SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2004
Commission file number 0-26559
CIK No. 0001082603
CHINA MOBILITY SOLUTIONS, INC.
(Exact name of registrant as specified in this charter)
XIN NET CORP.
(Former name)
Florida 330-751560
------------------------------- --------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
#900 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604)632-9638
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
----- -----
As of August 6, 2004, there were 15,826,670 shares of $0.001 par value common
stock outstanding.
1
CHINA MOBILITY SOLUTIONS, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-QSB
June 30, 2004
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets....................................... F-1
Consolidated Statements of Operations..............................F-2
Consolidated Statements of Cash Flows..........................F-3
Notes to Consolidated Financial Statements.........................F-4
ITEM 2. Management's Discussion and Analysis..............................3
ITEM 3. Controls and Procedures...........................................8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................9
ITEM 2. Changes in Securities and Use of Proceeds.........................9
ITEM 3. Defaults Upon Senior Securities...................................9
ITEM 4. Submission of Matters to a Vote of Security Holders...............9
ITEM 5. Other Information.................................................9
ITEM 6. Exhibits and Reports on Form 8-K..................................9
SIGNATURE.....................................................................11
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
Stated in U.S. dollars 2004 2003
--------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 4,732,248 $ 3,303,677
Accounts receivable, net of allowance of $nil (2003: $58,678) 100,496 95,465
Prepaid Expenses and Other Current Assets 27,281 31,587
Amount due from related parties 41,210 -
Assets to be disposed of 2,435,485 2,435,485
--------------------- ---------------------
Total Current Assets 7,336,720 5,866,214
Investment - at equity 172,251 253,524
Property and Equipment, Net 23,183 13,438
Goodwill 1,647,106 187,436
--------------------- ---------------------
Total Assets $ 9,179,260 $ 6,320,612
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Other Accrued Liabilities $ 322,241 $ 225,040
Deferred Revenue 1,660,746 28,354
Liabilities to be disposed of 3,338,783 3,200,857
Security deposit from Sino-i.com Ltd. 2,415,800 2,416,200
--------------------- ---------------------
7,737,570 5,870,451
Minority Interest - 38,147
Commitments and Contingencies - -
Stockholders' Equity
Common Stock : $0.001 Par Value; Authorized : 50,000,000
Issued and Outstanding : 15,826,670 (2003: 13,786,670) 15,827 13,787
Additional Paid In Capital 9,443,578 8,221,618
Accumulated Deficit (7,863,833) (7,659,628)
Accumulated Other Comprehensive Loss (153,882) (163,763)
--------------------- ---------------------
Total Stockholders' Equity 1,441,690 412,014
--------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 9,179,260 $ 6,320,612
===================== =====================
(See condensed notes to consolidated financial statements.)
F-1
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
Stated in U.S. dollars 2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Revenue - Tuition fee $ 62,769 $ 77,933 $122,915 $ 143,283
Cost of revenue - Tuition fee 13,828 - 28,373 -
--------------- -----------------------------------------------
Gross profit 48,941 77,933 94,542 143,283
Expenses
Consulting and professional 20,793 25,496 39,337 46,426
Depreciation 805 2,009 1,635 3,557
Foreign exchange loss 4,696 (14,096) 8,418 (4,455)
General and administrative 28,622 13,775 35,341 35,711
Legal settlement 29,513 - 29,513 -
Rent 11,967 24,598 25,561 43,147
Salaries, wages and sub-contract 34,836 59,575 71,666 112,494
--------------- -----------------------------------------------
131,232 111,357 211,471 236,880
Operating Loss (82,291) (33,424) (116,929) (93,597)
Other Income and Expenses
Interest income 29,555 4 29,556 8
Other income 1,186 53 1,461 6,048
Equity loss in undistributed earnings of investee company (81,273) (17,975) (81,273) (44,371)
--------------- -----------------------------------------------
(50,532) (17,918) (50,256) (38,315)
Loss before minority interest and discontinued operations (132,823) (51,342) (167,185) (131,912)
Minority interest 9,677 - 4,634 -
--------------- -----------------------------------------------
Loss from Continuing Operations (123,146) (51,342) (162,551) (131,912)
Discontinued operations
Loss from Assets held for sale - Internet related operations - (89,969) - (322,987)
Loss from discontinued operations - Dawa (62,142) - (41,654) -
--------------- -----------------------------------------------
Net Loss Available to Common Stockholders $ (185,288) $ (141,311) $(204,205) (454,899)
=============== ===============================================
F-2
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Three months Three months Six months Six months
Ended Ended Ended Ended
--------------------------------------------------------------
June 30, June 30, June 30, June 30,
Stated in U.S. dollars 2004 2003 2004 2003
Loss per share attributable to common stockholders:
Loss from continuing operations $(0.01) $(0.00) $(0.01) $(0.01)
Loss from discontinued operations 0.00 (0.01) 0.00 (0.02)
--------------------------------------------------------------
Total basic and diluted $(0.01) $(0.01) $(0.01) $(0.03)
==============================================================
Weighted average number of common shares outstanding:
Basic and diluted 13,966,011 13,786,670 13,876,340 13,786,670
==============================================================
(See condensed notes to consolidated financial statements.)
F-3
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Stated in U.S. dollars 2004 2003
---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (204,205) $ (454,899)
Less: loss from assets held for sale - 322,987
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 2,032 3,557
Loss on disposal of subsidiary 41,292 -
Translation adjustments 9,881 (5,188)
Minority interest (4,634) -
Equity loss of The Link Group, Inc. 81,273 44,371
Changes in assets and liabilities
Increase in accounts receivable (19,465) -
(Increase) Decrease in prepaid expenses and other current assets 15,237 (39,851)
Increase in amount due from related parties (41,210) -
Increase (Decrease) in accounts payable (68,307) 24,527
Increase (Decrease) in deferred revenue 17,697 (24,529)
Increase in liabilities to be disposed of 137,926 -
Increase in security deposits - 2,415,600
-------------------------------------
Net cash provided by operating activities (32,483) 2,286,575
-------------------------------------
Cash flows from investing activities
Purchases of property and equipment
- (5,708)
Reduction in investment - 1,266
Cash transferred in from acquisition of Quicknet 1,477,355 -
Cash transferred out from disposal of Dawa (15,217) -
-------------------------------------
Net cash flows used in investing activities 1,462,138 (4,442)
-------------------------------------
Effect of exchange rate changes on cash (1,084) -
Net cash provided by continuing operations 1,428,571 2,282,133
Net cash used in assets held for sale - 98,726
-------------------------------------
Increase in cash and cash equivalents 1,428,571 2,380,859
Cash and cash equivalents - beginning of period 3,303,677 957,133
-------------------------------------
Cash and cash equivalents - end of period $ 4,732,248 $ 3,337,992
=====================================
F-4
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
Stated in U.S. dollars 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Supplemental Information :
Cash paid for :
Interest $ - $6,399
Income taxes - 10,978
Non-cash investment :
-------------------
Issuance of 2,040,000 common shares for the acquisition of Quicknet $ 1,224,000 $ -
(See condensed notes to consolidated financial statements.)
F-5
CHINA MOBILITY SOLUTIONS, INC.
(Previously known as Xin Net Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
( Unaudited )
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
However, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted or condensed pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). In the opinion of management,
all adjustments of a normal recurring nature necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results for the entire year. These condensed consolidated
financial statements and accompanying notes should be read in conjunction with
the Company's annual consolidated financial statements and the notes thereto for
the fiscal year ended December 31, 2003 included in its Annual Report on Form
10-KSB.
The unaudited condensed consolidated financial statements include China Mobility
Solutions, Inc. and its subsidiaries. Significant inter-company transactions and
accounts have been eliminated.
Certain items have been reclassified to conform to the current period
presentation. There is no effect on total results of operations or shareholders'
equity.
2. Acquisition of Beijing Quicknet Telecommunication Corp. Ltd.
On June 23, 2004, the Company completed the acquisition of a 51% equity interest
from the shareholders of a short message system ("SMS") provider, Beijing
Quicknet Telecommunication Corp. Ltd. ("Quicknet"), located in Beijing, China
through the issuance 6,120,000 (2,040,000 post-reverse split) shares of common
stock of the Company. Due to the restrictions on foreign ownership of
telecommunication companies in China, 2% of the equity interest of Quicknet is
held by the management of Quicknet with Chinese citizenship and they will be
transferred back to the Company when the China government removes the
restrictions. The Company has an option to acquire the remaining 49% equity
interest in Quicknet within the first year from the closing date for $4,000,000.
The Company has another option to acquire the remaining 49% equity interest in
Quicknet within the second year from the closing date for $5,000,000. As a
general rule, the Company can 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
can 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 1,519,982
Accounts payables and accrued liabilies (275,130)
Unearned revenue (1,614,695)
------------
Fair value of net assets acquired $ 1,224,000
============
F-6
The following unaudited 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 $1,192,500 $ 143,283
=========== ==========
Net loss $ (43,163) $(454,899)
=========== ==========
Basic and diluted loss per share (0.00) (0.03)
=========== ==========
3. 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, 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 asets (145)
Current liabilities 55,907
---------
Loss on disposal of Dawa $(41,292)
The result of Dawa operations for the six months ended June 30, 2004 and the pro
forma results of operations for the six months ended June 30, 2003, which are
shown for comparison purposes assuming the Company acquired Dawa as of January
1, 2003, are as follows:
2004 2003
---------- ----------
Revenue $ 213,205 $ 149,338
Operating costs (213,567) (146,149)
---------- ----------
Net loss $ (362) $ (3,189)
========== ==========
F-7
4. 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., a company listed on the Hong Kong Stock Exchange, for total
consideration of RMB 20 million (approximately US$2,415,800), which the Company
has received and classified as a security deposit as of June 30, 2004. The
transaction is subject to the approval of shareholders.
The loss 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)
Capital assets (442,820)
Current liabilities 3,338,783
------------
Gain on disposal of internet-related business $ 3,319,098
============
The results of the discontinued internet-related services for the six months
ended June 30, 2004 and 2003 are as follows:
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
Reveune $ - $ 1,292,708 $ - $ 2,372,554
Operating costs - (1,382,677) - (2,695,541)
Net loss $ - $ (89,969) $ - $ (322,987)
======================= ======================
5. Property and Equipment
Property and equipment consist of the following:-
June 30, December 31,
2004 2003
Equipment $ 39,154 $ 31,160
Library 9,554 9,554
Furniture 11,871 10,683
--------- ---------
Total 60,579 51,397
Less: Accumulated depreciated (37,396) (37,959)
--------- ---------
Net book value $ 23,183 $ 13,438
========= =========
F-8
The depreciation expense charged to continuing operations for the six-month
period ended June 30, 2004 was $2,014.
6. Investment in The Link Group, Inc. ("Link")
Pursuant to a Share Exchange Agreement dated December 20, 2001, the Company paid
$200,000 cash for 3,882,700 shares of The Link Group, Inc. ("Link").
Pursuant to a Subscription Agreement dated January 18, 2002, the Company paid
$600,300 in a private placement of Link for 14,500,000 (pre-reverse one for four
split) common shares at $0.0414 per share, as well as 10,875,000 special
warrants convertible into 10,875,000 post-reverse one for four split common
shares on or before January 31, 2004 at no additional consideration. The Company
exercised the 10,875,000 special warrants on March 12, 2002. An option to
purchase an additional 7,500,000 post-reverse one for four split common shares
at $0.04 per share, or $300,000, until February 15, 2002, was also granted to
the Company, which was not exercised.
By an agreement dated January 21, 2002, Link agreed to purchase all of the
outstanding shares of Protectserve Pacific Ltd. ("PSP") through the issuance of
37,500,000 (post-reverse one for four split) common shares. Link has the right
to buy back its shares at $0.001 per share from these individuals if PSP's after
tax profit is less than Hong Kong $9 million dollars ("HKD") for the twelve
months ending December 31, 2002. The buy back formula is for every HKD $333,333
that PSP falls short of the HKD $9 million after tax profit, Link can buy back
one million (post-reverse one for four split) common shares from these
individuals.
On February 18, 2002, the shareholders of Link approved the reverse split of the
issued and outstanding common shares of Link at the ratio of one for four,
thereby making the Company's total Link shares held equal to 15,370,675 shares,
representing 28.8% of the total issued and outstanding shares of Link. On
October 14, 2002, Link cancelled 8,300,000 outstanding common shares as part of
the consideration of the disposition of its subsidiary company and thereafter
the Company's holding in Link correspondingly increases to 34.1%. On March 28,
2003, Link issued 3,000,000 common shares and cancelled 14,000,000 common shares
and thereafter the Company's holding in Link correspondingly changes to 24.8%.
On August 5, 2003, Link cancelled 22,200,000 shares pursuant to a repurchase
agreement and thereafter the Company's holding in Link correspondingly increases
to 38.6%. On October 17, 2003, Link issued 36,000,000 shares for the acquisition
of New Unicorn Holdings Ltd. and thereafter the Company's holding in Link
correspondingly decreases to 20.26%.
The Company accounts for its investment in Link on the equity basis, which is
carried at cost, adjusted for the Company's proportionate share of their
undistributed earnings or losses. As of June 30, 2004, the investee company's
financial statements were not sufficiently timely for the Company to apply the
equity method currently. Therefore, the Company recorded its share of the
investee's losses from the most recent available financial statements, which
were the audited financial statements as of December 31, 2003, as filed with the
Securities and Exchange Commission on August 2, 2004:
Original cost of 15,370,675 shares of The Link Group, Inc. $ 800,300
Equity in undistributed earnings of investee company (628,049)
----------
Investment - at equity $ 172,251
==========
F-9
7. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The following table sets forth the computations of shares and net loss used in
the calculation of basic and diluted loss per share for the three and six months
ended June 30, 2004 and 2003:
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
---------------------------- -----------------------------
Loss from continuing operations $ (123,146) $ (51,342) $ (162,551) $ (131,912)
Loss from discontinued operations (62,142) (89,969) (41,654) (322,987)
---------------------------- ------------------------------
Net loss for the period (185,288) (141,311) (204,205) (454,899)
Weighted-average number of shares outstanding 13,966,011 13,786,670 13,867,340 13,786,670
Effective of dilutive securities
Dilutive options -$3.90 - - - -
Dilutive warrants - $1.50 - - - -
Dilutive warrants -$2.25 - - - -
---------------------------- ------------------------------
Dilutive potential common shares - - - -
---------------------------- ------------------------------
Adjusted weighted-average shares and 13,966,011 13,786,670 13,876,340 13,786,670
assumed conversions
Loss per share attributable to common shareholders:
Los from continuing operations $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Loss from discontinued operations $ 0.01 $ (0.01) $ 0.01 $ (0.02)
---------------------------- ------------------------------
Total basic and diluted loss per share $ (0.01) $ (0.01) $ (0.01) $ (0.03)
============================ ==============================
F-10
The effect of outstanding options and warrants was not included as the effect
would be antidilutive.
On June 23, 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.
--------------------------------------------------------------------------------
8. Share Purchase Warrants
On April 1, 2003, the Company extended its outstanding 5,884,990 (1,961,663
post-reverse split) million Series "A" Share Purchase Warrants as follows:
(i) the exercise price of the Series "A" Share Purchase Warrants is
adjusted to $0.50 ($1.50 post-reverse split) each and their term
is extended to March 31, 2005:
(ii) upon exercise of one Series "A" Share Purchase Warrants at $0.50
($1.50 post-reverse split), the holder will receive one common
share of the company and one Series "B" Share Purchase Warrant;
and
(iii) the exercise price of the Series "B" Share Purchase Warrants is
adjusted to $0.75 ($2.25 post-reverse split) each and their term
is extended to March 31, 2006;
(iv) upon exercise of one Series "B" Share Purchase Warrant at $0.75
($2.25 post-reverse split), the holder will receive one common
share of the Company.
9. Segment and Geographic Data
The Company's reportable segments are geographic areas. Summarized financial
information concerning the Company's reportable segments is shown in the
following table. The "Other" column includes corporate related items, and, as it
relates to segment profit (loss), income and expenses not allocated to
reportable segments.
Canada China Other Total
------ ----- ----- -----
Three months ended June 30, 2004
--------------------------------
Revenue from continuing operations $ 62,769 $ - $ - $ 62,769
Operating loss (53,792) 1,652 (30,151) (82,291)
Total assets 190,008 8,770,544 218,708 9,179,260
Three months ended June 30, 2003
--------------------------------
Revenue from continuing operations $ 77,933 $ - $ - $ 77,933
Operating loss (21,356) (122) (11,946) (33,424)
Total assets 57,233 5,976,953 510,346 6,544,532
Six months ended June 30, 2004
------------------------------
Revenue from continuing operations $ 122,915 $ - $ - $ 122,915
Operating loss (86,122) 697 (31,504) (116,929)
Total assets 190,008 8,770,544 218,708 9,179,260
Six months ended June 30, 2003
------------------------------
Revenue from continuing operations $ 143,283 $ - $ - $ 143,283
Operating loss (70,688) (908) (22,001) (93,597)
Total assets 57,233 5,976,953 510,346 6,544,532
F-11
10. COMMITMENTS AND CONTINGENCIES
On August 7, 2003, the Company was named as a defendant in the Supreme Court of
British Columbia seeking C$40,313 (US$29,744) allegedly due on the contract
between Edward Kheng Yoong Lee, Sidney Pak Lai Ho, Ricky Chung Hou NG, and
Lilian Lee ("Plaintiffs") and XIN NET Corp. for the sale of Windsor Education
Academy, Inc.
Subsequent to quarter end, the parties have agreed to settle the claim for no
more than C$40,000 (US$29,513). The Company has accrued the full amount of
US$29,513 during the three and six month period ending June 30, 2004, as a
result.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information presented here should be read in conjunction with China Mobility
Solutions, Inc.'s consolidated financial statements and related notes. In
addition to historical information, the following discussion and other parts of
this document contain certain forward-looking information. When used in this
discussion, the words "believes," "anticipate," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected due to a number of factors beyond the
Company's control. The Company does not undertake to publicly update or revise
any of its forward-looking statements even if experience or future changes show
that the indicated results or events will not be realized. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Readers are also urged to carefully review and
consider the Company's discussions regarding the various factors, which affect
its business, included in this section and elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, accounts receivable and
allowance for doubtful accounts, intangible and long-lived assets, and income
taxes. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our consolidated financial
statements:
Revenue Recognition
Revenues consist of tuition fee earned. Revenue is recognized 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. Revenues
derived from education and training are recognized as the services are performed
and amounts received from customers in advance of revenue recognition are
deferred and classified on the balance sheet as "deferred revenue."
3
Accounts receivable and allowance for doubtful accounts
We present accounts receivable, net of allowances for doubtful accounts
and returns, to ensure accounts receivable are not overstated due to
uncollectibility. The allowances are calculated based on detailed review of
certain individual customer accounts, historical rates and an estimation of the
overall economic conditions affecting our customer base. We review a customer's
credit history before extending credit. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. There are currently no
allowances for doubtful accounts as of June 30, 2004, as management does not
deem any of the accounts are uncollectible.
Intangible and Long-lived assets
We evaluate our intangible assets and long-lived assets, which
represent goodwill and fixed assets, for impairment annually and when
circumstances indicate the carrying value of an asset may not be recoverable. If
impairment exists, an adjustment is made to write the asset down to its fair
value, and a loss is recorded as the difference between the carrying value and
fair value. We do not believe any impairment exists for any of these types of
assets as of June 30, 2004.
Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards ("SFAS" No. 109), "Accounting for Income
Taxes," whereby 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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2004 AS COMPARED TO THE
QUARTER ENDED JUNE 30, 2003
Revenues. The Company, through its subsidiary Windsor Education Academy, Inc.,
("Windsor") achieved revenues of $62,769 in the second quarter of 2004 compared
to $77,933 in the second quarter of 2003 representing net sales of education
courses.
Operating Expenses. The Company incurred operating expenses of $131,232 in the
second quarter of 2004 compared to operating expenses of $111,357 in the second
quarter of 2003. The increase was primarily due to an accrual for a legal
settlement offset by a decrease in salaries and wages expenses and an increase
in general and administrative expenses related to its Windsor Education Academy
operations.
Loss from continuing operations. Loss from continuing operations for the second
quarter of 2004 was $123,146 versus $51,342 for the second quarter of 2003. The
primary contributor to the net loss consisted of the loss in the second quarter
of 2004 from our equity interest in The Link Group, Inc., a publicly traded
company on the OTCBB, of $81,273 versus $17,975 for the same period in 2003.
Loss from discontinued operations. Loss from discontinued operations for the
second quarter of 2004 was $62,142, representing loss on disposal of $41,292 of
our interest in Dawa Business Group Inc. (a Canadian Corporation) ("Dawa"),
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which is engaged in the publication of a weekly Chinese community newspaper and
a monthly magazine featuring education and employment in Vancouver's Chinese
community, plus the loss from discontinued operations from this subsidiary of
$20,850. We owned 51% of the equity in each of Windsor and Dawa, until we
exchanged our 51% interest in Dawa for our 49% interest in Windsor per a Share
Exchange Agreement dated June 30, 2004. For the same period in 2003, loss from
discontinued operations of $89,969 represented the results of the Internet
related services operations in China, which are pending shareholder approval
prior to disposal.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2003
Revenues. The Company, through its subsidiary Windsor, achieved revenues of
$122,915 during the six months ended June 30, 2004, compared to $143,283 in the
same period in 2003 representing net sales of education courses.
Operating Expenses. The Company incurred operating expenses of $211,471 during
the six months ended June 30, 2004, compared to operating expenses of $236,880
during the same period in 2003. The decrease was primarily a result of an
accrual for a legal settlement offset by a decrease in salaries and wages
expenses related to its Windsor operations.
Loss from continuing operations. Loss from continuing operations during the six
months ended June 30, 2004, was $162,551 versus $131,912 for the same period in
2003. The primary contributor to the net loss consisted of the loss during the
six months ended June 30, 2004, from our equity interest in The Link Group, Inc.
of $81,273 versus $44,371 for the same period in 2003.
Loss from discontinued operations. Loss from discontinued operations during the
six months ended June 30, 2004 was $41,654 representing loss on disposal of our
interest in Dawa of $41,292 plus the loss from discontinued operations from this
subsidiary of $362. We owned 51% of the equity in each of Windsor and Dawa,
until we exchanged our 51% interest in Dawa for our 49% interest in Windsor per
a Share Exchange Agreement dated June 30, 2004. For the same period in 2003,
loss from discontinued operations was $322,987, representing the results of the
Internet related services operations in China, which are pending shareholder
approval prior to disposal.
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LIQUIDITY AND CAPITAL RESOURCES
We had cash capital of $4,732,248 as of the quarter ended June 30, 2004. We have
no other capital resources other than the ability to use our common stock to
achieve additional capital raising. Other than cash capital, our other assets
would be illiquid. At the quarter ended June 30, 2004, we had $7,336,720 in
current assets and current liabilities of $7,737,570. The cash capital at the
end of the period of $4,732,248 will be used to fund continuing operations. The
sale of the China DNS assets has provided more than US$2 million in working
capital.
Net cash flows provided by (used in) operating activities decreased to ($32,483)
for the six months ended June 30, 2004 from $2,286,575 for the six months ended
June 30, 2003. The significant change for the year over year results from the
security deposit received in 2003 of $2,415,600 for the sale of our Internet
related operations in China.
Net cash flows provided by (used in) investing activities increased to
$1,462,138 for the six months ended June 30, 2004 from ($4,442) for the six
months ended June 30, 2003, which primarily represents cash acquired in
connection with the acquisition of Quicknet.
Changes in Financial Condition:
At the end of the second quarter of 2004, we had assets of $9,179,260 compared
to $6,320,612 at year-end of 2003. The current assets totaled $7,336,720 at the
end of the second quarter 2004 compared to $5,866,214 at year-end of 2003. Total
liabilities at the end of the second quarter 2004 were $7,737,570 compared to
$5,870,451 at year-end of 2003. At June 30, 2004, the Company had $4,732,248 in
cash compared to $3,303,677 at year-end of 2003.
FUTURE PLANS
On Feb 15, 2004, we entered into a Definitive Agreement to acquire 49% of a
mobile solutions provider in China, Beijing Quicknet Telecommunications Corp.
Ltd. (Beijing Quicknet), from non-affiliates. Management of Beijing Quicknet has
joined our board, and we can consolidate our operations statements. The
acquisition closed on June 23, 2004. We have accumulated about 500,000 corporate
accounts from our previous business activities in China and we expect to
continue pursuing other Internet and mobile related businesses in China. The
acquisition of Beijing Quicknet gives the Company an opportunity to capitalize
in this rapidly growing market and it allows Beijing Quicknet to utilize these
corporate accounts to generate additional revenue streams.
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Currently, we provide mobile marketing solutions for enterprises in China. We
plan to roll out our other market ready solutions such as SMS-based services for
Police departments, mobile banking and office automation services in the Chinese
market in the future. We have offices in Beijing and Shanghai, and we plan to
expand to other major cities in China.
Need for Additional Financing:
We believe we have sufficient capital to meet our short-term cash needs,
including the costs of compliance with the continuing reporting requirements of
the Securities Exchange Act of 1934. However, if losses continue, we may 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
operating expenses.
If future revenue declines, or operations are unprofitable, we will be forced to
develop another line of business, or to finance our operations through the sale
of our existing assets, or enter into the sale of stock for additional capital,
none of which may be feasible when needed. We have no specific management
ability, nor financial resources or plans to enter any other business as of this
date.
From the aspect of whether we can continue toward the business goal of
maintaining and expanding the businesses in Canada and develop new business of
mobile solutions services in China, we may use all of our available capital
without generating a profit.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
Market Risk:
We do not hold any derivatives or investments that are subject to market risk.
The carrying values of any financial instruments approximate fair value as of
those dates because of the relatively short-term maturity of these instruments,
which eliminates any potential market risk associated with such instruments.
FUTURE TRENDS
Education Services: Through our subsidiary Windsor Education Academy, Inc., we
have operated for over a year now and the competition is very fierce in the
market. The Canadian government has tightened its budget on English training for
new immigrants, which leads to reduced government funding for Windsor, which
negatively effects the revenue of Windsor Education Academy. The Canadian
government also adopted a more strict system to choose schools that can be
funded by the government and every school needs to re-register with the
government annually. Windsor has re-registered with the government and the
government funding is extended to the end of 2004. Windsor has submitted an
application for government funding for 2005, but there is no assurance that
Windsor will continue receiving government funding in the coming years.
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Dawa News Business Group Services: On June 30, 2004, we entered into a Share
Exchange Agreement with Windsor Education Academy Inc. ("Windsor"), Dawa
Business Group Inc. ("Dawa") and 1041571 B.C. Ltd. ("1041571"). At the close of
this Share Exchange Agreement, we became the beneficial owner of all of the
issued and outstanding stock of Windsor and we ceased to own any of the common
stock of Dawa. Our board of directors determined that it was in the best
interests of the Corporation to abandon the business of Dawa by disposing all of
the issued and outstanding common stock of Dawa.
Mobile solution business in China: The Chinese economy has been among the
fastest growing in the world for the past several years. Growth is expected to
match this level in 2004. China has one of the largest and fastest-growing
telecom markets in the world, with the mobile phone sector in particular having
become the worlds biggest and the number of the subscribers continuing to grow.
Total SMS (short messaging services) revenues in China grew by 75% in 2003 to
US$248 million. SMS revenue growth in China is projected by Pacific Growth
Equities of San Francisco to be 60% in 2004. As the mobile solutions market
continues to grow, there will be more competitors coming into the market. The
Company may face fierce competition on the price of the products as well as the
increase on human resource cost if the Company wants to maintain a strong
management and technical team. According to the agreement entered between the
Company and Beijing Quicknet, the Company has the option to acquire the
remaining 49% of Beijing Quicknet within 2 years from the Closing Date, which is
June 23, 2004. If the Company exercises the option to purchase the remaining 51%
of Beijing Quicknet within first year from the Closing Date, the purchase price
will be US$4,000,000 (four million US dollars); if the Company exercises the
option to purchase the balance of Beijing Quicknet within the second year from
the Closing Date, the purchase price will be US$5,000,000 (five million US
dollars).
ITEM 3. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time period
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. As of the end of the period covered by this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
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b. Changes in Internal Control over Financial Reporting:
There were no changes in the Company's internal control over financial reporting
identified in connection with the Company evaluation of these controls as of the
end of the period covered by this report that could have significantly affected
those controls subsequent to the date of the evaluation referred to in the
previous paragraph, including any correction action with regard to significant
deficiencies and material weakness.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 7, 2003, we (Xin Net Corp.) were named as a defendant in the Supreme
Court of British Columbia seeking C$40,313 (US$29,744) allegedly due on the
contract between Edward Kheng Yoong Lee, Sidney Pak Lai Ho, Ricky Chung Hou NG,
and Lilian Lee ("Plaintiffs") and XIN NET Corp. for the sale of Windsor
Education Academy, Inc. XIN NET Corp. Both parties agreed on a settlement of no
more than C$40,000 (US$29,513).
Item 2. Changes in securities
The Company issued the following securities during the quarter ended June 30,
2004:
On June 23, 2004, the Company issued 6,120,000 (2,040,000 post-reverse split)
shares of common stock valued at $0.20 ($0.60 post-reverse split) per share in
connection with its acquisition of an equity interest in Beijing Quicknet
Telecommunication Corp. Ltd. The share issuances were made by the Company
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon senior securities - None.
Item 4. Submission of matters to a vote of security holders - None.
Item 5. Other information - None.
Item 6. Exhibits and reports on Form 8-K
(a) The following are filed as Exhibits to this Quarterly Report. The numbers
refer to the Exhibit Table of Item 601 of Regulation S-K:
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Exhibit 31.1 and 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES
OXLEY ACT
Exhibit 32.1 and 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
(b) Reports on Form 8-K filed during the three months ended June 30, 2004, which
are incorporated by reference:
8-K12G3 filed 06-04-04
8-K12G3/A filed 06-24-04
8-K filed 06-25-04
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Dated: August 20, 2004
CHINA MOBILITY SOLUTIONS INC.
by: /s/ Xiaoqing (Angela) Du
----------------------------
Angela Du, President
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