Registration
No. 333-128323
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 10549
AMENDMENT
NO. 2 TO
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Commission
File Number 000-26559
CHINA
MOBILITY SOLUTIONS, INC.
(Name
of
Small Business Issuer in its charter)
|
Florida
(State
or other jurisdiction of incorporation
or organization)
|
7374
Primary
Standard Industrial Classification Code Number
|
330-751560
(I.R.S.
Employer Identification No.)
|
#900
- 789 West Pender Street
Vancouver,
B.C. Canada V6C 1H2
(604)
632-9638
(Address
and telephone number of principal executive offices)
#900
- 789 West Pender Street
Vancouver,
B.C. Canada V6C 1H2
(604)
632-9638
(Address
of principal place of business)
Copies
of
all communications to agent for service should be sent to:
Elliot
H.
Lutzker, Esq.
Phillips
Nizer LLP
666
Fifth
Avenue
New
York,
NY 10103-0084
Telephone:
(212) 977-9700
Facsimile:
(212) 262-5152
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
|
Title
of each class of securities to be registered
|
Amount
to be registered
|
Proposed
maximum offering price per share(1)
|
Proposed
maximum aggregate offering price(1)
|
Amount
of registration fee
|
|||||||||
|
Common
stock, par value, $.001 per share
|
9,571,486(2
|
)
|
$
|
0.57(1
|
)
|
$
|
5,455,747
|
$
|
642.14
|
||||
|
Common
stock, par value, $.001 per share
|
9,571,486(3
|
)
|
$
|
0.57(1
|
)
|
$
|
5,455,747
|
$
|
642.14
|
||||
|
Common
stock, par value, $.001 per share
|
9,571,486(4
|
)
|
$
|
0.57(1
|
)
|
$
|
5,455,747
|
$
|
642.14
|
||||
|
Common
stock, par value, $.001 per share
|
7,178,572(5
|
)
|
$
|
0.57(1
|
)
|
$
|
4,091,786
|
$
|
481.60
|
||||
|
Common
stock, par value, $.001 par share
|
500,000(6
|
)
|
$
|
0.43(7
|
)
|
$
|
215,000(7
|
)
|
$
|
33.54
(8
|
)
|
||
|
Common
stock, par value, $.001 par share
|
1,595,281(9
|
)
|
$
|
0.31(12
|
)
|
$
|
494,537
|
$
|
52.92
|
||||
|
Common
stock, par value, $.001 par share
|
1,595,281(9
|
)
|
$
|
0.31(12
|
)
|
$
|
494,537
|
$
|
52.92
|
||||
|
Common
stock, par value, $.001 par share
|
1,595,281(9
|
)
|
$
|
0.31(12
|
)
|
$
|
494,537
|
$
|
52.92
|
||||
|
Common
stock, par value, $.001 par share
|
1,196,478(10
|
)
|
$
|
0.31(12
|
)
|
$
|
370,908
|
$
|
39.69
|
||||
|
Common
stock, par value, $.001 par share
|
200,000(11
|
)
|
$
|
0.31(12
|
)
|
$
|
62,000
|
$
|
6.63
|
||||
|
Total
|
42,575,351
|
$
|
22,530,546
|
$
|
2,646.64
|
||||||||
(1)
Estimated solely for purposes of calculating the registration fee pursuant
to
Securities Act Rule 457(c), based on the last sale price of the Registrant's
common stock of $0.57 on September 9, 2005 on the Over-the-Counter Bulletin
Board (“OTCBB”).
(2)
Represents shares of common stock underlying the Debentures (“Debenture
Shares”).
(3)
Represents shares of common stock underlying the Class A Warrants (“Warrant
Shares”).
(4)
Represents shares of common stock underlying the Class B Warrants (“Warrant
Shares”).
(5)
Represents shares of common stock underlying the placement agent warrants
(“Agent Warrant Shares”).
(6)
Represents shares of common stock underlying the Options issued to Yim Sheung
Wai (“Option Shares”).
(7)
Estimated solely for purposes of calculating the registration fee pursuant
to
Securities Act Rule 457(c), based on the last sale price of the Registrant's
common stock of $0.43 on May 2, 2005 on the OTCBB in connection with the
filing of the Registration Statement on Form S-8, SEC File #333-124654, on
May
5, 2005.
(8)
$2,408.02 of this fee was paid with the initial filing of this Registration
Statement on September 14, 2005; $33.54 associated with the Option Shares was
paid with the initial filing of the Registration Statement on Form S-8, SEC
File
#333-124654, on May 5, 2005 and the remaining $205.00 was paid with the filing
of this Amendment No. 2 to the Registration Statement on May 8,
2006.
(9)
Represents additional shares of common stock underlying the Debentures, Class
A
Warrants and Class B Warrants issuable pursuant to an April 24, 2006 amendment
(the “April Amendment”) which reduced the Debenture conversion price from $.35
to $.30 per share.
(10)
Represents additional shares of common stock underlying the placement agent
warrants, pursuant to the April Amendment.
(11)
Represents shares of common stock underlying warrants issued to Crystal Research
Associates, LLC (the “Crystal Warrant Shares”).
(12)Based
on the last sale price of the Registrant’s common stock of $0.31 on May 2, 2006
on the OTCBB.
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with Section 8(a) of the Securities Act
of
1933 or until the Registration Statement shall become effective on such date
as
the Commission, acting pursuant to said Section 8(a), may
determine.
-2-
The
information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with
the
Securities and Exchange Commission (the“SEC”) is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to
buy
these securities in any state where the offer or sale is not permitted.
PROSPECTUS
CHINA
MOBILITY SOLUTIONS, INC.
42,574,950
Shares of Common Stock
This
prospectus relates to the resale of 33,500,000 shares of our common stock which
were previously sold by Meyers
Associates, L.P., the placement agent (“Placement Agent” or “Meyers”), on a
“best efforts, all or none basis” (the
“Offering”) on behalf of China Mobility Solutions, Inc. to accredited investors
and institutional investors in a private equity offering, together with
8,374,950 shares of our common stock issuable to Meyers under placement agent
warrants and an additional 500,000 option shares issued to Yim Sheung Wai and
200,000 warrant shares issued to Crystal Research Associates LLC. The shares
may
be offered in transactions conducted on the Over-The-Counter Bulletin Board
("OTCBB")
maintained by the NASD, in privately negotiated transactions or through a
combination of such methods. The shares may be sold at prices relating to the
prevailing market prices, at privately negotiated prices or at other prices,
which may change from time to time and from offer to offer. The distribution
of
the shares by the selling shareholders is not subject to any underwriting or
other agreement.
Our
common stock is currently traded on the OTCBB, under the symbol "CHMS.OB."
On
May 5, 2006, the closing price of our common stock, as reported by the OTCBB,
was $0.29 per
share.
The
shares being offered pursuant to this prospectus involve a high degree of risk.
Persons should not invest unless they can afford to lose their entire
investment. You should carefully read and consider the "Risk Factors" commencing
on page 7 for information that should be considered in determining whether
to
purchase any of the shares.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is ____________ __, 2006
-3-
You
should rely only on the information contained or incorporated by reference
in
this prospectus and in any accompanying prospectus supplement. No one has been
authorized to provide you with different information. The shares are not being
offered in any jurisdiction where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement
is
accurate as of any date other than the date on the front of such
documents.
Government
filings. We are subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we
file annual, quarterly and special reports, proxy statements and other documents
with the SEC. These reports, proxy statements and other documents may be
inspected and copied at the public reference facilities maintained by the SEC
at
100 F Street, NE, Washington, D.C. 20549. You may also obtain copies of such
material by mail from the public reference facilities of the SEC's Washington,
D.C. offices, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on their public reference facilities. In addition, the
SEC
maintains
an
Internet website that contains reports, proxy and information statements
and other information regarding companies, including us, that file
electronically with the SEC. The address of the SEC's web site is
http://www.sec.gov.
-4-
INTRODUCTORY
COMMENTS
Use
of Names
Throughout
this prospectus, the terms "we," "us," "our" and "our company" refer to China
Mobility Solutions, Inc. (or "China Mobility” or “CHMS").
Forward-Looking
Statements
Statements
contained in this prospectus 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
that
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 People’s
Republic of China
(“China”)
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,
|
|
·
|
our
historical losses,
|
|
·
|
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
prospectus and in the documents incorporated by reference in this
prospectus.
|
Persons
reading this prospectus 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
subject
to applicable law.
Our
Company
China
Mobility Solutions, Inc. (“CHMS” or the “Company”) is one of the first companies
to focus on providing mobile solutions to many diverse businesses throughout
China . Through its subsidiary QuickNet Beijing Technology Development Corp.
(“QuickNet”), a
short
message service (“SMS”)
provider in Beijing, China, the Company is presently focused on its mobile
marketing solutions for enterprises. QuickNet is one of the first companies
to
focus on mobile solutions for businesses in China. QuickNet's strategy of
targeting corporate users is aimed at achieving a higher percentage of recurring
revenue and better margins. The Company initially acquired (controlled) 51%
of
QuickNet in June 2004 and indirectly though an affiliate exercised its option
to
acquire the remaining 49% of
the
company by December 31, 2005. See the “Business” section of this
prospectus for further information.
CHMS
launched its mobile marketing services in July 2003 and became cash flow
positive by the end of 2003. However, in accordance with U.S. generally accepted
accounting principles (GAAP), all revenue needs to be deferred for 12 months.
Therefore, the Company had revenues of $1,871,960 from mobile marketing services
in 2004 which increased to $4,703,348 in 2005. The Company’s operating loss
increased from $242,216 in 2004 to $7,979,186 in 2005, primarily as a result
of
the inclusion of the “Fair Value of Warrants Issued” in our August 2005
offering, as well as increases in advertisement, general expenses and salaries
due to the increased sales scale. Investors should read the Company’s financial
statements, especially the accompanying
notes thereto.
In
January 6, 2003, the Company announced the acquisition of Windsor Education
Academy Inc. (“Windsor”),
a Richmond, British Columbia based school specializing in the education and
training field providing English as a second Language (“ESL”) in British
Columbia. The Company’s contract with the government to provide ESL ended on
March 31, 2005.
-5-
CHMS
has
an accumulated customer base of 19,000 clients, and has access to a database
of
about 500,000 corporate enterprises.
This knowledge was gained from its previous Chinese domain name registration
in
its web hosting business.
There
are
almost 400 million cellular phone customers in China, which surpasses the United
States with about 170 million cellular phone customers according to the China
Ministry of Information (“MII”) and Cellular Telecommunications & Internet
Association. Currently, there are about 1 billion SMS sent per day in China,
which accounts for about one-third of the world traffic, according to Anbound
Information Corporation. With the penetration rate just above 20%, however,
there is still considerable room for growth in the Chinese mobile market. This
data is provided by MII. Pacific Growth Equities of San Francisco foresees
500
million mobile phone users in China by 2007.
CHMS’s
first application in mobile marketing is the use of the mobile medium as a
communications and entertainment channel between a brand and an end-user. Mobile
marketing can be used in a wide variety of ways, such as for customer retention,
to raise brand awareness and for advertising purposes. Businesses that purchase
this service will send out messages through the Company’s platform, which has
been connected by Chinese mobile carriers to the targeted customers. All types
of mobile phones may be used for this service.
CHMS
has
a strong management team and successful management record with the previous
development of a profitable internet service company with over 200 employees
and
19 offices across the world.
The
Company will use four outlets to approach the market for its business solutions:
| · |
Agencies
- We have primarily made sales for our mobile marketing services
via
advertising agencies. We have made approximately 91% of such sales
from
advertising agencies. These agencies are paid sales commissions of
between
15% and 20% under contracts with the
Company.
|
| · |
Mobile
Carriers - In the future, we intend to co-market mobile carriers’ mobile
solutions to enterprises and use mobile carriers’ extensive connections
and influence to lead to potentially more
clients.
|
| · |
In-House
Sales Staff - The Company has a database of 500,000 enterprises through
its previous Internet services. Through direct mail, advertising,
telephone calling and SMS, the in-house sales staff of approximately
23
persons will contact many of these
companies.
|
| · |
Sales
support offices - The Company plans to set up small sales support
offices
across China to enhance local presence, provide customer support
and show
responsiveness. Currently, we have offices in Beijing, Shanghai and
Shenzhen.
|
As
discussed under the “Business,” section of the prospectus, the Company will need
to raise a significant amount of additional funds to implement its strategy
of
promoting its mobile solutions to businesses throughout China; establishing
sales support offices in key urban centers in China; developing new solutions
that are being demanded by enterprises; and acquiring other mobile companies
that will deliver synergistic benefits. The Company does not have any binding
commitments for such additional capital as of the date of this prospectus and
no
assurances can be given that it will be able to raise any additional
capital.
The
Company was formed in Florida under the name Placer Technologies, Inc. on
September 6, 1996. On June 11, 1997, the Company purchased a 100% interest
in
Infornet Investment Corp., a British Columbia corporation, which is the
subsidiary that manages daily operations of the Company in China. 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. The Company changed its name to China Mobility Solutions, Inc. in June
2004.
The
Offering
The
Offering of 134 units (“Units”) was for $2 million on a “best efforts - all or
none basis” with an over-subscription of $1,350,000, all $3,350,000 of which was
sold. 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 Company.
Each of the
Debentures was initially convertible at $.35 per share
(however, the conversion was reduced to $.30 per share in April
2006, for 83,333 shares of Common Stock, as adjusted); matures on August 15,
2006; and accrues 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 this registration statement. Each Unit also includes: (i) Class A
Warrants exercisable at $.38 per share, as adjusted, to purchase 83,333 shares
of Common Stock for two years from the Effective Date, but no later than
February 15, 2008; and (ii) Class B Warrants exercisable at $.45 per share,
as adjusted, to purchase 83,333 shares of Common Stock for three years from
the
Effective Date, but no later than February 15, 2009. 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. For additional
information, see “Description of Securities” and “Plan of Distribution”
elsewhere in this prospectus.
-6-
Summary
Financial Information
The
summary financial information set forth below is derived from the more detailed
audited and unaudited financial statements of China Mobility appearing elsewhere
in this prospectus. This information should be read in conjunction with such
financial statements, including the notes to such financial statements.
|
Statement
of Operations Data:
|
||||||||||||||||
|
Year
Ended
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
Revenue
|
$
|
4,902,628
|
$
|
2,170,766
|
$
|
280,723
|
$
|
0
|
$
|
0
|
||||||
|
Cost
of revenue
|
1,427,291
|
473,235
|
134,340
|
0
|
0
|
|||||||||||
|
Operating
expenses
|
11,454,523
|
1,939,747
|
337,093
|
191,269
|
298,525
|
|||||||||||
|
Interest
income
|
84,932
|
82,602
|
15,066
|
1,272
|
43,281
|
|||||||||||
|
Other
income (expenses)
|
20
|
10,272
|
(58,398
|
)
|
(463,747
|
)
|
0
|
|||||||||
|
Loss
before minority interest and discontinued operations
|
(9,024,984
|
)
|
(230,615
|
)
|
(234,042
|
)
|
(653,744
|
)
|
(255,244
|
)
|
||||||
|
Provision
for minority interest
|
(138,469
|
)
|
(28,157
|
)
|
26,046
|
0
|
0
|
|||||||||
|
Gain
(loss) from discontinued operations
|
(9,163,453
|
)
|
(258,772
|
)
|
(106,281
|
)
|
(254,035
|
)
|
(1,255,659
|
)
|
||||||
|
Net
Income (loss)
|
($9,163,453
|
)
|
$
|
3,018,672
|
($314,277
|
)
|
($907,779
|
)
|
($1,510,903
|
)
|
||||||
|
Net
gain (loss) per basic and diluted shares
|
($0.52
|
)
|
$
|
0.20
|
($0.02
|
)
|
($0.04
|
)
|
($0.07
|
)
|
||||||
|
Weighted
average number of common shares outstanding
|
17,633,162
|
14,856,834
|
13,786,670
|
24,757,270
|
21,360,010
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
Current
assets
|
$
|
6,412,893
|
$
|
5,466,574
|
$
|
5,869,782
|
$
|
3,460,530
|
$
|
3,549,864
|
||||||
|
Total
assets
|
11,222,363
|
$
|
6,447,030
|
$
|
6,320,612
|
$
|
3,918,160
|
$
|
3,753,612
|
|||||||
|
Current
liabilities
|
6,765,295
|
$
|
2,452,522
|
$
|
5,870,451
|
$
|
3,176,765
|
$
|
3,104,368
|
|||||||
|
Minority
interest
|
$
|
0
|
$
|
32,791
|
$
|
38,147
|
$
|
0
|
$
|
0
|
||||||
|
Total
liabilities and minority interest
|
6,765,295
|
$
|
2,485,313
|
$
|
5,908,598
|
$
|
3,176,765
|
$
|
3,104,368
|
|||||||
|
Stockholders'
equity
|
4,457,068
|
$
|
3,961,717
|
$
|
412,014
|
$
|
741,395
|
$
|
649,244
|
|||||||
Our
Common Stock is traded on the OTCBB under the symbol CHMS.OB. Material filed
by
us can also be inspected and copied at the offices of the NASD, located at
9509
Key West Avenue, Rockville, MD 20850-3329.
We
will
distribute annual reports to our stockholders, including financial statements
examined and reported on by independent certified public accountants. We also
will provide you without charge, upon your request, with a copy of any or all
reports, proxy statements and other documents we file with the SEC, as well
as
any or all of the documents incorporated by reference in this prospectus or
the
registration statement we filed with the SEC registering for resale the shares
of our common stock being offered pursuant to this prospectus, other than
exhibits to such documents unless such exhibits are specifically incorporated
by
reference into such documents. Requests for such copies should be directed
to
Angela Du, the Company’s Chief Executive Officer at China Mobility Solutions,
Inc., #900 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2, telephone:
(604) 632-9638; URL:
www.chinamobilitysolutions.com.
We
have
filed a registration statement on Form SB-2 with the SEC registering under
the
Securities Act the common stock that may be distributed under this prospectus.
This prospectus, which is a part of such registration statement, does not
include all the information contained in the registration statement and its
exhibits. For further information regarding us and our common stock, you should
consult the registration statement and its exhibits.
Statements
contained in this prospectus concerning the provisions of any documents are
summaries of those documents, and we refer you to the documents filed with
the
SEC for more information. The registration statement and any of its amendments,
including exhibits filed as a part of the registration statement or an amendment
to the registration statement, are available for inspection and copying as
described above.
Notice
to California Residents:
Sales
in
the state of California are limited to investors with a combined annual income
of $65,000 and a net worth of $250,000 or a minimum net worth of $500,000,
exclusive of homes, furnishings and automobiles or accredited investors as
such
term is defined in Rule 501 of Regulation D of
the
Securities Act.
-7-
RISK
FACTORS
The
securities offered hereby are speculative, involve a high degree of risk and
should only be purchased by persons who can afford to lose their entire
investment. Prospective purchasers should carefully consider, among other
things, the following risk factors relating to the business of the Company
and
this Offering prior to making any investment. These risk factors are summary
in
nature and are not intended to be exhaustive or set forth all the possible
risks
and uncertainties that may be associated with purchasing or owning this
investment. You are strongly urged to consult with professional financial
advisors, accountants, and lawyers in evaluating this investment and making
an
independent and informed decision about whether or not to invest your money
in
this Offering.
Risks
Relating to Our Operations
Need
for additional financing.
Unless
a
substantial portion of the Debentures from the Offering are converted into
Common Stock, we will need additional funds to repay such Debentures and fully
implement our business plan. Management can give no assurance that
any 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 substantial
prior operating losses and are implementing a new business
plan.
The
Company had substantial
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 become 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 for 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 promotional 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
lack business diversification.
As
a
result of the
Company’s 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 the sale of equity or debt securities in order to raise
additional capital, none of which may be feasible when needed. Unless we are
able to raise more money than we did in the 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.
-8-
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 its revenue. There is no
assurance that Windsor 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 Offering were unsecured 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. If we have to repay a substantial amount of the
Debentures our cash resources are not currently adequate to fund our intended
future operations and there can be no assurance that we will ever have such
resources.
While
we
have the cash on hand to repay the debenture holders, 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 their 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 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 governmental 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.
-9-
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
our current mobile solution services in China. Moreover, we must ensure that
the
quality and content of our services will comply with related rules and
regulations. Although we already have this license, it requires an annual
renewal from the applicable
governmental body.
MII
and/or other related authorizations might perform spot checks to track and
supervise the quality and content of our services. Any
determination that our services fail to comply with applicable rules and
regulations could result in a revocation of our license, which would have a
material adverse effect on our business.
China’s
changing economic environment may impact our ability to do business in
China.
Since
1978, the Chinese government has been reforming the economic system in China
to
increase the emphasis placed on decentralization and the utilization of market
forces in the development of China’s economy. These reforms have resulted in
significant economic growth. However, any economic reform policies or measures
in China may from time to time be modified or revised by the Chinese government,
at their discretion. While we may be able to benefit from the
effects of some of these policies, these policies and other measures taken
by
the Chinese government to regulate the economy could also have a significant
negative impact on economic conditions in China, which would result in a
negative impact on our business.
China’s
economic environment has been changing as a result of China’s entry, in
December of 2001, into the World Trade Organization (the “WTO”). Entry into
the WTO required that China reduce tariffs and eliminate non-tariff barriers,
including quotas, licenses and other restrictions by early 2005, and we cannot
predict the impact of these changes on China’s economy. Moreover, although
China’s entry into the WTO and the related relaxation of trade restrictions may
lead to increased foreign investment, it may also lead to increased competition
in China’s markets from other foreign companies. If China’s entry into the WTO
results in increased competition or has a negative impact on China’s economy,
our business could suffer. In addition, although China is increasingly according
foreign companies and foreign investment enterprises established in China the
same rights and privileges as Chinese domestic companies as a result of its
admission into the WTO, special laws, administrative rules and regulations
governing foreign companies and foreign investment enterprises in China may
still place foreign companies at a disadvantage in relation to Chinese domestic
companies and may adversely affect our competitive position.
Uncertainties
with respect to the Chinese legal system may adversely affect
us.
We
conduct our business in China primarily through our subsidiary incorporated
in
China. Our subsidiary is generally subject to laws and regulations applicable
to
foreign investment in China. Accordingly, our business will be affected by
China’s developing legal system. Since 1978, many new laws and regulations
covering general economic matters have been promulgated in China, and government
policies and internal rules promulgated by governmental agencies may not be
published in time, or at all. As a result, we may operate our business in
violation of new rules and policies without having any knowledge of their
existence. In addition, there are uncertainties regarding the interpretation
and
enforcement of laws, rules and policies in China. The Chinese legal system
is based on written statutes, and prior court decisions have limited
precedential value. Because many laws and regulations are relatively new and
the
Chinese legal system is still evolving, the interpretations of many laws,
regulations and rules are not always uniform. Moreover, the relative
inexperience of China’s judiciary in many cases creates additional uncertainty
as to the outcome of any litigation, and the interpretation of statutes and
regulations may be subject to government policies reflecting domestic political
changes. Finally, enforcement of existing laws or contracts based on existing
law may be uncertain and sporadic, and it may be difficult to obtain swift
and
equitable enforcement, or to obtain enforcement of a judgment by a court of
another jurisdiction. Any litigation in China may be protracted and result
in
substantial costs and diversion of resources and management’s attention.
We
are subject to risks relating to currency rate fluctuations and exchange
controls.
Because
most of our sales are made in China and denominated in Renminbi (“RMB”), as
such, the impact of currency fluctuations of RMB thus far has been insignificant
as it is fixed to the U.S. dollar. However, in the future, China could choose
to
revalue the RMB versus the U.S. dollar, or the RMB-U.S. dollar exchange rate
could float, and the RMB could depreciate or appreciate relative to the U.S.
dollar. In such event, currency rate fluctuations could adversely affect our
sales, cost of revenues and profit margins, as well as our net income, and
subject us to volatility in our financial reporting. Very limited hedging
transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions to
reduce our exposure to foreign currency exchange risk.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Because
substantially all of our revenues are denominated in RMB, any restrictions
on
currency exchange may limit our ability to use revenues generated in RMB to
fund
any business activities we may have outside China or to make dividend payments
in U.S. dollars. The principal regulation governing foreign currency
exchange in China is the Foreign Currency Administration Rules (1996), as
amended. Under these rules, RMB are freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment,
loan or investment in securities outside China unless the prior approval of
the
State Administration of Foreign Exchange is obtained. Although the China's
government regulations now allow greater convertibility
of RMB for current account transactions, significant restrictions still remain.
For example, foreign exchange transactions, including principal payments in
respect of foreign currency-denominated obligations, remain subject to
significant foreign exchange controls and the approval of the State
Administration of Foreign Exchange. These limitations could affect our ability
to obtain foreign exchange for capital expenditures. We cannot be certain that
the China's regulatory authorities will not impose more stringent
restrictions on the convertibility of RMB, especially with respect to foreign
exchange transactions.
-10-
Our
business benefits from certain tax incentives, and changes to these tax
incentives could adversely affect our operating results.
The
Chinese government has provided various tax incentives to domestic high
technology companies, including our Chinese subsidiaries, in order to encourage
the development of technology companies. There have been various tax reform
proposals in China, and if any of these incentives are reduced or eliminated
by
government authorities in the future, the effective tax rates of our
subsidiaries in China and our effective tax rates on a consolidated basis could
increase significantly. Any such change could adversely affect our operating
results.
Recent
Chinese
regulations relating to acquisitions of Chinese
companies by foreign entities may limit our ability to acquire
such companies and adversely affect our business and
prospects.
China's State
Administration of Foreign Exchange, or SAFE, issued a public notice in January
2005 concerning foreign exchange regulations on mergers and acquisitions in
China. The public notice states that if an offshore company controlled by Chinese residents
intends to acquire a Chinese company,
such acquisition will be subject to strict examination by the relevant foreign
exchange authorities. The public notice also states that the approval of the
relevant foreign exchange authorities is required for any sale or transfer
by
the Chinese
residents of a Chinese company’s
assets or equity interests to foreign entities, such as us, for equity interests
or assets of the foreign entities.
In
April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a Chinese company
by an offshore company controlled by Chinese residents
has been confirmed by a Foreign Investment Enterprise Certificate prior to
the
promulgation of the January notice, the Chinese residents
must each submit a registration form to the local SAFE branch with respect
to
their respective ownership interests in the offshore company, and must also
file
an amendment to such registration if the offshore company experiences material
events, such as changes in the share capital, share transfer, mergers and
acquisitions, spin-off transaction or use of assets in China to guarantee
offshore obligations. The April notice also provides that failure to comply
with
the registration procedures set forth therein may result in a restriction on
the
Chinese company’s
ability to distribute profits to its offshore parent company. Pending the
promulgation of detailed implementation rules, the relevant government
authorities are reluctant to commence processing any registration or application
for approval required under the SAFE notices. We have requested our relevant
shareholders to complete the SAFE registration procedures as soon as
practicable.
As
it is
uncertain how the SAFE notices will be interpreted or implemented, we cannot
predict how they will affect our business operations or future strategy. For
example, we may be subject to more stringent review and approval process with
respect to our foreign exchange activities, such as remittance of dividends
and
foreign-currency-denominated borrowings, which may adversely affect our results
of operation and financial condition. In addition, if we decide to acquire
a
Chinese company,
we cannot assure you that we or the owners of such company, as the case may
be,
will be able to complete the necessary approval, filings and registrations
for
the acquisition. This may restrict our ability to implement our acquisition
strategy and adversely affect our business and prospects.
Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations, financial
condition and results of operations.
In
the
first half of 2003, China and certain other countries experienced an outbreak
of
a new and highly contagious form of atypical pneumonia known as SARS. The SARS
outbreak damaged the economy of China as a whole. On July 5, 2003, the
World Health Organization declared that SARS had been contained. Any recurrence
of SARS or other adverse public health developments in China may have an adverse
effect on our business operations, financial condition and results of
operations. For instance, health or other government regulations may require
temporary closure of our offices, which will severely disrupt our business
operations. We have not adopted any written preventive measures or contingency
plans to combat any future outbreak of SARS or any other epidemic.
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 Articles 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.
-11-
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 the increase was that management did not believe it
had
sufficient shares for future growth, including potential acquisitions. However,
the Board of Directors has 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 may 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. This
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 Offering and/or
exercise of outstanding options 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 11,166,667 shares of Common Stock as adjusted,
and exercise their Warrants for an aggregate of 22,333,334 shares of Common
Stock, as adjusted. 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.
As
of April 30, 2006, the Company had an aggregate of 660,000 options
and no warrants outstanding, exclusive of those issued in the Offering.
Pursuant to a Settlement Agreement entered into on April 24, 2006, the Company
agreed that it will not file a new S-8 Registration Statement prior to 45 days
from the effective date of this prospectus. 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 favorable to us than the exercise terms provided
by
the outstanding options and warrants.
If
we do not keep a registration statement current, your ability to sell the
Debenture Shares and Warrant Shares will be limited.
We
must
keep a registration statement such as the one of which this prospectus is a
part
effective with the SEC in order for you to receive registered stock upon the
exercise of your warrants as well as to freely sell the Debenture Shares and
Warrant Shares. We may not be able to maintain a registration statement in
effect throughout the period during which the debentures remain convertible
and
the warrants remain exercisable. Maintaining an effective registration statement
requires substantial continuing expenses for legal and accounting fees and
we
cannot guarantee our ability to keep the registration statement effective.
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 commencing 6 months
and
12 months from the Effective Date of this Registration Statement with respect
to
the Class A Warrants and Class B Warrants, respectively. 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 be 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.
-12-
Difficulty
of trading and obtaining quotations for Common Stock.
Our
Common Stock is currently quoted on the 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 retain 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 SEC 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.
-13-
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 against it. 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 that 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. 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.
CHANGES
IN ACCOUNTANTS
On
December 22, 2004,
the
Company engaged Moen & Company (“Moen”) to act as the principal accountant
to audit China Mobility’s financial statements. Clancy
and Co., P.L.L.C. ("Clancy and Co., P.L.L.C.") was the Company’s independent
auditor and examined the financial statements of the Company for the fiscal
years ended December 31, 2003 and 2002 and the subsequent interim periods until
December 22, 2004. On
that
date, the Board of Directors approved the dismissal of Clancy and Co., P.L.L.C.
("Clancy and Co., P.L.L.C.") as China Mobility's independent public accountants
and the selection of Moen and Company as their replacement.
Clancy
and Co., P.L.L.C.'s reports on the consolidated financial statements of China
Mobility and its subsidiaries for the two most recent fiscal years ended
December 31, 2003 and 2002 did not contain any adverse opinion or disclaimer
of
opinion, nor were they qualified or modified as to uncertainty, audit scope,
or
accounting principles.
During
China Mobility's two most recent fiscal years ended December 31, 2003 and 2002
and the subsequent interim period through December 22, 2004, there were no
disagreements between China Mobility and Clancy and Co., P.L.L.C. on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to Clancy
and
Co., P.L.L.C.'s satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their reports on China
Mobility's consolidated financial statements for such years; and there were
no
reportable events as described in Item 304(a)(1)(iv) of Regulation S-K. China
Mobility provided Clancy and Co., P.L.L.C. with a copy of the foregoing
disclosures.
During
China Mobility's two most recent fiscal years ended December 31, 2003 and 2002
and the subsequent interim periods through December 22, 2004, China Mobility
did
not consult with Moen and Company with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the
type
of audit opinion that might be rendered on China Mobility's financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
We
will
not receive proceeds from the resale of Shares offered hereby by the Selling
Stockholders. Any proceeds from the exercise of Warrants will be used for
general corporate purposes.
-14-
China
Mobility Common Stock has traded on the OTCBB under the symbol "CHMS.OB" since
July 24, 1998. The following table sets forth the high and low closing bid
prices for the Common Stock, as reported by Pink Sheets, LLC for the periods
indicated below. The following quotations represent prices between dealers
and
do not include retail markups, markdowns or commissions. They do not represent
actual transactions and have not been adjusted for stock dividends or splits.
| High | Low | |
|
Second
Quarter
(April
1 -
April 30, 2006)
|
$.39 | $.26 |
|
First
Quarter
|
$.37 | $.25 |
|
2005
|
||
|
Fourth
Quarter
|
$.67 | $.32 |
|
Third
Quarter
|
$.73 | $.36 |
|
Second
Quarter
|
$.70 | $.38 |
|
First
Quarter
|
$.59 | $.38 |
|
2004
|
||
|
Fourth
Quarter
|
$.68 | $.18 |
|
Third
Quarter
|
$.65 | $.16 |
|
Second
Quarter
|
$1.01 | $.09 |
|
First
Quarter
|
$.27 | $.10 |
As
of May 4, 2006,
there were 163 holders of record of our Common Stock. On May 5, 2006, the
closing price of our Common Stock was $0.29 per
share.
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. (Quicknet), the Company’s
subsidiary in China. The purchase price of US$4,000,000 was paid in two
installments. The Company now directly and indirectly owns and controls 100%
of
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 shares of Common Stock 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.
-15-
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 campaigns, sign up with
more
agents, both domestic and international and provide marketing materials and
financial support to those agents.
The
Company will focus on Mobile Solution Services and use limited working capital
for 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
Quicknet gives the Company an opportunity to capitalize in this rapidly growing
market, and it also gives the chance for 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 December 31, 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 the Company 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 fiscal year end 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 were $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
Stock
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 were initially convertible at $.35 per share for 71,429 shares of
Common Stock (as adjusted below); 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, of which this Prospectus forms a part, 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;
and breach of any representation or warranty made in this
transaction.
In
January, 2006, the Company received a 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).
-16-
The
Company denied that it was in default of the Transaction Agreements; however,
in
order to avoid costly litigation and to remove any uncertainly from the public
offering to be made by this prospectus the parties entered into a settlement
agreement as of April 24, 2006. The notice of default was withdrawn and the
Company agreed not to file any S-8 Registration Statement prior to 45 days
after
the Effective Date. The initial conversion price of the Debentures was reduced
to $.30 per share and the Class A Warrant exercise price of 125% of the
Conversion Price was reduced from $.44 to $.38 and the Class B Warrant exercise
price of 150% of the Conversion Price was reduced from $.52 per share to $.45
per share. The number of shares of Common Stock exercisable upon conversion
of
the Debenture and upon exercise of the Class A and Class B Warrants determined
by dividing the purchase price per Unit of $25,000 by the conversion price
was
increased from 71,429 shares for each to 83,333 shares for each of the
Debenture, Class A Warrants and Class B Warrants on an aggregate of 250,000
shares per Unit.
The
Company has revenues from its mobile marketing services and other mobile
solutions through QuickNet and tuition fees from 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 that
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 and 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.
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 increasing 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
shares of Common Stock 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 Exchange Act, 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 operating
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.
The
Company may use all of its available capital to continue toward the
business goal of maintaining and expanding the business in Canada and developing
the business of mobile solution services in China.
The
effect of inflation has not had a material adverse impact on its operation,
nor
is it expected to in the immediate future.
-17-
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, which typically lasts for a period of three weeks. Therefore,
in effect, the first quarter 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.
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.
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 was ($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 $6,891486. Operating earnings in 2005 were
($0.52) per share compared to a loss of ($0.02) per share in 2004.
-18-
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
its
revenue. The Government-supported ELSA courses held at Windsor 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.
-19-
China
Mobility Solutions, Inc. (“CHMS” or the “Company”) is one of the first companies
to focus on providing mobile solutions to many diverse businesses throughout
China. Through its subsidiary QuickNet, short message service (“SMS”) provider
in Beijing, China, the Company is presently focused on its mobile marketing
solutions for enterprises. QuickNet is one of the first companies to focus
on
mobile solutions for businesses in China. QuickNet's strategy of targeting
corporate users is aimed at achieving a higher percentage of recurring revenue
and better margins. The Company initially acquired (controlled) 51% of QuickNet
in June 2004 and exercised its option to acquire the remaining 49% by December
31, 2005. See the “Business” section of this Prospectus for further
information.
CHMS
launched its mobile marketing services in July 2003 and became cash flow
positive by the end of 2003. However, in accordance with GAAP, all revenue
needs
to be deferred for 12 months. Therefore, the Company had revenues of $1,871,960
from mobile marketing services in 2004 which increased to $4,703,348 in 2005.
The Company’s operating loss increased from $242,216 in 2004 to $7,979,186 in
2005, primarily as a result of the inclusion of the “Fair Value of Warrants
Issued” in our August 2005 Offering, as well as increases in advertisement,
general expenses and salaries due to the increased sales scale. Investors
should
read the Company’s financial statements, especially the notes thereto.
Prior
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 stock 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 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’s structure showing its subsidiaries is as follows, with the
jurisdiction of incorporation of each subsidiary included in
parentheses:
(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.
-20-
Through
its wholly owned subsidiary, Infornet Investment Ltd. (Hong Kong), the Company
formed a joint venture with Xin Hai Technology Development Ltd. for upgrading
telecommunication technology and services in China. This evolved into an
internet-focused service provider and e-commerce solutions business. However,
the Company decided in May 2001 to focus its business in China on domain
name
registration and web-hosting services and to discontinue Internet access
provision services. On June 22, 2001, the Company entered into an agreement
to
sell its ISP assets (Xin Hai). The price for the sale was $700,000 (USD)
payable
to the Company in Renminbi at the official exchange rate. As of December
31,
2003, $500,000 had been received for the transaction. A loss provision of
$200,000 was made against the balance of the sales price as the Company
determined that the purchaser will not be able to pay the remaining balance.
Since
the
Company started its Internet-related business in China, it has seen rapid
growth
in Internet use in China; but it has also seen an equal, if not greater,
growth
in companies entering this arena. As a result, the industry experienced severely
reduced operating margins and continued losses. Although the Company was
considered an early leader in the domain name registration field, due to
the
lack of adequate funding, future growth potential against the many competitors
was limited at best. The Company had struggled for several years to break
even
and was hoping for required funding to grow, but the plan was nullified when
the
funding failed to materialize. Now, as China has become more and more open
according to the terms of the World Trade Organization, the world's largest,
well-funded companies have been given access to the China market and have
seriously compromised the Company's competitive position.
In
February 2003, the Company signed an agreement to sell the Company's China
assets (domain name registration) to a subsidiary of Sino-i.com Limited,
a Hong
Kong Stock Exchange listed company, for a total consideration of RMB 20 million
(approx. US$ 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 Chinese
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 a 49% interest.
-21-
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 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 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 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 China 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.
-22-
PRODUCTS,
SERVICES, MARKETS AND METHODS OF DISTRIBUTION
Mobile
Solutions: Quicknet in China
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
|
| · |
For
customer retention
|
| · |
For
loyalty building
|
| · |
As
a sales promotion tool
|
| · |
To
support product launches
|
| · |
To
raise brand awareness
|
| · |
For
internal communications
|
| · |
As
a redemption / coupon tool
|
| · |
For
direct marketing
|
| · |
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
|
Mobile
marketing is growing in popularity. In Asia, eMarketer reports that 39% of
mobile phone users have received SMS messages from advertisers, 36% in Europe
and only 8% in the U.S. These figures point to a strong and growing trend
among
advertisers to embrace mobile marketing in different parts of the world and
for
consumers to be fairly receptive to it.
A
study
by Jupiter Research confirmed the effectiveness of SMS advertising. SMS has
shown to be more than twice as effective as direct mail. An average SMS campaign
generates a 15% response rate, compared with less than half that amount for
direct mail. The survey also found that 94% of all advertising text messages
are
read. Furthermore, 23% are forwarded or shown to other users. As a result
an
average of 8% reply to the text message and 6% visit a Web site mentioned
in the
text.
Some
consumers will tolerate ads and some will not. The issue of spam is one that
is
being addressed in the U.K. and the U.S. by the Mobile Marketing Association
and
by the Ministry
of Information Industry (“MII”)
in China. "All disturbing SMS should be eradicated to help standardize the
market and ensure the healthy development of the industry," said Chen Jinqiao,
director of the Chinese Academy of Telecommunications Research under the
MII.
By
keeping messages small, by providing a benefit to the receiver, and by sending
to companies that are already in China Mobility Solution's database, the
Company is
avoiding the perception that the messages it sends for its clients are "spam."
Recent research conducted by the Wireless Internet Panel in Europe indicates
that consumers’ first reaction is to reject SMS advertising. However 64% of the
same respondents changed their attitude if the SMS advertisements offered
the
candidate some benefit (e.g., provides information, inform receivers of
promotions). The best way for marketers to distance themselves from spam,
according to the Mobile Marketing Association, is to give consumers choice,
control, constraint and confidentiality while insuring that they only receive
relevant information.
The
Management of China Mobility Solutions is drawing upon successful examples
of
SMS advertising in other countries to make its offerings in China more valuable
to its clients and well received by mobile phone users.
Some
examples of positive SMS campaigns include:
| · |
In
London, successful trials were held of a location based taxi-hailing
service using GPS and mobile triangulation technologies. The solution
included voice taxi hailing plus SMS customer recruitment, driver
and
customer CRM.
|
| · |
Since
launching its mobile marketing services July 2004, the Company
has served
over 17,000 customers and had collected about US$4 million in sales
from
customers in 2004.
|
-23-
China
Mobility Solutions' new market-ready solutions
China
Mobility is
working in cooperation with China’s major mobile carriers, China Unicom and
China Mobile, to provide mobile solutions for corporate customers.
Chinese
companies in many different industries have a need for mobility services.
Only
telecom VAS providers have access to mobile carrier networks, so most of
the 30
million enterprises in China could not be able to access mobile carriers
networks, thus creating a demand for a “hub” that China Mobility has
already built for Chinese companies. Rather than creating their own platforms
to
access the carriers' networks (and thus the country's cellular population),
the
companies will be able to access China Mobility Solutions’ platform for a fee.
China Mobility Solutions will act as the link between the companies and the
carriers.
The
Company’s platform has been developed using the C programming language to
facilitate high speed, create a more stable system, secure intellectual property
rights protection, and provide complicated functions. The platform can be
connected to using WAP or GPRS on digital GSM and CDMA networks. The platform
is
compatible with the carriers' networks, as it supports all bands - GSM, CDMA,
GPRS and future 3G.
The
following diagram illustrates the architecture of our platform:
China
Mobility Solutions' Platform Architecture
China
Mobility Solutions’ platform is aimed at providing a solution for clients to
access their staff, customers, suppliers and partners to obtain information
from
their mobile phones without having to develop the technology themselves. The
end
users can load, edit, delete, read and share corporate information.
The
Company’s technical team has successfully completed the technology to offer
business solutions in four additional areas as well.
These
are:
| · |
Office
Automation Solutions
|
| · |
Mobile
Banking
|
| · |
Mobile
Tax Services
|
| · |
SMS-based
Services for Police
|
China
Mobility Solutions will receive annual fees for providing corporate clients
with
access to its technology/hub and for providing a certain amount of airtime.
The
mobile carrier will bill users a traffic fee for each SMS sent over its
network.
The
sending of clients’ information will generate significant SMS traffic over the
mobile phone networks. As a result, China Mobility Solutions will become
increasingly important to the mobile carriers in China.
-24-
Descriptions
of each type of service offering are below:
Office
Automation Solutions
| Status: | Market Ready |
| Costs to Launch: | 4 million RMB (US$480,000) for fixed assets and marketing |
| Steps to Launch: | Raise funds, approach companies through agents |
| Target Market: | Small, medium and large businesses |
| Fee Per Year to Client: | 5,000 RMB (US$600) |
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 inquiries 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.
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.
-25-
Mobile
Banking
| Status: | Market Ready |
| Costs to Launch: | 1.5 million RMB (US$180,000) for fixed assets and marketing |
| Steps to Launch: | Raise funds, approach banks through agents |
| Target Market: | Customers of banks |
| Fee Per Year to Client: | 3,000 RMB (US$360) |
Our
mobile solutions will allow customers of bank to check their account
information, make transactions and be informed of new services.
Information
that can be accessible via SMS includes account balances, recent transactions,
interest rates and exchange rates.
Customers
will be able to transfer funds between their bank accounts, make bill payments
and report lost or stolen cards.
Business
customers of checks will be able to certify checks through their mobile
phones.
SMS-based
Services for Police
| Status: | Market Ready |
| Costs to Launch: | 1.25 million RMB (U$150,000) for fixed assets and marketing |
| Steps to Launch: | Raise funds, approach police departments |
| Target Market: | Police Departments |
| Fee Per Year to Client: | 5,000 RMB (US$600) |
There
are
several functions that police stations will be able to perform through their
cell phones once they implement our solution.
For
example, the departments will be able to provide information on fines and fine
payments, and deliver traffic information.
The
mobile solution of the Company will also be beneficial for force management,
specifically through location-based tracking and monitoring of officers and
police cars.
The
solution provided to the police stations will also include the base components
of our Office Automation package.
-26-
Mobile
Tax Services
| Status: | Market Ready |
| Costs to Launch: | 1.25 million RMB (U$150,000) for fixed assets and marketing |
| Steps to Launch: | Raise funds, approach tax offices |
| Target Market: | Tax Offices |
| Fee Per Year to Client: | 2,000 RMB (US$240) |
This
solution will be similar to our Office Automation package, but will be tailored
to government tax offices.
Tax
offices will be able to provide and manage messages to staff and to tax
filers.
Customer
support will be a key function enhanced by our solution, as the offices will
be
able to send out notices about filing deadlines and respond to people's
inquiries.
Tax
officers will be able to submit and access tax reports by cell phone, even
when
away from their offices.
Education
and Training
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 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 the Chinese market.
Method
of
Distribution and Marketing: Education
Windsor uses
the
printed media as well as recruitment agents to attract students. Word of
mouth
is also an important endorsement.
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.
Competition
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 largest, 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 because the individual market is very saturated
and
there are a large number of large and small competitors and 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.
-27-
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 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.
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.
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 China may be adversely affected by significant
political, economic and social uncertainties in China. Any changes in policies
by the government of China 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.
Employees
At
March
31, 2006, QuickNet had approximately 75 employees. About 41% are technical
support, 20% are in sales and marketing, 25% 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
March
31, 2006, Windsor had six employees, consisting of three full and part time
teachers and three administrative personnel. The key to success is the ability
to attract students. The number of employees will change as the students
change.
There is no collective bargaining unit at the academy.
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 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.
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 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.
-28-
MANAGEMENT
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table furnishes the information concerning the Company’s directors and
executive officers as of the date of this prospectus.
|
Name
|
Age
|
Position
|
|
Xiao-qing
Du
|
36
|
President
and Director
|
|
Ernest
Cheung
|
55
|
Director
and Secretary
|
|
Greg
Ye
|
36
|
Director
|
|
Bryan
Ellis
|
34
|
Director
|
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.
Identification
of Certain Significant Employees.
Strategic
matters and critical decisions are handled by the Company’s 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. Xiao-qing Du
and Xin
Wei are husband and wife.
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 36.
Ms.
Du
has been President and a 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 and a director 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 Company since January 1997.
-29-
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 34.
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.
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.
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 the Company’s Annual Report on Form 10-KSB for December 31, 2005.
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.
-30-
Executive
Compensation
The
following table sets forth compensation paid by the Company for all services
provided during the three fiscal years ended 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,
|
2005
|
10,129
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
President
of
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
330,000(1)
|
|
Infornet
Subsidiary
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernest
Cheung,
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Secretary
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
165,000(2)
|
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
as a group
|
2005
|
10,129
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
495,000
|
|
|
2003
|
0
|
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
|
165,000
|
0
(1)
|
0
(1)
|
0
|
||
(1) The
closing price for the Common Stock of the Company on December 31, 2005 was
$0.33.
-31-
Long-Term
Incentive Plant (“LTIP”) Awards Table - None
The
following table sets forth compensation paid by the Company for all services
rendered during the three fiscal years ended December 31, 2005 to each director
and all directors as a group.
|
Summary
Compensation Table of Directors
|
|||||||||
|
Cash
Compensation
|
Security
Grants
|
||||||||
|
Name
and Principal Position
|
Year
|
Annual
Retainer Fees ($)
|
Meeting
Fees ($)
|
Consulting
Fees/Other Fees ($)
|
Number
of Shares
|
Securities,
Underlying Options/SARs (#) (SHARES)
|
LTIP
Payments
|
All
other Compensation
|
|
|
Xiao-qing
Du,
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
Director
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernest
Cheung,
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
Director
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maurice
Tsakok
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
Director
(1)
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
(Resigned
2004)
|
2003
|
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
|
2005
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
2004
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
|
|
2003
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
(1)
On
July 15, 2004, Maurice Tsakok resigned as a Director of the
Company.
*
See
Executive Compensation Table.
-32-
Directors'
Compensation
Directors
who are also officers of China Mobility 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
(g)
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 (the “2006 Plan”)
on November 2, 2005, and filed a Registration Statement on Form S-8 with
the SEC
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.
-33-
2005
Employee Stock Option Plan
The
Company adopted a 2005 Stock Option Plan (the “2005 Plan”) on May 3, 2005, and
filed a Registration Statement on Form S-8 with the SEC on May 5, 2005, to
register options and shares underlying options granted under the Plan. The
Board
of Directors administered the 2005 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 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 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 2005
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 SEC. 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.
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.
PRINCIPAL
STOCKHOLDERS
Section
13(d) of 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 SEC. 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
rights.
Based
upon such reports as of December 31, 2005, 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)(2)
|
1,250,000
|
6.25%
|
|
Common
Stock
|
Richco
Investors, Inc.(1)
|
1,137,999
(3)(5)
|
5.69%
|
|
Common
Stock
|
Ernest
Cheung(1)
|
1,446,333
(3)(4)(5)
|
7.23%
|
|
Common
Stock
|
Maurice
Tsakok (1)
|
1,225,333
(3)(5)(6)
|
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)
|
As
an officer, Ms. Du recieved 330,000 options in 2004 which are currently
exercisable.
|
|
(3)
|
Mr.
Cheung and Mr. Tsakok are officers, directors and beneficial owners
of
Richco Investors Inc. For purposes of this table, the 1,137,999
shares
owned by Richco are deemed owned by Mr.Cheung and Mr. Maurice Tsakok,
a
former director, beneficially and individually.
|
|
(4)
|
Ernest
Cheung has options to purchase 165,000 shares at $0.30 per share
and
16,667 options to purchase shares at $3.90 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.
|
| (5) | Includes all shares of Richco Investors, Inc., Ernest Cheung, Maurice Tsakok, and Development Fund II of Nova Scotia since there is common control. |
| (6) | Maurice Tsakok has 87,333 options to purchase shares at $3.90 per share. |
-34-
An
aggregate of 42,574,950 shares of Common Stock may be offered for resale
and
sold pursuant to this prospectus by the selling shareholders. The shares
are to
be offered by and for the respective accounts of the selling shareholders.
We
have agreed to register all of the shares under the Securities Act for resale
by
the selling shareholders and to pay all of the expenses in connection with
such
registration and sale of the shares, other than underwriting discounts and
selling commissions and the fees and expenses of counsel and other advisors
to
the selling shareholders. We will not receive any proceeds from the sale
of the
shares by the selling shareholders.
| · |
An
aggregate of 33,500,000 shares
of our Common Stock are issuable to 37 investors in our Offering,
which
shares are being offered hereby for resale upon conversion of Debentures
and/or exercise of warrants. The Offering of 134 units (“Units”) was sold
at $25,000 per Unit or an aggregate of $3,350,000 and net proceeds
of
approximately $2,866,000. Each Unit consists of $25,000 principal
amount
of Debentures, and Class A Warrants and Class B Warrants. The Debentures
are convertible at $.30 per share, as adjusted, for 83,333 shares
of
Common Stock; mature on August 15, 2006 and accrue interest at
a rate of
not less than 6% per annum. Each Unit also includes: (i) Class
A Warrants
exercisable at $.38 per share, as adjusted, to purchase 83,333
shares of
Common Stock for two years from the Effective Date, but no later
than
February 15, 2008; and (ii) Class B Warrants exercisable at $.45
per
share, as adjusted, to purchase 83,333 shares of Common Stock for
three
years from the Effective Date, but no later than February 15, 2006.
For
additional information, see “Description of Securities” and “Plan of
Distribution” elsewhere in this prospectus.
|
| · |
In
connection with the Offering, we issued warrants to purchase 8,374,950
shares of Common Stock, as adjusted, to the placement agent, and
its
assignees including selected dealers (“Placement Agent Warrant Shares”).
|
| · |
500,000
Option Shares are issuable to Yim Sheung Wai, a consultant with
Lanxes
Consultants Limited, pursuant to the Registration Statement on
Form S-8,
SEC File #333-124654, which are being re-registered pursuant to
this
prospectus.
|
| · |
200,000
Warrant Shares are issuable to Crystal Research Associates LLC,
a
consultant.
|
Information
with respect to the selling shareholders and the shares of our Common Stock
held
by them and those shares being offered for resale pursuant to this prospectus
is
set forth in the following table. None of the selling shareholders has had
any
material relationship with us within the past three years, except as noted
above
or in the notes to the following table.
|
Number
of Shares Owned Prior to Sale
|
Number
of Shares Being Offered for Sale
|
Amount
and Nature of Beneficial Ownership After the Sale of the Shares Being
Offered Percentage(1)
|
|||
|
Selling
Shareholder
|
Before
|
After
|
|||
|
Alpha
Capital AG (18)
|
3,500,000
|
3,500,000
|
(3)
|
13.0%
|
-
|
|
Robert
Baron
|
150,000
|
150,000
|
(4)
|
*
|
-
|
|
Robert
Bauers
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Brookshire
Securities (19)
|
375,000
|
375,000
|
(2)
|
1.6%
|
-
|
|
Michael
Capozzi
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Lewis
G. Cole
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Thomas
Dupont
|
500,000
|
500,000
|
(6)
|
2.1%
|
-
|
|
John
E. and Georgianna Gimbel
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Andreas
Gubser
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Michael
Hamblett
|
8,750
|
8,750
|
(2)
|
*
|
-
|
|
Philip
J. Hempleman
|
2,500,000
|
2,500,000
|
(7)
|
9.7%
|
-
|
|
Fiona
Holland
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Richard
N. Houlding
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Iroquois
Master Fund LTD (20)
|
3,750,000
|
3,750,000
|
(8)
|
13.8%
|
-
|
|
Robert
Jackson
|
125,000
|
125,000
|
(9)
|
*
|
-
|
|
Louis
Jaffe
|
500,000
|
500,000
|
(6)
|
2.1%
|
-
|
|
George
Jarskey
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Francis
William Johnson
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Kinder
Investments, L.P. (21)
|
1,750,000
|
1,750,000
|
(10)
|
7.0%
|
-
|
|
Michael
J. Maloney
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Frank
Mantek
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Management
Solutions International, Inc. (22)
|
408,330
|
408,330
|
(2)
|
1.7%
|
-
|
|
Meridian
Ventures, LLC (23)
|
612,500
|
612,500
|
(2)
|
2.6%
|
-
|
|
Meyers
Associates, LP (24)
|
6,957,500
|
6,957,500
|
(2)
|
23.0%
|
-
|
|
Karen
Lynne Miller
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Dr.
Gerald Millstein
|
125,000
|
125,000
|
(9)
|
*
|
-
|
|
Richard
Molinsky
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Donald
Mudd
|
1,500,000
|
1,500,000
|
(11)
|
6.0%
|
-
|
|
Nite
Capital LP (25)
|
1,500,000
|
1,500,000
|
(11)
|
6.0%
|
-
|
|
Omicron
Master Trust (26)
|
900,000
|
900,000
|
(12)
|
3.7%
|
-
|
|
Wayne
and Bonnie Pensenstadler
|
750,000
|
750,000
|
(13)
|
3.1%
|
-
|
|
Norman
Rothstein
|
200,000
|
200,000
|
(14)
|
*
|
-
|
|
The
Rubin Family Irrevocable Trust (27)
|
500,000
|
500,000
|
(6)
|
2.1%
|
-
|
|
SCG
Capital, LLC (28)
|
500,000
|
500,000
|
(6)
|
2.1%
|
-
|
|
Cira
A. Lim, John L. Smith
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Southridge
Partners LP (29)
|
5,000,000
|
5,000,000
|
(15)
|
17.6%
|
-
|
|
Anthony
Spatacco
|
4,375
|
4,375
|
(2)
|
*
|
-
|
|
Starboard
Capital (30)
|
4,375
|
4,375
|
(2)
|
*
|
-
|
|
Michael
F. Stone
|
1,500,000
|
1,500,000
|
(11)
|
6.0%
|
-
|
|
Robert
I. Strougo
|
125,000
|
125,000
|
(9)
|
*
|
-
|
|
Rodney
E. and Donna R. Suggs
|
3,000,000
|
3,000,000
|
(16)
|
11.4%
|
-
|
|
Yim
Sheung Wai
|
500,000
|
500,000
|
(31)
|
||
|
Peter
Wakeham
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
David
Ward
|
125,000
|
125,000
|
(9)
|
*
|
-
|
|
Dr.
Ferdinand Weisbrod
|
1,000,000
|
1,000,000
|
(17)
|
4.1%
|
-
|
|
Dean
Whitla
|
250,000
|
250,000
|
(5)
|
1.1%
|
-
|
|
Crystal
Research Associates LLC
|
200,000
|
200,000
|
(32)
|
-
|
-
|
*
Less
than 1% of the issued and outstanding shares
|
(1)
|
As
of May 2, 2006, we had 20,011,792 shares
of Common Stock issued and unless otherwise indicated, each person
has
sole disposition and voting power with respect to the shares indicated.
For purposes of this table, a person or group of persons is: (a)
deemed to
have "beneficial ownership" of any shares as of a given date which
such
person has the right to acquire within 60 days after such date and
(b)
assumed to have sold all shares registered hereby in this offering.
For
purposes of computing the percentage of outstanding shares held by
each
person or group of persons named above on a given date, any security
which
such person or persons has the right to acquire within 60 days after
such
date is deemed to be outstanding for the purpose of computing the
percentage ownership of such person or persons, but is not deemed
to be
outstanding for the purpose of computing the percentage ownership
of any
other person.
|
| (2) | These are Placement Agent Warrant Shares. |
| (3) |
These
include 1,166,667 shares issuable upon conversion of the Debentures,
1,166,667 shares issuable upon exercise of the Class A Warrants
and
1,166,667 shares issuable upon exercise of the Class B
Warrants.
|
|
(4)
|
These
include 50,000 shares issuable upon conversion of the Debentures,
50,000
shares issuable upon exercise of the Class A Warrants and 50,000
shares
issuable upon exercise of the Class B
Warrants.
|
|
(5)
|
These
include 83,333 shares issuable upon conversion of the Debentures,
83,333
shares issuable upon exercise of the Class A Warrants and 83,333
shares
issuable upon exercise of the Class B
Warrants.
|
|
(6)
|
These
include 166,667 shares issuable upon conversion of the Debentures,
166,667
shares issuable upon exercise of the Class A Warrants and 166,667
shares
issuable upon exercise of the Class B
Warrants.
|
|
(7)
|
These
include 833,333 shares issuable upon conversion of the Debentures,
833,333
shares issuable upon exercise of the Class A Warrants and 833,333
shares
issuable upon exercise of the Class B
Warrants.
|
|
(8)
|
These
include 1,250,000 shares issuable upon conversion of the Debentures,
1,250,000 shares issuable upon exercise of the Class A Warrants and
1,250,000 shares issuable upon exercise of the Class B
Warrants.
|
|
(9)
|
These
include 41,667 shares issuable upon conversion of the Debentures,
41,667
shares issuable upon exercise of the Class A Warrants and 41,667
shares
issuable upon exercise of the Class B
Warrants.
|
|
(10)
|
These
include 583,333 shares issuable upon conversion of the Debentures,
583,333
shares issuable upon exercise of the Class A Warrants and 583,333
shares
issuable upon exercise of the Class B
Warrants.
|
|
(11)
|
These
include 500,000 shares issuable upon conversion of the Debentures,
500,000
shares issuable upon exercise of the Class A Warrants and 500,000
shares
issuable upon exercise of the Class B
Warrants.
|
|
(12)
|
These
include 300,000 shares issuable upon conversion of the Debentures,
300,000
shares issuable upon exercise of the Class A Warrants and 300,000
shares
issuable upon exercise of the Class B
Warrants.
|
|
(13)
|
These
include 250,000 shares issuable upon conversion of the Debentures,
250,000
shares issuable upon exercise of the Class A Warrants and 250,000
shares
issuable upon exercise of the Class B
Warrants.
|
|
(14)
|
These
include 66,667 shares issuable upon conversion of the Debentures,
66,667
shares issuable upon exercise of the Class A Warrants and 66,667
shares
issuable upon exercise of the Class B
Warrants.
|
|
(15)
|
These
include 1,666,667 shares issuable upon conversion of the Debentures,
1,666,667 shares issuable upon exercise of the Class A Warrants and
1,666,667 shares issuable upon exercise of the Class B
Warrants.
|
|
(16)
|
These
include 1,000,000 shares issuable upon conversion of the Debentures,
1,000,000 shares issuable upon exercise of the Class A Warrants and
1,000,000 shares issuable upon exercise of the Class B
Warrants.
|
|
(17)
|
These
include 333,333 shares issuable upon conversion of the Debentures,
333,333
shares issuable upon exercise of the Class A Warrants and 333,333
shares
issuable upon exercise of the Class B
Warrants.
|
|
(18)
|
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Konrad Ackerman,
Director.
|
| (19) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Timothy Roggiero,
President.
|
| (20) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Joshua Silverman, Authorized
Signatory.
|
| (21) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Dov Perlysky, Managing Member of
G.P.
|
| (22) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Michael Sid, President.
|
| (23) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Shahid Khan, President.
|
| (24) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Bruce Meyers, President.
|
| (25) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Keith A. Goodman, Manager of the General
Partner.
|
| (26) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Bruce Bernstein, Managing
Partner.
|
| (27) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Marjorie Rubin, Trustee.
|
| (28) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Steven Geduld.
|
| (29) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by Henry Sargent, Portfolio
Manager.
|
| (30) |
Voting
and disposition power with respect to the Shares offered hereby for
resale
is held by James Dotzam, Managing
Principal.
|
| (31) |
This
includes 500,000 Option Shares issuable upon exercise of outstanding
options.
|
| (32) |
Warrant
shares issuable upon exercise of outstanding
warrants.
|
-35-
DESCRIPTION
OF SECURITIES
General
The
Company is authorized to issue 500,000,000 shares of Common Stock, par value
$.001 per share. As of May 1, 2006, there were 20,011,792 shares of Common
Stock
issued and outstanding held by 163 shareholders of record as of May 4,
2006.
Common
Stock
The
holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by stockholders. Holders of shares of Common
Stock
are not entitled to cumulative voting rights. The favorable vote of a plurality
of the votes of the shares of Common Stock is necessary to elect the directors
of the Company. To take all other actions, a majority of the votes of the shares
of Common Stock outstanding is necessary. The holders of Common Stock are
entitled to receive ratably such dividends when, as and if declared by the
Board
of Directors out of funds legally available therefore. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of Common Stock, as such, have no conversion, preemptive or
other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock, when issued in
exchange for the consideration set forth herein, will be, validly issued, fully
paid and non-assessable.
Warrants
The
following discussion is subject to the terms and conditions of the Class A
and
Class B Warrants, copies of which are incorporated by reference
hereto.
Terms.For
each
Unit issued in the Offering, the Company also issued Class A Warrants and Class
B Warrants to purchase such number of shares of Common Stock determined by
dividing the purchase price per Unit of $25,000 by the $.30 per share Conversion
Price of the Debentures, as adjusted, or 83,333 shares per Unit. Each Class
A
Warrant entitles the holder to purchase one share of Common Stock at any time
after issuance at an exercise price per Class A Warrant of $.38 per share.
The
Class A Warrants shall expire on the second anniversary of the Effective Date
of
this Registration Statement, but not later than February 15, 2008 and be subject
to other terms and conditions described below. Each Class B Warrant entitles
the
holder to purchase one share of Common Stock at any time after issuance at
an
exercise price of $.45 per share. The Class B Warrants shall expire on the
third
anniversary of the Effective Date of this Registration Statement, but not later
than February 15, 2009 and be subject to other terms and conditions described
below. The Class A Warrants and the Class B Warrants are sometimes collectively
referred to herein as the “Warrants.” The actual number of securities underlying
the Units will be determined on the Closing Date based on the Average Closing
Price. The Warrants may be exercised in whole or in part, at any time and from
time to time during the Exercise Period. Warrants may be exercise for cash
or
pursuant to a “cashless exercise” right. Unless exercised, the Warrants will
automatically expire at the end of the Exercise Period, subject to earlier
termination by reason of redemption.
Anti-Dilution
Provisions.The
Exercise Price of the Warrants shall be subject to adjustment from time to
time
in the event of any stock
split, reverse stock split, stock dividend, distributions, recapitalization,
reorganization, reclassification or similar events. In addition, if at any
time
prior to the expiration dates of the Warrants, the Company issues or sells
any
shares of Common Stock or any equity or equity equivalent securities
(collectively, “Common Stock Equivalents”) for a per share consideration less
than the Exercise Price on the date of such issuance or sale (a “Dilutive
Issuance”), then the Exercise Price shall be adjusted so as to equal the value
of the consideration received or receivable by the Company (on a per share
basis) for the additional shares of Common Stock or Common Stock Equivalents
so
issued.
Redemption. The
Class
A Warrants and Class B Warrants will be subject to redemption by the Company
at
$.001 per Warrant, on not less than 30 days’ prior written notice to the holders
of the Warrants at any time commencing 6 months and 12 months, respectively,
after the Effective Date of this Registration Statement assuming the resale
of
the Warrant Shares has been declared effective by the SEC and is in effect
prior
to the date of the notice of redemption and remains in effect; provided (i)
the
average closing bid quotation or last sales price of the Common Stock, as
applicable, has been at least 175% of the respective Exercise Prices per share
for a period of 20 consecutive trading days ending not more than 15 days prior
to the date on which the Company gives notice of redemption. The Warrants will
be exercisable until 5:00 p.m. on the day immediately preceding the date fixed
for redemption.
To
date,
the Company has not declared or paid any dividends on its Common Stock. The
payment by the Company of dividends, if any, is within the discretion of the
Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, any dividend restrictions or
prohibitions under outstanding loan agreements, as well as other relevant
factors. The Board of Directors does not intend to declare any dividends in
the
foreseeable future, but instead intends to retain earnings for use in the
Company's business operations.
-36-
Transfer
Agent and Warrant Agent
The
transfer agent for our Common Stock, and the warrant agent for the Warrants
is
Holladay Stock Transfer, Inc., 2939 N. 67th Place, Scottsdale, AZ 85251.
SEC
Position on Indemnification
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons under the above
provisions, or otherwise, we have been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities
Act, and is unenforceable.
Certain
Market Information
Our
Common Stock is listed on the OTCBB. There is no listing for the Debentures
or
the Warrants. However, there has been limited trading, to date, of our Common
Stock. An OTCBB listing does not guarantee that an active trading market for
our
securities will develop. You will likely not be able to sell your securities
if
an active trading market for our securities does not develop. Further, we can
give no assurance that such a market could be sustained if a trading market
for
our securities were to develop, nor that our securities could be resold at
their
original offering price or at any other price. Any market for our securities
on
the OTCBB will very likely be a limited one and, in all likelihood, be highly
volatile. Although we intend to apply for a listing on Nasdaq or an exchange,
when qualified, there is no assurance we will obtain such a listing. In any
event, if our securities trade at a low price, many brokerage firms may choose
not to engage in market making activities or effect transactions in our
securities. Accordingly, purchasers of our securities may have difficulties
in
reselling them and many banks may not grant loans using our securities as
collateral.
Federal
regulations governing “penny stocks” could have a detrimental effect on holders
of our securities. Our securities are subject to the SEC rules that impose
special sales practice requirements upon broker-dealers that sell such
securities to parties other than established customers or accredited investors.
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of purchasers of our securities to buy or sell in any market
that may develop. In addition, the SEC has adopted a number of rules to regulate
“penny stocks.” Because our securities currently constitute a “penny stock”
within the meaning of these rules, the rules would apply to us and our
securities. The rules may further affect the ability of owners of our securities
to sell their securities in any market that may develop for them.
Equity
Compensation Plan Information
See
“Executive Compensation - 2006 Non-Qualified Stock Compensation Plan and 2005
Stock Option Plan” described above.
The
shares being offered for resale pursuant to this prospectus may be sold by
the
selling shareholders for their respective accounts.
The selling shareholders will pay or assume brokerage commissions or other
charges and expenses incurred in the sale of the shares. The distribution of
the
shares by the selling shareholders is not subject to any underwriting or other
agreement. Each selling shareholder must use a broker-dealer which is registered
in the state in which the selling shareholder seeks to sell their shares.
The
shares may be sold or transferred for value by the selling shareholders, in
one
or more transactions, on the OTCBB, in privately negotiated transactions or
in a
combination of such methods. The shares may be sold or transferred at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at prices otherwise negotiated. The selling shareholders may
effect such transactions by selling or transferring the shares to or through
brokers and/or dealers, and such brokers or dealers may receive compensation
in
the form of underwriting discounts, concessions or commissions from the selling
shareholders and/or the purchasers/transferees of the shares for whom such
brokers or dealers may act as agent. Such broker or dealer compensation may
be
less than or in excess of customary commissions. However, the maximum
compensation to be received by any NASD member or independent broker dealer
will
not be greater than eight (8%) percent of the gross proceeds of any sale. The
selling shareholders and any broker or dealer that participate in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by them
and
any profit on the resale of the shares sold by them may be deemed to be
underwriting discounts and commissions under the Securities Act and under the
NASD Corporate Financing Rules.
-37-
Upon
our
being notified by a selling shareholder that any material arrangement has been
entered into with a broker or dealer for the sale of shares through a secondary
distribution, or a purchase by a broker or dealer, a supplemental prospectus
will be filed, if required, pursuant to Rule 424(b) under the Securities Act,
disclosing:
| · |
the
name of each of such selling shareholder and the participating brokers
and/or dealers,
|
| · |
the
number of shares involved,
|
| · |
the
price at which such shares are being sold,
|
| · |
the
commissions paid or the discounts or concessions allowed to such
brokers
and/or dealers,
|
| · |
where
applicable, that such brokers and/or dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in the prospectus, as supplemented, and
|
| · |
other
facts material to the transaction.
|
Any
of
the shares of our common stock being offered for sale pursuant to this
prospectus that qualify for sale pursuant to Rule 144 promulgated under the
Securities Act may be sold under Rule 144 rather than pursuant to this
prospectus.
Other
than as a selling stockholder, Meyers, an NASD member firm, will not participate
under this resale prospectus and distribution. Meyers was, however, granted
an
irrevocable right of first refusal pursuant to the Placement Agency Agreement
between Meyers and the Company dated as of June 30, 2005 (the “Placement Agency
Agreement”). The right of first refusal covers this offering for all future
public offerings or private financings (whether debt or equity) to purchase
for
Meyers account or to sell for the account of the Company. It does not include
commercial bank financing arrangements entered into by the Company. The other
material terms of the Placement Agency Agreement, attached hereto as
Exhibit
10.8,
are as
follows:
1. Meyers
agreed to deliver the subscription funds received from the investors to the
Company for deposit in a segregated escrow account at an independent banking
institution and agreed to deliver the executed copies of the Subscription
Agreements to the Company;
2.
Meyers
was given the option to engage other persons selected by Meyers to assist Meyers
in the Offering;
3. The
Company agreed to enter into a separate agreement (the "Investment Banking
Agreement") with Meyers, pursuant to which the Company retained Meyers and
agreed to pay Meyers a fee of five (5%) percent of the first $5,000,000, two
and
one-half (2-1/2%) percent of the amount over $5,000,000 but less than
$10,000,000, and 1% of the amount over $10,000,000 of the consideration paid
or
received by the Company (or by any subsidiary or affiliated entity of the
Company) in any transaction (including mergers and acquisitions, joint ventures
and other business transactions) consummated by the Company or any subsidiary
or
affiliated entity of the Company, which is introduced to the Company by Meyers;
and
4. Finally,
the Company agreed that, for a period of three years from June 30, 2005, it
would not solicit any offer to buy from or offer to sell to any person
introduced to the Company by Meyers in connection with the
Offering.
There
can
be no assurance that the selling shareholders will sell or transfer any of
the
Shares being offered pursuant to this prospectus.
Our
consolidated financial statements as of December 31, 2005 and for the two years
then ended, have been included in this prospectus and in the Registration
Statement upon the report of Moen and Company, Canadian Chartered Accountants,
on their audit of our financial statements given on the authority of this firm
as an expert in accounting and auditing.
The
validity of the shares of Common Stock offered in this Offering will be passed
upon by Phillips Nizer LLP, 666 Fifth Avenue, New York, NY
10103-0084.
PROSPECTIVE
INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE
NOT AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR
ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY IN ANY JURISDICTION WHERE SUCH OFFER, OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS
OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THESE SHARES.
-38-
FINANCIAL
STATEMENTS
|
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
|
|||||||
F
1
-39-
|
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
|
|||||||
F
2
-40-
|
CHINA
MOBILITY SOLUTIONS, INC.
|
|||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
|
|||||||||||||||||||||||||
|
For
the Years Ended December 31, 2005 and 2004
|
|||||||||||||||||||||||||
|
|
|
Number
of
|
|
|
|
|
|
|
|||||||||||||||||
|
|
|
Common
|
|
|
Accumulated
|
|
Accumulated
|
|
|||||||||||||||||
|
|
|
Shares
|
Stock
|
Additional
|
Retained
|
|
Other
|
|
|||||||||||||||||
|
|
Common
|
(Retroactively
|
Amount
At
|
Paid
In
|
Earnings
|
Comprehensive
|
Comprehensive
|
|
|||||||||||||||||
|
Stated
in U.S. dollars
|
Shares
|
Stated)
|
Par
Value
|
Capital
|
(Deficit)
|
Income
(Loss)
|
Income
(Loss)
|
Total
|
|||||||||||||||||
|
Balance,
December 31, 2003
|
41,360,010
|
13,786,792
|
$
|
41,360
|
$
|
8,194,045
|
$
|
(7,659,628
|
)
|
$
|
(163,763
|
)
|
$
|
412,014
|
|||||||||||
|
Issuance
of common stock for acquisition
|
|||||||||||||||||||||||||
|
of
Quicknet on June 23, 2004
|
6,120,000
|
2,040,000
|
6,120
|
544,680
|
550,800
|
||||||||||||||||||||
|
Reverse
stock split 3:1
|
|||||||||||||||||||||||||
|
on
June 24, 2004
|
(31,653,218
|
)
|
(31,653
|
)
|
31,653
|
-
|
|||||||||||||||||||
|
Net
income for the year ended December 31, 2004
|
|||||||||||||||||||||||||
|
|
3,018,672
|
3,018,672
|
3,018,672
|
||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
(19,769
|
)
|
(19,769
|
)
|
(19,769
|
)
|
|||||||||||||||||||
|
Total
comprehensive income
|
$
|
2,998,903
|
|||||||||||||||||||||||
|
Balance,
December 31, 2004
|
15,826,792
|
15,826,792
|
$
|
15,827
|
$
|
8,770,378
|
$
|
(4,640,956
|
)
|
$
|
(183,532
|
)
|
$
|
3,961,717
|
|||||||||||
|
Issuance
of common stock for cash on exercise of stock options on
February 24, 2005
@$0.30
|
495,000
|
495
|
148,005
|
148,500
|
|||||||||||||||||||||
|
Issuance
of common stock for services rendered
|
600,000
|
600
|
350,700
|
351,300
|
|||||||||||||||||||||
|
Issuance
of common stock for cash on exercise of stock options on
September 1, 2005
@$0.40
|
500,000
|
500
|
199,500
|
200,000
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Issuance
of common stock for cash on exercise of stock options on
September 1, 2005
@$0.35
|
2,590,000
|
2,590
|
903,910
|
906,500
|
|||||||||||||||||||||
|
Stock-based
compensation
|
126,000
|
126,000
|
|||||||||||||||||||||||
|
Fair
value of Series 'C' warrants issued
|
3,254,305
|
3,254,305
|
|||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Fair
value of Series 'D' warrants issued
|
3,637,165
|
3,637,165
|
|||||||||||||||||||||||
|
Intrinsic
value of the conversion feature of the convertible
debenture
|
1,052,863
|
1,052,863
|
|||||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Net
loss for the year ended December
31, 2005
|
(9,163,453
|
)
|
(9,163,453
|
)
|
(9,163,453
|
)
|
|||||||||||||||||||
|
Foreign
currency translation adjustments
|
(17,829
|
)
|
(17,829
|
)
|
(17,829
|
)
|
|||||||||||||||||||
|
Total
comprehensive income (loss)
|
$ | (9,181,282 | ) |
|
|||||||||||||||||||||
|
Balance,
December 31, 2005
|
20,011,792
|
|
$
|
20,012
|
$
|
18,442,826
|
$
|
(13,804,409
|
)
|
|
$
|
(201,361
|
)
|
$
|
4,457,068
|
||||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements
|
|||||||||||||||||||||||||
F
3
-41-
|
CHINA
MOBILITY SOLUTIONS, INC.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
For
the Years Ended December 31, 2005 AND 2004
|
|||||||
|
|
|||||||
|
Stated
in U.S. dollars
|
2005
|
2004
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income (loss)
|
$
|
(9,163,453
|
)
|
$
|
3,018,672
|
||
|
Less:
loss from discontinued operations
|
-
|
362
|
|||||
|
Adjustments
to reconcile net loss to net cash
|
|
|
|||||
|
Provided
by
(Used in) operating activities
|
|
|
|||||
|
Depreciation
and amortization
|
2,705
|
2,071
|
|||||
|
Stock-based
compensation
|
126,000
|
-
|
|||||
|
Fair
value of warrants issued
|
6,891,486
|
-
|
|||||
|
Interest
expenses on intrinsic value of the convertible debenture
|
1,052,863
|
-
|
|||||
|
Translation
adjustments
|
(17,829
|
)
|
(19,769
|
)
|
|||
|
Minority
interest
|
138,469
|
28,157
|
|||||
|
Impairment
of
marketable securities
|
-
|
172,250
|
|||||
|
Gain
on
disposal of Internet-related operations
|
-
|
(3,319,098
|
)
|
||||
|
Loss
on
disposal of business press operations
|
-
|
41,292
|
|||||
|
Non-cash
-
share issued for consulting fees, less prepaid
|
279,475
|
-
|
|||||
|
Equity
loss
|
-
|
81,273
|
|||||
|
Changes
in assets and liabilities
|
|
|
|||||
|
Decrease
in
accounts receivable
|
28,690
|
57,107
|
|||||
|
(Increase)Decrease
in prepaid expenses and other current assets
|
(115,007
|
)
|
9,174
|
||||
|
Increase
in
amount due from related parties
|
(14,927
|
)
|
(18,322
|
)
|
|||
|
Increase
(Decrease) in accounts payable and accrued liabilities
|
5,189
|
(75,848
|
)
|
||||
|
Increase
in
deferred revenue
|
941,584
|
468,649
|
|||||
|
Net
cash provided by (used in) operating activities
|
155,245
|
445,970
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Cash
transferred in from acquisition of Quicknet
|
-
|
1,477,355
|
|||||
|
Purchases
of
remaining interest of Quicknet
|
(4,000,000
|
)
|
-
|
||||
|
Purchases
of
property and equipment
|
(2,368
|
)
|
-
|
||||
|
Net
cash from sale of assets
|
-
|
152,381
|
|||||
|
Net
cash provided by discontinued operations
|
-
|
631
|
|||||
|
Net
cash flows provided by (used in) investing activities
|
(4,002,368
|
)
|
1,630,367
|
||||
|
|
|
|
|||||
|
Cash
flows from financing activities
|
|
|
|||||
|
Issuance
of
common stock for cash
|
1,255,000
|
-
|
|||||
|
Issuance
of
convertible debentures for cash
|
3,350,000
|
-
|
|||||
|
Net
cash flows provided by financing activities
|
4,605,000
|
-
|
|||||
|
|
|
|
|||||
|
Effect
of exchange rate changes on cash
|
110
|
694
|
|||||
|
|
|
|
|||||
|
Increase
in cash and cash equivalents
|
757,987
|
2,077,031
|
|||||
|
|
|
|
|||||
|
Cash
and cash equivalents - beginning of year
|
5,380,622
|
3,303,591
|
|||||
|
|
|
|
|||||
|
Cash
and cash equivalents - end of year
|
$
|
6,138,609
|
$
|
5,380,622
|
|||
|
|
|
|
|||||
|
Supplemental
Information :
|
|
|
|||||
|
Cash
paid for :
|
|
|
|||||
|
Interest
on
debentures
|
$
|
51,087
|
$
|
69
|
|||
|
Income
taxes
|
-
|
-
|
|||||
|
|
|
|
|||||
|
Non-cash
investment :
|
|
|
|||||
|
Issuance
of
6,120,000 common shares for the acquisition of Quicknet
|
$
|
-
|
$
|
550,800
|
|||
|
Issuance
of
600,000 common shares for services rendered
|
351,300
|
-
|
|||||
|
The
accompanying notes are an integral part of the consolidated
financial
statements
|
|||||||
F
4
-42-
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.
F
5
-43-
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.
F
6
-44-
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.
F
7
-45-
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)
F
8
-46-
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.
|
F
9
-47-
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
|
F
9
-48-
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.
F
10
-49-
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)
|
||
F
11
-50-
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
|
|||||||||
F
12
-51-
|
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.
F
13
-52-
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:
|
|
Shares
under option
|
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
|
|||||
F
14
-53-
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.
F
15
-54-
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.
F
16
-55-
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
The
following statutes and by-law provisions are the only statutes, charter
provisions, by-laws, contracts or other arrangements known to the Registrant
that insure or indemnify a controlling person, director or officer of the
registrant in any manner against liability which he or she may incur in his
or
her capacity as such.
Article
V
of the Registrant's Amended Articles of Incorporation provides that: the
directors shall be protected from personal liability to the fullest extent
permitted by law.
Article
VII of the Registrant’s by-laws provides that:
Section
1. Right to Indemnification. The Corporation hereby indemnifies each person
(including the heirs, executors, administrators, or estate of such person)
who
is or was a director or officer of the Corporation to the fullest extent
permitted or authorized by current or future legislation or judicial or
administrative decision against all fines, liabilities, costs and expenses,
including attorneys' fees, arising out of his or her status as a director,
officer, agent, employee or representative. The foregoing right of
indemnification shall not be exclusive of other rights to which those seeking
an
indemnification may be entitled. The Corporation may maintain insurance, at
its
expense, to protect itself and all officers and directors against fines,
liabilities, costs and expenses, whether or not the Corporation would have
the
legal power to indemnify them directly against such liability.
Section
2. Advances. Costs, charges and expenses (including attorneys' fees) incurred
by
a person referred to in Section 1 of this Article in defending a civil or
criminal proceeding shall be paid by the Corporation in advance of the final
disposition thereof upon receipt of an undertaking to repay all amounts advanced
if it is ultimately determined that the person is not entitled to be indemnified
by the Corporation as authorized by this Article, and upon satisfaction of
other
conditions required by current or future legislation.
Section
3. Savings Clause. If this Article or any portion of it is invalidated on any
ground by a court of competent jurisdiction, the Corporation nevertheless
indemnifies each person described in Section 1 of this Article to the fullest
extent permitted by all portions of this Article that have not been invalidated
and to the fullest extent permitted by law.
Florida
General Corporation Law, Section 607.0850 provides that:
(1) A
corporation shall have power to indemnify any person who was or is a party
to
any proceeding (other than an action by, or in the right of, the corporation),
by reason of the fact that he or she is or was a director, officer, employee,
or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against liability incurred in
connection with such proceeding, including any appeal thereof, if he or she
acted in good faith and in a manner he or she reasonably believed to be in,
or
not opposed to, the best interests of the corporation and, with respect to
any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, or conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation or, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or
her
conduct was unlawful.
(2) A
corporation shall have power to indemnify any person, who was or is a party
to
any proceeding by or in the right of the corporation to procure a judgment
in
its favor by reason of the fact that the person is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of
the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses and
amounts paid in settlement not exceeding, in the judgment of the board of
directors, the estimated expense of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or settlement
of
such proceeding, including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made under this subsection
in respect of any claim, issue, or matter as to which such person shall have
been adjudged to be liable unless, and only to the extent that, the court in
which such proceeding was brought, or any other court of competent jurisdiction,
shall determine upon application that, despite the adjudication of liability
but
in view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
-56-
(3) To
the extent that a director, officer, employee, or agent of a corporation has
been successful on the merits or otherwise in defense of any proceeding referred
to in subsection (1) or subsection (2), or in defense of any claim, issue,
or
matter therein, he or she shall be indemnified against expenses actually and
reasonably incurred by him or her in connection therewith.
(4) Any
indemnification under subsection (1) or subsection (2), unless pursuant to
a
determination by a court, shall be made by the corporation only as authorized
in
the specific case upon a determination that indemnification of the director,
officer, employee, or agent is proper in the circumstances because he or she
has
met the applicable standard of conduct set forth in subsection (1) or subsection
(2). Such determination shall be made:
(a) By
the board of directors by a majority vote of a quorum consisting of directors
who were not parties to such proceeding;
(b) If
such a quorum is not obtainable or, even if obtainable, by majority vote of
a
committee duly designated by the board of directors (in which directors who
are
parties may participate) consisting solely of two or more directors not at
the
time parties to the proceeding;
(c) By
independent legal counsel:
1. Selected
by the board of directors prescribed in paragraph (a) or the committee
prescribed in paragraph (b); or
2. If
a quorum of the directors cannot be obtained for paragraph (a) and the committee
cannot be designated under paragraph (b), selected by majority vote of the
full
board of directors (in which directors who are parties may participate);
or
(d) By
the shareholders by a majority vote of a quorum consisting of shareholders
who
were not parties to such proceeding or, if no such quorum is obtainable, by
a
majority vote of shareholders who were not parties to such
proceeding.
(5) Evaluation
of the reasonableness of expenses and authorization of indemnification shall
be
made in the same manner as the determination that indemnification is
permissible. However, if the determination of permissibility is made by
independent legal counsel, persons specified by paragraph (4)(c) shall evaluate
the reasonableness of expenses and may authorize indemnification.
(6) Expenses
incurred by an officer or director in defending a civil or criminal proceeding
may be paid by the corporation in advance of the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of such director
or
officer to repay such amount if he or she is ultimately found not to be entitled
to indemnification by the corporation pursuant to this section. Expenses
incurred by other employees and agents may be paid in advance upon such terms
or
conditions that the board of directors deems appropriate.
-57-
| SEC registration fee | $ | 2,646.64 | ||
| NASD registration fee | $ | 2,760.00 | ||
| Printing expenses | $ | 5,000.00 | ||
| Legal fees | $ | 30,000.00 | ||
| Accounting fees | $ | 5,000.00 | ||
| Miscellaneous | $ | 4,593.36 | ||
|
Total
|
$
|
50,000.00
|
||
|
*
Estimated
|
Item
26. Recent Sales of Unregistered Securities.
Except
as
described herein, there were no other sales of unregistered securities during
the last three years.
On
September 2, 2005, the Company issued 3,090,000 shares of the Company’s common
stock, $0.001 par value per share, (the “Shares”), to nine employees, including
Yanli Jia, Aixiang Li, Jing Li, Xiao Liu, Yim Sheung Wai, Kun Wang, Kun Wei,
Sheung Wai Yim, Fan Zhang, and Yongfu Zhu, upon exercise of the options granted
pursuant to the 2005 Stock Option Plan. These Shares were subsequently
registered on a Form S-8 Registration Statement filed by the Company on October
12, 2005.
As
of
August 15, 2005, we sold 134 Units or 28,714,458 shares of the Company’s Common
Stock, par value $0.001 (the “Shares”) and raised $3,350,000 in a private
placement of our securities on a “best efforts - all or none basis.” We received
net proceeds of approximately $2,866,000, after deducting fees payable to the
placement agent and expenses of the Offering. These fees included a 10% sales
commission equal to $335,000, a 3% non-accountable expense allowance of $100,500
(less $25,000 that was already paid as a non-refundable advance), as well as
other transaction and legal expenses. The Shares were purchased solely by
accredited institutional and individual investors without registration under
the
Securities Act, or state securities laws, in reliance on the exemptions provided
by Sections 4(2) and 4(6) of the Securities Act and Rule 506 of Regulation
D
promulgated thereunder and in reliance on similar exemptions under applicable
state laws.
(a)
Exhibits
Number
Description
3.1 Amendment
to Articles of Incorporation, as amended(1)
3.2 Amended
By-Laws(2)
4.1 Form
of
Debenture(3)
4.2 Form
of
Class A Warrant(3)
4.3 Form
of
Class B Warrant(3)
4.4
2005
Stock Option Plan (4)
4.5
Form
of Stock Option Agreement (4)
*5.1 Opinion
of Phillips Nizer LLP
5.2
Opinion of Stone, Rosenblatt & CHA (4)
10.1 Debenture
Purchase and Warrant Agreement(3)
10.2
Business Plan(5)
10.3
Share Exchange Agreement(6)
10.4
Assets Transfer Agreement(7)
10.5
Option Written Notice(8)
10.6
Legal Letter(8)
10.7
Share Purchase Agreement, as amended(8)
*10.8
Placement Agency Agreement, dated as of June 30, 2005, by and between China
Mobility Solutions, Inc. and Meyers Associates, L.P.
14.1 Code
of
Ethics (9)
21.1
Subsidiaries(9)
*23.1
Consent of Phillips Nizer LLP (included in Exhibit 5.1)
*23.2
Consent of Moen & Company.
*
filed
with this amendment to this Registration Statement
| (1) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
August 26, 2005, file #000-26559.
|
| (2) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
August 13, 2001, file #000-26559.
|
| (3) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 18, 2005, file #000-26559.
|
| (4) |
Incorporated
herein by reference from Exhibit to Registration Statement on Form
S-8
filed on May 5, 2005, file
#000-26559.
|
| (5) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
June 30, 2005, file #000-26559.
|
| (6) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
October 4, 2001, file #000-26559.
|
| (7) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
July 12, 2001, file #000-26559.
|
| (8) |
Incorporated
herein by reference from Exhibit to Current Report on Form 8-K filed
on
August 5, 2005, file #000-26559.
|
| (9) |
Incorporated
herein by reference from Exhibit to Annual Report on Form 10-KSB
filed on
April 18, 2006, file #000-26559.
|
-58-
Item
28. Undertakings.
The
registrant hereby undertakes:
(1)
To
file, during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement;
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Act, to treat each post-effective amendment
as a
new registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3)
To
file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4)
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the SEC such indemnification
is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid
by a
Director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5)
For
determining any liability under the Securities Act, to treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1), or (4) or 497(h) under the Act
as
part of this registration statement as of the time the Commission declared
it
effective.
(6)
For
determining any liability under the Securities Act, to treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for
the securities offered in the registration statement, and that offering of
the
securities at that time as the initial bona fide offering of those securities.
-59-
In
accordance with the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
of filing on Form SB-2 and authorized this Amendment No. 2 to its registration
statement to be signed on its behalf by the undersigned, in Vancouver, British
Columbia, Canada on May 8, 2006.
CHINA
MOBILITY SOLUTIONS, INC.
| By: |
/s/
Xiao-qing
Du
|
| Xiao-qing Du, Chief Executive Officer |
In
accordance with the requirements of the Securities Act, this registration
statement was signed by the following persons in the capacities and on the
dates
stated.
|
Signature
|
Title
|
Date
|
| /s/ Xiao-qing Du | Chairman of the Board and Chief Executive Officer (Principal Executive Officer and Principal Accounting Officer) | May 8, 2006 |
|
Xiao-qing
Du
|
|
|
| /s/ Ernest Cheung | Secretary, Director (Principal Financial Officer) | May 8, 2006 |
|
Ernest
Cheung
|
|
|
| /s/ Greg Ye | Director | May 8, 2006 |
|
Greg
Ye
|
|
|
|
/s/
Bryan
D. Ellis
|
Director
|
May 8,
2006
|
|
Bryan
D. Ellis
|
||
-60-
|
Exhibit
Index
|
||
|
Exhibit
Number
|
|
Description
|
| 5.1 | Opinion of Phillips Nizer LLP | |
| 10.8 | Placement Agency Agreement | |
| 23.1 |
|
Consent of Phillips Nizer LLP |
| 23.2 |
|
|
-61-