender Street Vancouver, B.C. Canada V6C 1H2).
A copy
of the Code of Ethics has been filed as an exhibit to this report. 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.
ITEM
10. EXECUTIVE COMPENSATION
(a) Officers'
Compensation
Compensation
paid by the Company for all services provided up to December 31, 2005: (1)
to
each of the executive officers, and (2) to all officers as a group.
SUMMARY
COMPENSATION TABLE OF EXECUTIVES
|
Cash
Compensation
|
Security
Grants
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Annual
Compensation
|
Restricted
Stock Options
|
Securities,
Underlying Options/SARs (#) (SHARES)
|
Long
Term Compensation / Options
|
LTIP
Payments
|
All
other Compensation
|
Xiao-qing
Du,
|
2001
|
32,084
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
President
of
|
2002
|
4,182
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Infornet
Subsidiary
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
330,000(1)
|
|
2005
|
10,129
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
Ernest
Cheung,
|
2001
|
0
|
0
|
20,870
|
0
|
0
|
0
|
0
|
0
|
Secretary
|
2002
|
0
|
0
|
20,870
|
0
|
0
|
0
|
0
|
0
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
165,000(2)
|
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
Officers
as a group
|
2001
|
32,084
|
0
|
20,870
|
0
|
0
|
0
|
0
|
0
|
|
2002
|
4,182
|
0
|
20,870
|
0
|
0
|
0
|
0
|
0
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
495,000
|
|
2005
|
10,129
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
(1) |
Options
at $0.30 per share which were granted in 2004 and exercised in
2005.
|
(2) |
Options
at $0.30 per share which were granted in 2004 and will expire
on August 1, 2007.
|
Option
Grants in Last Fiscal Year
The
following table sets forth certain information concerning options granted
to the
Named Executive Officers in the Summary Compensation Table above during the
fiscal year ended December 31, 2005:
Name
|
Number
of Securities Underlying
Options
Granted
|
Percent
of Total Options Granted All Employees in Fiscal
Year
|
Exercise
or Base Price
($/Share)
|
Expiration
Date
|
Xiao-qing
Du
|
None
|
|
|
|
Ernest
Cheung
|
None
|
|
|
|
Aggregated
Option Exercises During the Fiscal Year Ended December 31, 2005 and Fiscal
Year
End Option Values
The
following table sets forth certain information concerning the number and
value
of securities underlying exercisable stock options as of the fiscal year
ended
December 31, 2005 by the Named Executive Officers. 330,000 options were
exercised by the Named Executive Officers in the Summary Compensation Table
during the fiscal year ended December 31, 2005.
Name
|
Number
of Shares Acquired on
Exercise (#)
|
Value
Realized($)
|
Number
of Securities Underlying Unexercised Options at Fiscal
Year
End (#)
|
Value
of Unexercised In-the-Money Options at Fiscal Year
End $ (1)
|
|
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
Xiao-qing
Du
|
330,000
|
$9,900
|
0
|
0
|
0
|
0
|
Ernest
Cheung
|
0
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
(1) The
closing price for the Common Stock of the Company on December 31, 2005 was
$0.33.
LONG-TERM
INCENTIVE PLAN (“LTIP”) AWARDS TABLE - None
SUMMARY
COMPENSATION TABLE OF DIRECTORS
(To
December 31, 2005)
|
|
Cash
Compensation
|
|
Security
Grants
|
|
Name
and Principal Position
|
|
Year
|
|
Annual
Retainer Fees ($)
|
|
Meeting
Fees ($)
|
|
Consulting
Fees/Other Fees ($)
|
|
Number
of Shares
|
|
Securities,
Underlying Options/SARs (#) (SHARES)
|
|
LTIP
Payments
|
|
All
other Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xiao-qing
Du,
|
|
|
2001
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Director
|
|
|
2002
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2003
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2004
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2005
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernest
Cheung,
|
|
|
2001
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Director
|
|
|
2002
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2003
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2004
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2005
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maurice
Tsakok
|
|
|
2001
|
|
|
0
|
|
|
0
|
|
|
20,870
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Director
(1)
|
|
|
2002
|
|
|
0
|
|
|
0
|
|
|
20,870
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(Resigned
2004)
|
|
|
2003
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
2004
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg
Ye
|
|
|
2005
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bryan
Ellis
|
|
|
2005
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
as a group
|
|
|
2001
|
|
|
0
|
|
|
0
|
|
|
73,043
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2002
|
|
|
0
|
|
|
0
|
|
|
46,957
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2003
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2004
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
2005
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
On
July 15, 2004, Maurice Tsakok resigned as the director of the
Company.
*
See
Executive Compensation Table.
(b)
Directors' Compensation
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,
2005.
Termination
of Employment and Change of Control Arrangements:
None.
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; and
On
September 1, 2005, the Company granted 3,090,000 stock options to consultants
and employees with an exercise price of $0.35 each and $0.40 each for 2,590,000
and 500,000 stock options, respectively, expiring on September 1, 2015. These
stock options were all exercised on the date of grant.
SUMMARY
DESCRIPTION OF EMPLOYEE BENEFIT PLANS
2006
Non-Qualified Stock Compensation 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.
2005
Employee Stock Option Plan
-------------------------------
The
Company adopted a 2005 Stock Option Plan on May 3, 2005, and filed a
Registration Statement on Form S-8 with the Commission on May 5, 2005, to
register options and shares underlying options granted under the Plan. The
Board
of Directors administered the 2005 Stock Option Plan, and awarded options
to key
employees (including officers and directors), non-employee members of the
Board
or non-employee members of the Board of any parent or subsidiary corporations,
consultants and independent contractors. The 2005 Stock Option Plan was intended
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to our employees and consultants
and to promote the success of our business. A total of 3,500,000 options
and
3,500,000 shares of common stock underlying options were authorized under
the
2005 Stock Option Plan.
On
October 12, 2005, the Company filed Post Effective Amendment No. 1 to the
Registration Statement on Form S-8 in order to register the sale by the selling
security holders named therein of 3,090,000 shares of common stock underlying
options. To date, all 3,090,000 of the options and shares under the Plan
have
been awarded to consultants and employees.
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 fro 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, 2005.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Section
13(d) of the Securities Exchange Act of 1934, as amended (The "Exchange Act"),
requires persons or groups who own more than 5% of a registered class of
the
Company’s equity securities, to file Schedules of ownership and changes
in ownership of Company equity securities with the Securities and Exchange
Commission. Except as otherwise noted in the footnotes to this table, the
named
person owns directly and exercises sole voting and investment power over
the
shares listed as beneficially owned by such person. Includes any securities
that
such person has the right to acquire within sixty days pursuant to options,
warrants, conversion, privileges or other nights.
Based
upon such reports as of December 31, 2006, management knows of no other persons
other than those identified below who were beneficial owners of more than
five
percent of the outstanding Shares of Common Stock. The following sets forth
information with respect to ownership by holders of more than five percent
(5%)
of its common stock known by the Company based upon 20,011,670 shares
outstanding at March 27, 2006, and in the event of exercise of all options
for
our stock.
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
of Beneficial Interest
|
Percent
of Class
|
Common
Stock
|
Xiao-qing
(Angela) Du (1)
|
1,250,000
|
6.25%
|
Common
Stock
|
Richco
Investors, Inc.(1)
|
1,137,999
(2)(4)
|
5.69%
|
Common
Stock
|
Ernest
Cheung(1)
|
1,446,333
(2)(3)(4)
|
7.23%
|
Common
Stock
|
Maurice
Tsakok (1)
|
1,225,333
(2)(4)
|
6.12%
|
Common
Stock
|
QuickNet
Partners
#1859
New Century Office Tower
Beijing
China
|
2,040,000
|
10.19%
|
Common
Stock
|
Greg
Ye(1)
|
0
|
0%
|
Common
Stock
|
Bryan
Ellis(1)
|
0
|
0%
|
Total
for Officers and Directors as a group
(4 persons)
|
|
2,696,333
|
13.47%
|
(1)
Except as otherwise noted each person’s business address is c/o the Company,
Ste. 900-789 West Pender Street, Vancouver BC V6C 1H2.
(2)
Richco Investors, Inc., owns 1,137,999 shares after the reverse split. Mr.
Cheung and Mr. Tsakok are officers, directors and beneficial owners of Richco
Investors Inc. For purposes of this table, the shares owned by Richco are
deemed
owned by Mr.Cheung and Mr. Maurice Tsakok, a former director, beneficially
and
individually.
(3)
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.
(4)
Includes all shares of Richco Investors, Inc., Ernest Cheung, Maurice Tsakok,
and Development Fund II of Nova Scotia since there is common
control.
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Options
- During
2004, 1,155,000 options were granted to five directors and officers of the
Company to purchase shares at $0.30. 660,000 of the options are outstanding
as
of December 31, 2005.
Wages
and benefits
- The
Company paid $30,866 as wages and benefits to a director and an officer of
the
Company during the year ended December 31, 2005.
Advances
-
As of
December 31, 2005, the Company advanced $8,485 to a director for expenses
to be
incurred on behalf of the Company and also advanced $21,443 to a company
with a
director in common. The advances are non-interest bearing and without specified
terms of repayment.
3.1
|
|
Certificate
of Incorporation, as amended (Incorporated by Reference as previously
filed Form 8-K dated June 25, 2005).
|
3.2
|
|
Bylaws,
as amended (Incorporated by reference as previously
filed Form 8-K dated 8/15/01.
|
4.1
|
|
Form
of Senior Convertible Debenture (Incorporated by reference to previously
filed Form 8-K dated August 17, 2005).
|
4.2
|
|
Form
of Class A Warrants (Incorporated by reference to previously filed
Form
8-K dated August 17, 2005).
|
4.3
|
|
Form
of Class B Warrant (Incorporated by reference to previously filed
Form 8-K
dated August 17, 2005).
|
10.1
|
|
Form
of Debenture Purchase and Warrant Agreement (Incorporated by reference
to
previously filed Form 8-K dated August 17, 2005).
|
10.2
|
|
Investment
Banking Agreement (Incorporated by reference to previously
filed Form 8-K dated 11/28/01).
|
10.3
|
|
Share
Exchange Agreement (Incorporated by reference to previously
filed Form 8-K dated 10/03/01).
|
10.4
|
|
Letter
of Intent (Incorporated by reference to previously
filed Form 8-K dated 8/03/01).
|
10.5
|
|
Assets
Transfer Agreement (Incorporated by reference to previously
filed Form 8-K dated 7/12/01).
|
*14.1
|
|
|
*31.1
|
|
|
*31.2
|
|
|
*32.1
|
|
|
*32.2
|
|
|
______________________
*
Filed with this report.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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.
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.
There
were no audit-related fees in 2004. There were no tax fees in 2004 or
2005.
Moen
was
not paid any other fees for professional services during the fiscal years
ended
December 31, 2005 and December 31, 2004.
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
2004
and 2005.
All
audit
work was performed by the auditors' full time employees.
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:
April 17, 2006
|
CHINA
MOBILITY SOLUTIONS, INC.
by: /s/
Xiao-qing Du
|
|
Xiao-qing
Du, President
|
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
|
|
President,
Director and Principal Accounting Officer
|
April
17, 2006
|
Xiao-qing
Du
|
|
|
|
|
|
|
|
/s/
Ernest Cheung
|
|
Secretary,
Director and Principal Financial Officer
|
April
17, 2006
|
Ernest
Cheung
|
|
|
|
|
|
|
|
/s/
Greg Ye
|
|
Director
|
April
17, 2006
|
Greg
Ye
|
|
|
|
|
|
|
|
/s/
Bryan
Ellis |
|
Director
|
|
Bryan
Ellis
|
|
|
April
17, 2006
|
MOEN
AND COMPANY
CHARTERED
ACCOUNTANTS
Member:
|
Securities
Commission Building
|
Canadian
Institute of Chartered Accountants
|
PO
Box 10129, Pacific Centre
|
Institute
of Chartered Accountants of British Columbia
|
Suite
1400 - 701 West Georgia Street
|
Institute
of Management Accountants (U.S.A.) (From 1965)
|
|
|
Vancouver,
British Columbia
|
Registered
with:
|
Canada
V7Y 1C6
|
Public
Company Accounting Oversight Board (U.S.A.) (PCAOB)
|
|
Canadian
Public Accountability Board (CPAB)
|
Telephone:
(604) 662-8899
|
Canada
- British Columbia Public Practice License
|
Fax:
(604) 662-8809
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
China
Mobility Solutions, Inc.
We
have
audited the accompanying consolidated balance sheets of China Mobility
Solutions, Inc. as of December 31, 2005 and December 31, 2004, and the
related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended. These financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated financial position of China Mobility
Solutions, Inc. as of December 31, 2005 and 2004, and the consolidated
results
of its operations and its cash flows for the years then ended in conformity
with
U.S. generally accepted accounting principles.
|
“Moen
and Company LLP”
|
|
(“Signed”)
|
|
Chartered
Accountants
|
Vancouver,
British
Columbia, Canada
March
31,
2006
|
|
CHINA
MOBILITY SOLUTIONS, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
December
31, 2005 and 2004
|
|
|
|
|
|
|
Stated
in U.S. dollars
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
6,138,609
|
|
$
|
5,380,622
|
|
Accounts
receivable
|
|
|
5,870
|
|
|
34,560
|
|
Prepaid
Expenses
|
|
|
235,165
|
|
|
33,070
|
|
Amount
due from related parties
|
|
|
33,249
|
|
|
18,322
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
6,412,893
|
|
|
5,466,574
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
1
|
|
|
1
|
|
Property
and Equipment, Net (Note 4)
|
|
|
6,248
|
|
|
6,549
|
|
Goodwill
|
|
|
4,802,520
|
|
|
973,906
|
|
Other
assets
|
|
|
701
|
|
|
-
|
|
Total
Assets
|
|
$
|
11,222,363
|
|
$
|
6,447,030
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
260,326
|
|
$
|
340,824
|
|
Accrued
Liabilities
|
|
|
101,687
|
|
|
-
|
|
Deferred
Revenue
|
|
|
3,053,282
|
|
|
2,111,698
|
|
Convertible
Debentures (Note 5)
|
|
|
3,350,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
6,765,295
|
|
|
2,452,522
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
-
|
|
|
32,791
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
Common
Stock : $0.001 Par Value
|
|
|
|
|
|
|
|
Authorized
:
500,000,000 common shares
|
|
|
|
|
|
|
|
Issued
and Outstanding : 20,011,792 shares (2004: 15,826,792
shares)
|
|
|
20,012
|
|
|
15,827
|
|
Additional
Paid In Capital
|
|
|
18,442,826
|
|
|
8,770,378
|
|
Retained
Earnings (Deficit)
|
|
|
(13,804,409
|
)
|
|
(4,640,956
|
)
|
Accumulated
Other Comprehensive Loss
|
|
|
(201,361
|
)
|
|
(183,532
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
4,457,068
|
|
|
3,961,717
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
11,222,363
|
|
$
|
6,447,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated
financial
statements
|
CHINA
MOBILITY SOLUTIONS, INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Years Ended December 31, 2005 AND 2004
|
|
|
|
Stated
in U.S. dollars
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
Mobile
marketing services
|
|
$
|
4,703,348
|
|
$
|
1,871,960
|
|
Tuition
fees
|
|
|
199,280
|
|
|
298,806
|
|
|
|
|
4,902,628
|
|
|
2,170,766
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
Mobile
marketing services
|
|
|
1,372,707
|
|
|
412,222
|
|
Tuition
fee
|
|
|
54,584
|
|
|
61,013
|
|
|
|
|
1,427,291
|
|
|
473,235
|
|
Gross
profit
|
|
|
3,475,337
|
|
|
1,697,531
|
|
Expenses
|
|
|
|
|
|
|
|
Advertising
and promotion
|
|
|
953,720
|
|
|
541,142
|
|
Commissions
|
|
|
376,146
|
|
|
-
|
|
Consulting
and professional
|
|
|
339,128
|
|
|
116,784
|
|
Depreciation
|
|
|
2,705
|
|
|
2,071
|
|
Fair
value of warrants issued
|
|
|
6,891,486
|
|
|
-
|
|
Foreign
exchange gain
|
|
|
(109,880
|
)
|
|
(24,029
|
)
|
General
and administrative
|
|
|
309,513
|
|
|
110,116
|
|
Impairment
of marketable securities
|
|
|
-
|
|
|
172,250
|
|
Investor
relations
|
|
|
263,475
|
|
|
-
|
|
Liquidated
damages (Note 12)
|
|
|
33,500
|
|
|
-
|
|
Rent
|
|
|
797,509
|
|
|
296,920
|
|
Salaries,
wages and sub-contract
|
|
|
1,391,221
|
|
|
724,493
|
|
Management
fees - stock-based compensation
|
|
|
126,000
|
|
|
-
|
|
Website
development
|
|
|
80,000
|
|
|
-
|
|
|
|
|
11,454,523
|
|
|
1,939,747
|
|
Operating
Loss
|
|
|
(7,979,186
|
)
|
|
(242,216
|
)
|
|
|
|
|
|
|
|
|
Other
Income and Expenses
|
|
|
|
|
|
|
|
Interest
income
|
|
|
84,932
|
|
|
82,602
|
|
Interest
expense on convertible debentures
|
|
|
(77,887
|
)
|
|
-
|
|
Interest
expense - instrinsic value of the conversion feature of debenture
(Note
9)
|
|
|
(1,052,863
|
)
|
|
-
|
|
Other
income
|
|
|
20
|
|
|
10,272
|
|
Equity
loss
|
|
|
-
|
|
|
(81,273
|
)
|
|
|
|
(1,045,798
|
)
|
|
11,601
|
|
Loss
before minority interest and
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
(9,024,984
|
)
|
|
(230,615
|
)
|
Minority
interest
|
|
|
(138,469
|
)
|
|
(28,157
|
)
|
Loss
from Continuing Operations
|
|
|
(9,163,453
|
)
|
|
(258,772
|
)
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
Gain
on disposal of internet-related operations
|
|
|
-
|
|
|
3,319,098
|
|
Loss
on disposal of business press operations
|
|
|
-
|
|
|
(41,292
|
)
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(362
|
)
|
|
|
|
- |
|
|
3,277,444
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Available to Common Stockholders
|
|
$
|
(9,163,453
|
)
|
$
|
3,018,672
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$
|
(0.52
|
)
|
$
|
(0.02
|
)
|
Earnings
(loss) from discontinued operations
|
|
|
0.00
|
|
|
0.22
|
|
Total
basic and diluted
|
|
$
|
(0.52
|
)
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
17,633,162
|
|
|
14,856,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements
|
CHINA
MOBILITY SOLUTIONS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005
(Stated
in U.S. dollars)
NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature
of Business
China
Mobility Solutions, Inc. (“the Company”), previously known as Xin Net Corp., was
incorporated under the laws of the State of Florida on September 12, 1996,
with
an authorized capital of 50,000,000 shares of $0.001 par value common stock.
The
Company’s principal business activities include providing mobile/wireless
communication; in particular, Short Message Services (“SMS”) and education and
training courses for foreign students.
Prior
to
June 2003, the Company commenced providing internet-related services, including
domain name registration, web hosting and other value-added services, such
as
e-commerce and advertising in several major cities in the Peoples Republic
of
China (“PRC”). Due to the lack of funding and high competition in the market,
the Company completed the sale of its internet-related services in the PRC
in
2004.
Summary
of Significant Accounting Policies
Principles
of consolidation
- The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries as outlined in Notes 2 and 3. All
significant inter-company transactions and balances have been eliminated
on
consolidation.
Accounting
method
-
The
Company’s financial statements are prepared using the accrual method of
accounting.
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 the People’s Republic of
China and U.S. Dollar cash balances in Canadian and Hong Kong banks, that
are
not insured. Revenues were derived in geographic locations outside the United
States. The ELSA program of Windsor accounts for 40% of the total tuition
fees
and 4% of the total revenue of the Company. The SMS of Quicknet accounts
for 96%
of the total revenue of the Company.
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
& fixture
|
20%
|
Declining
balance method
|
Machinery
& equipment
|
20%
|
Declining
balance method
|
Computer
equipment
|
30%
|
Declining
balance method
|
Library
|
100
|
Declining
balance method
|
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 2005 consisted of revenues from SMS, education and
training services. In accordance with Securities and Exchange Commission,
or
S.E.C., Staff Accounting Bulletin No. 104, "Revenue Recognition” and the
Emerging Issue Task Force, or 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 SMS,
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 2005 consists primarily of SMS, 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 $953,720 for 2005 and $541,142 for 2004.
Total
advertising costs included in discontinued operations amounted to $nil for
2005
and $2,193 for 2004.
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
- The
Company accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees.” Compensation cost for stock options, if any, is
measured as the excess of the quoted market price of the Company’s stock at the
date of grant over the amount an employee must pay to acquire the stock.
SFAS
No.123, “Accounting for Stock-Based Compensation,” established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. The Company has elected to remain
on
its current method of accounting as described above, and has adopted the
disclosure requirements of SFAS No. 123. 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 adopts the disclosure
provisions and the amendment to APB No. 28 effective for interim periods
beginning after December 15, 2002.
Had
compensation expense for the Company’s stock-based compensation plans been
determined under FAS No. 123, based on the fair market value at the grant
dates,
the Company’s pro forma net loss and pro forma net loss per share would have
been reflected as follows at December 31:
|
|
|
Year
Ended December 31
|
|
|
|
2005
|
|
2004
|
Net
income (loss)
|
|
|
|
|
As
reported
|
|
$
(9,163,453)
|
|
$
3,018,672
|
|
Stock-based
employee compensation cost, net of tax
|
(301,600)
|
|
(267,300)
|
|
Pro-forma
|
|
$
(9,465,053)
|
|
$
2,751,372
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
As
reported
|
|
$
(0.52)
|
|
$
0.20
|
|
Pro-forma
|
|
$
(0.54)
|
|
$
0.19
|
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
|
|
2004
|
|
|
|
|
Risk
free interest rate
|
2.78%
|
|
3.65%
|
Expected
life of options in years
|
1
year
|
|
1
to 3 years
|
Expected
volatility
|
132%
|
|
184%
|
Dividend
per share
|
$0.00
|
|
$0.00
|
Asset
Retirement Obligations
-
Statement of Financial Accounting Standards No. 143 (FAS-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.
FAS-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 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 133) and classified
under liability section of the balance sheet (paragraph 16 of SFAS 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 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 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 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 133). (See Note 9-Common Stock, Stock Options and Warrants)
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’s 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. (See Note
12)
Reclassification
of Prior Period
-
Certain prior period 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 pronouncements during
2004,
none of which is expected to have a significant effect on the financial
statements:
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”.
SFAS No. 154 replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless it is impracticable to determine
either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 will not have any impact on the Company’s consolidated financial
statements.
NOTE
2 - SUBSIDIARIES
The
Company’s wholly owned subsidiaries are as follows:
(1) |
Infornet
Investment Limited (a Hong Kong corporation) (“Infornet HK”) is a
telecommunication and management network company providing financial
resources and expertise in telecommunication projects. This subsidiary
was
originally incorporated as Micro Express Limited and was acquired
at no
cost. The name was changed to Infornet Investment Limited on July
18,
1997.
|
(2) |
Infornet
Investment Corp., (a Canadian corporation) (“Infornet Canada”) is engaged
in a similar line of business as that of the Company. The Company
issued
5,000,000 shares of common stock to acquire this subsidiary for
a total
value of $65, the latter representing organizational costs and
filing
fees.
|
(3) |
Xinbiz
(HK) Limited (a Hong Kong corporation) (“Xinbiz Ltd.”) and Xinbiz Corp. (a
British Virgin Islands corporation) (“Xinbiz Corp.”). Both subsidiaries
were inactive during 2005 and 2004.
|
(4) |
Windsor
Education Academy Inc., (a Canadian Corporation) (“Windsor”) is engaged in
providing English as a secondary language (“ESL”) training program to
foreign students.
|
NOTE
3 - ACQUISITION OF QUICKNET
On
June
23, 2004, the Company completed the acquisition of 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”). Quicknet is engaged in the use 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
(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 owned 2% of the
equity interest of Quicknet whereby the Company purchased a 1% interest from
each of the two unaffiliated shareholders of Quicknet,
namely,
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 a nominal consideration
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. 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 direct ownership of 49% equity interest and
indirect ownership of the remaining 2% equity interest through the contract
arrangements with Chinaco.
Under
the
Quicknet Purchase Agreement, the Company also had an option to acquire the
remaining 49% equity interest in Quicknet from the Quicknet Shareholders
within
the first year for $4,000,000. The Company had an option to acquire this
remaining 49% equity interest in Quicknet within the second year for $5,000,000.
As a general rule, 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.
Quicknet’s
financial information is incorporated into the consolidation of the Company
effective June 30, 2004, as the transactions that occurred between the period
from June 23, 2004 to June 30, 2004 were immaterial.
The
value
assigned to assets and liabilities acquired can be summarized as follows:
Cash
and short term investments
|
$
1,477,355
|
Accounts
receivables
|
90,560
|
Prepaid
expenses
|
10,998
|
Fixed
assets, net
|
14,930
|
Goodwill
|
846,782
|
Accounts
payables and accrued liabilities
|
(275,130)
|
Unearned
revenue
|
(1,614,695)
|
Fair
value of consideration issued - 2,040,000 common shares @ $0.27
per
share
|
$
550,800
|
The
following pro forma information is based on the assumption that the acquisition
took place as of beginning of the period (January 1, 2004), with comparative
information for the immediately preceding period as though the acquisition
had
been completed at the beginning of that period:
|
|
2004
|
|
2003
|
|
|
|
|
|
Net
sales
|
|
$
3,191,010
|
|
$
502,035
|
|
|
|
|
|
Net
income (loss)
|
|
$
3,258,277
|
|
$
(594,293)
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
$
0.22
|
|
$
(0.04)
|
The
Company exercised its right to purchase the remaining 49% interest in September,
2005 (the “Option Exercise”), by having Chinaco purchase a 24.5% interest from
each of the two unaffiliated shareholders of Quicknet,
Mr.
Bo Yu
and Mr. Fang Hu.
On
September 30, 2005, the Company acquired the remaining 49% of ownership of
Quicknet through exercising its option under the original acquisition agreement.
The Company paid the acquisition price of $4,000,000 by December 31, 2005,
as
required by the agreement.
The
value
assigned to assets and liabilities acquired is summarized as
follows:
Cash
and short term investments
|
|
$
1,356,834
|
Accounts
receivable
|
|
1,626
|
Goodwill
|
|
|
3,973,646
|
Accounts
payables and accrued liabilities
|
|
(134,452)
|
Unearned
revenue
|
|
|
(1,197,654)
|
Cash
paid
|
|
|
$
4,000,000
|
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 51% equity interest, and therefore controls
100%
of Quicknet.
Until
such time, if ever, that Chinese law permits the transfer of a direct
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, the Company will be unable to directly own
the
remaining 51% interest held by Chinaco.
NOTE
4 - PROPERTY AND EQUIPMENT
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Equipment
|
|
|
$
26,986
|
|
$
24,832
|
Library
|
|
|
9,554
|
|
9,554
|
Furniture
|
|
|
10,189
|
|
9,975
|
Total
|
|
|
46,729
|
|
44,361
|
Less
: Accumlated depreciation
|
|
(40,481)
|
|
(37,812)
|
Net
|
|
|
$
6,248
|
|
$
6,549
|
Depreciation
charged to continuing operations amounted to $2,705 for 2005 and $2,071 for
2004. Depreciation included in discontinued operations amounted to $nil for
2005
and $397 for 2004.
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” Warrants. 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 the
effective
date (the "Effective Date") of the registration statement. The registration
statement has not been approved by the regulatory authority.
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 for two years from
the
Effective Date, but no later than February 15, 2008; and (ii) new Series
“B”
Warrants exercisable at $0.52 per share to purchase 71,429 shares of Common
Stock for three years from the Effective Date, but no later than 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 the Effective Date, 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.
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 133). The redemption provision thus should not
be
separated from the host contract for separate consideration.
The
Company incurred $335,000 as the 10% sales commission of the aggregate
purchase
price, $100,500 as the 3% expenses of the agent, $16,750 for the agent’s
out-of-pocket expenses and $120,609 for legal fees for total costs of $572,859
that are charged to operations for the year ended December 31, 2005 in
view of
the short term of the debenture.
To
December 31, 2005 interest has been paid of $51,087 and accrued of $26,800
for
total interest charged to operations of $77,887. The accrued interest is
included in accrued liabilities at December 31, 2005.
NOTE
6 - DISCONTINUED OPERATIONS
(a) DISCONTINUED
OPERATIONS - INTERNET-RELATED SERVICES
On
February 26, 2003, the Company entered into an agreement to sell the
internet-related services provided in China to a subsidiary company of
Sino-i.com Ltd., the latter a company listed on the Hong Kong Stock Exchange,
for total consideration of RMB 20 million (approximately US$2,415,800). The
transaction is subject to shareholders approval. Pursuant to Florida law,
the
Company was required to obtain shareholder approval for the sale of all or
substantially all of the assets for a Florida corporation. However, if the
assets do not represent all or substantially all of the business, the Board
of
directors can approve it without shareholder approval, which it did by written
consent. Because there has been no operations or cash flows consolidated
in the
financial statements since 2001, the Company has eliminated this component
from
its ongoing operations and it does not have any significant continuing
involvement
in the operations of the component.
The
gain
on disposal of the internet-related business, together with the related assets
and liabilities disposed of, is as follows:
Sales
proceeds
|
|
$
2,415,800
|
Less
:
|
Current
assets
|
|
(1,992,665)
|
|
Fixed
assets
|
|
(442,820)
|
|
Current
liabilities
|
|
3,338,783
|
Loss
on disposal of Dawa
|
$
3,319,098
|
(b) DISPOSAL
OF DAWA BUSINESS GROUP INC. (“DAWA”)
On
June
30, 2004, the Company entered into a Share Exchange Agreement (the "2004
Share Exchange Agreement") with Windsor Education Academy Inc. ("Windsor"),
Dawa
Business Group Inc. ("Dawa") and 1041571 B.C. Ltd. ("1041571") whereby the
Company exchanged 102 shares, or 51%, of the issued and outstanding common
stock
of Dawa to 1041571 in consideration for 98 shares, or 49%, of the issued
and
outstanding common stock of Windsor.
The
Company first acquired the 102 shares of common stock of Dawa pursuant to
a
prior Share Exchange Agreement, dated July 3, 2003, (the "2003 Share Exchange
Agreement") between the Company, Windsor, Dawa and 1041571 whereby the Company
exchanged 98 shares, or 49%, of the issued and outstanding common stock of
Windsor to 1041571 in consideration for 102 shares, or 51%, of the issued
and
outstanding common stock of Dawa. Prior to the 2003 Share Exchange Agreement,
Windsor was a wholly owned subsidiary of the Company.
At
the
close of the 2004 Share Exchange Agreement, the Company became the beneficial
owner of all of the issued and outstanding stock of Windsor and the Company
ceased to own any of the common stock of Dawa. The 2004 Share Exchange Agreement
did not involve any cash consideration.
The
loss
on disposal of Dawa during the year ended December 31, 2004, together with
the
related assets and liabilities disposed of, is as follows:
Sales
proceeds
|
|
$
26,862
|
Less
:
|
Current
assets
|
|
(61,987)
|
|
Fixed
assets
|
|
(1,617)
|
|
Goodwill
|
|
(60,312)
|
|
Other
assets
|
|
(145)
|
|
Current
liabilities
|
|
55,907
|
Loss
on disposal of Dawa
|
|
$
(41,292)
|
NOTE
7 - 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
PRC;
|
(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 “PRC 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, 2005
and
2004, 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:
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
1,081,616
|
$
|
512,349
|
Valuation
allowance
|
$
|
(1,081,616)
|
$
|
(512,349)
|
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, 2005 and
2004
is as follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
33.0%
|
|
33.0%
|
Valuation
allowance
|
|
-33.0%
|
|
-33.0%
|
Effective
income tax rate
|
|
0.0%
|
|
0.0%
|
NOTE
8 - SEGMENTS AND GEOGRAPHIC DATA
The
Company’s reportable segments are geographic areas and two operating segments,
the latter comprised of mobile / wireless communication and ESL education.
Summarized financial information concerning the Company’s reportable segments is
shown in the following table. The “Other” column includes corporate related
items, and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
A.
By geographic areas
|
|
China
|
|
Canada
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from continuing operations
|
|
$
|
4,703,348
|
|
$
|
199,280
|
|
$
|
-
|
|
$
|
4,902,628
|
|
Operating
profit (loss)
|
|
|
257,915
|
|
|
(64,024
|
)
|
|
(8,263,719
|
)
|
|
(8,069,828
|
)
|
Total
assets
|
|
|
8,152,122
|
|
|
147,803
|
|
|
2,922,438
|
|
|
11,222,363
|
|
Depreciation
|
|
|
-
|
|
|
2,697
|
|
|
8
|
|
|
2,705
|
|
Interest
income
|
|
|
20,193
|
|
|
105
|
|
|
64,634
|
|
|
84,932
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Investment
in equity method investee
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from continuing operations
|
|
$
|
1,871,960
|
|
$
|
298,806
|
|
$
|
-
|
|
$
|
2,170,766
|
|
Operating
profit (loss)
|
|
|
55,906
|
|
|
(22,060
|
)
|
|
(276,062
|
)
|
|
(242,216
|
)
|
Total
assets
|
|
|
6,362,416
|
|
|
75,925
|
|
|
8,689
|
|
|
6,447,030
|
|
Depreciation
|
|
|
-
|
|
|
1,906
|
|
|
165
|
|
|
2,071
|
|
Interest
income
|
|
|
82,588
|
|
|
14
|
|
|
-
|
|
|
82,602
|
|
Gain
from discontinued operations - net
|
|
|
3,277,444
|
|
|
-
|
|
|
-
|
|
|
3,277,444
|
|
Equity
loss in undistributed earnings of investee company
|
|
|
-
|
|
|
-
|
|
|
(81,273
|
)
|
|
(81,273
|
)
|
Investment
in equity method investee
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
1
|
|
B.
By operating segments
|
|
Mobile/Wireless
|
|
ESL
|
|
|
|
|
|
|
|
communications
|
|
education
|
|
Other
|
|
Total
|
|
For
the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
4,703,348
|
|
$
|
199,280
|
|
$
|
-
|
|
$
|
4,902,628
|
|
Intersegment
revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
revenue
|
|
|
20,193
|
|
|
105
|
|
|
64,634
|
|
|
84,932
|
|
Interest
expense
|
|
|
-
|
|
|
-
|
|
|
77,887
|
|
|
77,887
|
|
Depreciation
|
|
|
-
|
|
|
2,218
|
|
|
487
|
|
|
2,705
|
|
Segment
operation profit (loss)
|
|
|
257,915
|
|
|
25,729
|
|
|
(8,353,472
|
)
|
|
(8,069,828
|
)
|
Segment
assets
|
|
|
8,152,122
|
|
|
82,490
|
|
|
2,987,751
|
|
|
11,222,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
1,871,960
|
|
$
|
298,806
|
|
$
|
-
|
|
$
|
2,170,766
|
|
Intersegment
revenue
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
revenue
|
|
|
82,588
|
|
|
14
|
|
|
-
|
|
|
82,602
|
|
Interest
expense
|
|
|
-
|
|
|
-
|
|
|
69
|
|
|
69
|
|
Depreciation
|
|
|
-
|
|
|
1,710
|
|
|
361
|
|
|
2,071
|
|
Segment
operation profit (loss)
|
|
|
57,964
|
|
|
(11,230
|
)
|
|
(288,950
|
)
|
|
(242,216
|
)
|
Segment
assets
|
|
|
6,351,943
|
|
|
73,823
|
|
|
21,264
|
|
|
6,447,030
|
|
NOTE
9 - COMMON STOCK, STOCK OPTIONS AND WARRANTS
Common
Stock
On
June
24, 2004, the Company carried out a 3-for-1 reverse stock-split. Figures
of
prior periods have been retroactively restated to reflect the effect of the
reverse stock-split.
During
the year ended December 31, 2005, the Company issued 600,000 shares of its
common stock at a fair value of $351,300 to a company for one-year investor
relations services until March 2006. As of December 31, 2005, $116,667 was
recorded as prepaid expenses and $234,633 was
recorded as investor relations expense.
During
the year ended December 31, 2005, the Company increased its authorized share
capital from 50,000,000 to 500,000,000 shares of common stock with a par
value
of $0.001 per share.
Conversion
Feature of the convertible debenture
According
to EITF 98-5, the intrinsic value of the conversion feature of the convertible
debenture is $1,052,863. The whole amount has been recorded as interest expenses
in the statement of operations as the debentures are convertible at any time
during the specified periods and is reflected in an increase in additional
paid-in-capital.
Stock
Options
The
2,136,000 stock options granted on November 12, 1999 at an exercise price
of
$3.90 each and the 1,155,000 stock options granted on July 23, 2004 at an
exercise price of $0.30 each were only approved by the Board of Directors
as the
Company did not have an option plan at that time.
The
Company filed a Form S-8 for its “2005 Stock Option Plan” with Security Exchange
Commission (“SEC”) on May 5, 2005 for up to 3,500,000 Stock Options. “2005
Stock Option Plan” has been approved by a majority vote of the shareholders at
the Annual General Meeting held on July 28, 2005. The Company has granted
3,090,000 stock options to employees and consultants under "2005 Stock Option
Plan" in 2005 and all options have been exercised as of December 31,
2005.
The
Company filed another S-8 for its “2006 Stock Option Plan” with SEC on Nov.3,
2005 for up to 4,000,000 Stock Options. “2006 Stock Option Plan” is a
Non-qualified Stock Option Plan meaning it hasn’t been approved by the majority
of the shareholders of the Company. There is no option been granted under
"2006
Stock Option Plan" as of December 31, 2005.
On
February 24, 2005, 495,000 stock options at $0.30 each were
exercised.
On
September 1, 2005, the Company granted 3,090,000 stock options to consultants
and employees with an exercise price of $0.35 each and $0.40 each for 2,590,000
and 500,000 stock options, respectively, expiring on September 1, 2015. These
stock options were all exercised on the date of grant.
Options
outstanding at December 31, 2005 were 660,000 with option price of $0.30
each.
No options were canceled or forfeited during the year ended December 31,
2005.
The weighted average remaining contractual life is 1.56 years.
The
continuity of stock options can be summarized as follows:
|
|
|
|
Weighted
average per share exercise
price
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
2,136,000
|
|
$
3.90
|
Granted
|
|
1,155,000
|
|
0.30
|
Expired
|
|
(2,136,000)
|
|
3.90
|
Balance,
December 31, 2004
|
|
1,155,000
|
|
0.30
|
Granted
|
|
3,090,000
|
|
0.32
|
Exercised
|
|
(3,585,000)
|
|
0.31
|
Balance,
December 31, 2005
|
|
660,000
|
|
0.30
|
Warrants
5,884,990
Series “A” Warrants at an exercise price of $0.50 each expired on March 31,
2005.
On
August
15, 2005, the Company issued 134 new Series “A” Warrants. Each new Series “A”
Warrant entitles the holder to purchase 71,429 shares of common stock of
the
Company at $0.44 per share for two years from the Effective Date, but no
later
than February 15, 2008. The Company also issued 134 new Series “B” Warrants.
Each new Series “B” Warrant entitles the holder to purchase 71,429 shares of
common stock of the Company at $0.52 per share for three years from the
Effective Date, but no later than February 15, 2009. The new Series “A” and “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 the Effective
Date, provided that 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.
The
fair
value of the new Series “A” warrants issued was estimated at $24,286 each by
using the Black-Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, expected volatility of 141%, risk-free interest rates
of
3.14%, and expected lives of two years.
The
fair
value of the new Series “B” warrants issued was estimated at $27,143 each by
using the Black-Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, expected volatility of 158%, risk-free interest rates
of
3.26%, and expected lives of three years.
As
of
December 31, 2005, 10 Series “B” warrants were outstanding which entitle the
holders to purchase a common share of the Company at $2.25 each on or before
March 31, 2006. 134 new Series “A” warrants 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 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.
The
new
Series “A” and “B” warrants issued through the Units sold are considered as
equity instruments. These warrants are separated from the convertible debentures
and are not affected by any of the redemption or early settlement feature
of the
convertible debentures. The exercisability of the warrants is not contingently
depending on the terms of the convertible debentures. The warrants can
be
exercised within their own specified periods at specified prices. If the
related
shares cannot be registered, the Company is only obligated to issue unregistered
shares to the warrants holders when the warrants are exercised without
any
penalty. There is no penalty payable in cash by the Company for these new
Series
“A” and “B” warrants if the Company fails to register the shares. The Company
also has enough authorized share capital to cover all the potential shares
to be
issued.
The
fair
value of the warrants are $24,286 ($0.34 * 71,429) and $27,143 ($0.38 *
71,429)
each, respectively, as determined by using the Black-Scholes Model. The
total
fair value of the warrants $6,891,486 ($24,286 * 134 + $27,143 * 134) has
been
recorded as an expense in the statement of operation and a separate line
in the
equity section of the balance sheet as the amount involved is regarded
as a cost
of issuance of the convertible debenture. Revaluation has to be done on
a
periodic basis to update the fair value of the warrants. The periodic difference
will be charged to the statement of operation as expenses or expenses recovery
and adjustment to the fair value of the warrants in the equity section
of the
balance sheet.
NOTE
10 - LEASE COMMITMENTS
Operating
leases
- The
Company leases office space under various operating leases expiring through
June, 2007. Total rent expense charged to operations during 2005 and
2004 was
$292,340 and $155,734, respectively. Future minimum rental commitments
are
(approximately) $236,513 as follows:
Year
Ending
|
|
|
December
31, 2006
|
|
$
178,670
|
December
31, 2007
|
|
57,843
|
|
|
$
236,513
|
NOTE
11 - RELATED PARTY TRANSACTIONS
Options
- The
Company’s five directors were granted 1,155,000 options to purchase shares at
$0.30. 660,000 of the options are outstanding at December 31, 2005.
Wages
and benefits
- The
Company paid $30,866 as wages and benefits to a director and an officer of
the
Company during the year ended December 31, 2005.
Advances
-
As of
December 31, 2005, the Company advanced $8,485 to a director for expenses
to be
incurred on behalf of the Company and also advanced $21,443 to a company
with a
director in common. The advances are non-interest bearing and are repayable
within twelve months of December 31, 2005.
NOTE
12 - SUBSEQUENT EVENTS
(a) Litigation
On
January 18, 2006, the Company received a letter (the "Default Letter") from
the
attorney for the Holder of $500,000 principal amount of the Company's Senior
Convertible Debenture (the "Debenture") stating that the Company was in default
of 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 effectiveness of the Registration Statement required under
the
Registration Rights Agreement (one of the Transaction Agreements).
The
Default Letter was withdrawn while the parties tried unsuccessfully through
February 2, 2006 to resolve the dispute. The Company denies that it is in
default of the Transaction Agreements and will vigorously defend any action
which might be brought against it in this matter.
Since
no
settlement was reached by January 31, 2006, the Default Letter is in effect
retroactive to when it was received. The Holder declared the entire balance
of
the Debenture immediately due and payable. Accordingly, as of January 17,
2006,
the aggregate amount of principal and interest claimed to be owed by the
Company
was $629,868, with interest claimed to accrue at the rate of 12% per annum,
pursuant to Section 1(e) of the Debenture. The Company has recorded $33,500
as
expense for estimated liquidated damages in the statement of operations for
the
year ended December 31, 2005.
(b) 2006
Non-Qualified Stock Compensation Plan
The
Company filed S-8 for its 2006 non-qualified Stock Option Plan” with SEC 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-employee 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 NQSQ
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.
At
the discretion of the Committee, 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.