UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ________________________________
CINTEL CORP.
------------
(Exact name of small business issuer in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
52-2360156
(I.R.S. Employer Identification No.)
9900 Corporate Campus Drive, Suite 3000, Louisville, KY 40223
--------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (502) 657-6077
WITH COPIES TO:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November ____, 2006, the issuer
had ______ outstanding shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 2
Item 2. Management's Discussion and Analysis or Plan of Operation........ 21
Item 3. Controls and Procedures.......................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 25
Item 3. Defaults Upon Senior Securities.................................. 25
Item 4. Submission of Matters to a Vote of Security Holders.............. 25
Item 5. Other Information................................................ 25
Item 6. Exhibits......................................................... 25
SIGNATURES..................................................................... 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CINTEL CORP. AND THE SUBSIDIARY
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
UNAUDITED
CONTENTS
Report of Independent Registered Public Accounting Firm 1
Consolidated Interim Balance Sheets 2
Consolidated Interim Statement of Operations and Comprehensive Loss -Nine months ended 3
Consolidated Interim Statement of Operations and Comprehensive Income -Three months ended 4
Consolidated Interim Statement of Stockholders' Equity 5
Consolidated Interim Statement of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7 - 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cintel Corp. and the Subsidiary
We have reviewed the accompanying consolidated interim balance sheets of
Cintel Corp. and the Subsidiary (the "Company") as of September 30, 2006 and
2005 and the related consolidated interim statements of operations and
comprehensive loss, stockholders' equity, and cash flows for the nine-month
periods ended September 30, 2006 and 2005. These consolidated interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of financial information
consists principally of applying analytical procedures and making inquiries of
persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with standards of the Public
Company Accounting Oversight Board (United States), the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such consolidated interim financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
November 13, 2006
-1-
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Balance Sheets
September 30, 2006 and 2005
Unaudited
2006 2005
---------------- --------------
ASSETS
Current Assets
Cash and cash equivalents (note 3) $ 1,333,510 $ 143,192
Accounts receivable (net of allowance for doubtful
accounts of $1,117,530; 2005 - $1,013,918) 616,894 684,175
Inventory (note 4) 581,384 212,399
Prepaid and sundry assets 889,813 200,035
Loans receivable - 9,635
Deferred taxes (note 5) - 202,024
---------------------------------
Total Current Assets 3,421,601 1,451,460
Deferred Taxes (note 5) - 947,365
Investments (note 6) 1,926,404 -
Investments in Available for Sale Securities (note 7) 17,025 48,204
Equipment, net (note 8) 449,066 411,860
---------------------------------
Total Assets $ 5,814,096 $ 2,858,889
---------------------------------
LIABILITIES
Current Liabilities
Accounts payable $ 447,092 $ 1,217,945
Shareholder loan - 179,902
Customer deposits - 191,800
Loans payable - current (note 9) 53,509 1,430,542
---------------------------------
Total Current Liabilities 500,601 3,020,189
Accrued Severance (note 10) 87,503 63,985
Loans Payable (note 9) 32,067 509,484
Convertible Debentures (note 11) - 30,000
---------------------------------
Total Liabilities 620,171 3,623,658
---------------------------------
Commitments and Contingencies (note 13) - -
STOCKHOLDERS' EQUITY
Capital Stock (note 12) 87,619 41,834
Authorized
300,000,000 common shares, par value $0.001 per share
Issued
87,619,896 common shares (41,834,102 in 2005)
Additional Paid-in Capital 14,319,408 5,277,110
Treasury Stock (5,630) (105,185)
Cumulative Other Comprehensive (Loss) Income (207,510) 45,241
Accumulated Deficit (8,999,962) (6,023,769)
---------------------------------
Total Stockholders' Equity (Deficit) 5,193,925 (764,769)
---------------------------------
Total Liabilities and Stockholders' Equity $ 5,814,096 $ 2,858,889
=================================
(The accompanying notes to the financial statements are an integral part of these statements.)
- 2 -
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Operations and Comprehensive Loss
Nine Months Ended September 30, 2006 and 2005
Unaudited
2006 2005
---------------- --------------
Revenue
Merchandise $ 3,980,325 $ 957,125
Finished goods 76,680 264,392
Services 66,018 29,396
---------------------------------
4,123,023 1,250,913
---------------------------------
Cost of Sales
Merchandise 3,795,287 833,462
Finished goods 51,538 170,188
---------------------------------
3,846,825 1,003,650
---------------------------------
Gross Profit 276,198 247,263
---------------------------------
Expenses
Salaries and employee benefits 516,423 378,411
Professional fees 454,436 222,087
Office and general 291,196 413,590
Travel 185,190 165,099
Research and development 18,940 -
Taxes and dues 595 52,426
Depreciation 170,908 163,521
---------------------------------
1,637,688 1,395,134
---------------------------------
Loss from Operations (1,361,490) (1,147,871)
---------------------------------
Other Income (Expense)
Interest income 46,714 7,594
Other income 106,261 -
Foreign exchange (7,577) -
Interest expense (27,636) (209,541)
Amortization of deferred financing fees (90,000) (120,000)
Share of income from equity investment (note 6) 16,303 -
---------------------------------
Total Other Income (Expense) 44,065 (321,947)
---------------------------------
Loss Before Income Taxes (1,317,425) (1,469,818)
---------------------------------
Current 52,373 -
Deferred income taxes recoverable - (235,181)
---------------------------------
52,373 235,181
---------------------------------
Net Loss (1,369,798) (1,234,637)
Foreign currency translation adjustment 391,287 21,415
Unrealized loss on investment (note 6) (720,536) -
---------------------------------
Total Comprehensive Loss $ (1,699,047) $ (1,213,222)
=================================
Basic and Diluted Loss per Share $ (0.02) $ (0.04)
---------------------------------
Basic and Diluted Weighted Average Number of Shares
Outstanding during the period 62,512,395 32,323,055
(The accompanying notes to the financial statements are an integral part of these statements.)
- 3 -
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2006 and 2005
Unaudited
2006 2005
---------------- --------------
Revenue
Merchandise $ 525,242 $ 630,499
Finished goods 199 66,689
Services 16,868 7,752
---------------------------------
542,309 704,940
---------------------------------
Cost of Sales
Merchandise 483,387 556,063
Finished goods 134 93,819
---------------------------------
483,521 649,882
---------------------------------
Gross Profit 58,788 55,058
---------------------------------
Expenses
Salaries and employee benefits 173,761 93,051
Professional fees 141,409 26,711
Office and general 103,617 205,440
Travel 84,908 12,829
Taxes and dues 322 2,831
Research and development 49 -
Depreciation 61,992 50,884
---------------------------------
566,058 391,746
---------------------------------
Operating Loss (507,270) (336,688)
---------------------------------
Other Income (Expense)
Interest income 9,760 1,336
Foreign exchange 2,955 -
Interest expense (5,149) (42,758)
Amortization of deferred financing fees (30,000) (30,000)
Share of income from equity investment (note 6) 43 -
---------------------------------
Total Other Income (Expense) (22,391) 71,422
---------------------------------
Loss Before Income Taxes (529,661) (408,110)
---------------------------------
Current 8,316 -
Deferred income taxes (recoverable) expense 244,667 65,308
---------------------------------
252,983 65,308
---------------------------------
Net Loss (782,644) (342,802)
Foreign currency translation adjustment (87,270) 10,858
---------------------------------
Total Comprehensive Income $ (77,728) $ 10,858
---------------------------------
Basic and Diluted Loss per Share $ (0.01) $ (0.01)
Basic and Diluted Weighted Average Number of Shares Outstanding
during the period 87,594,963 41,240,272
(The accompanying notes to the financial statements are an integral part of these statements.)
- 4 -
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Stockholders' Equity
Nine Months Ended September 30, 2006 and 2005
Unaudited
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Stockholders' Equity
Nine Months Ended September 30, 2006 and 2005
Unaudited
Cumulative
Additional Other Total
Number of Capital Paid-in Treasury Comprehensive Accumulated Stockholders'
Shares Stock Capital Stock Income(Loss) Deficit Equity
-------------------------------------------------------------------------------------------
Balance, January 1, 2005 23,409,800 $23,410 $ 4,573,535 $ -- $ 23,826 $(4,789,132) $ (168,361)
Common stock issued for
consulting services -
March 31, 2005 640,000 640 63,860 -- -- -- 64,500
Common stock issued for
consulting services -
June 30, 2005 1,350,000 1,350 51,151 -- -- -- 52,501
Common stock issued for
consulting services -
September 30, 2005 500,000 500 14,500 -- -- -- 15,000
Common stock issued as
repayment of promissory note 11,987,320 11,987 368,011 -- -- -- 379,998
Conversion of convertible
debenture into common stock 3,946,982 3,947 206,053 -- -- -- 210,000
Repurchase of employees' stock -- -- -- (105,185) -- -- (105,185)
Foreign currency
translation adjustment -- -- -- -- 21,415 -- 21,415
Net loss for the period -- -- -- -- -- (1,234,637) (1,234,637)
--------------------------------------------------------------------------------------------
Balance, September 30, 2005 41,834,102 $41,834 $ 5,277,110 $(105,185) $ 45,241 $(6,023,769) $ (764,769)
============================================================================================
Balance, January 1, 2006 42,379,354 $42,379 $ 5,351,058 $ (5,630) $ 121,739 $(7,630,164) $(2,120,618)
Unrealized loss on
investment (note 6) -- -- -- -- (720,536) -- (720,536)
Common stock issued for
consulting services - April, 2006 500,000 500 89,500 -- -- -- 90,000
Conversion of
convertible debenture
into common stock (note 12) 44,300,542 44,300 8,808,890 -- -- -- 8,853,190
Common stock issued for
consulting services - July, 2006 440,000 440 69,960 -- -- -- 70,400
Foreign currency
translation adjustment -- -- -- -- 391,287 -- 391,287
Net loss for the period -- -- -- -- -- (1,369,798) (1,369,798)
--------------------------------------------------------------------------------------------
Balance, September 30, 2006 87,619,896 $87,619 $14,319,408 $ (5,630) $(207,510) $(8,999,962) $ 5,193,925
============================================================================================
(The accompanying notes to the financial statements are an integral part of these statements.)
- 5 -
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Cash Flows
Nine Months Ended September 30, 2006 and 2005
Unaudited
2006 2005
---------------- --------------
Cash Flows from Operating Activities
Net loss
Items not affecting cash: $ (1,369,798) $ (1,234,637)
Depreciation 170,908 163,521
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of financing fees 90,000 120,000
Common stock issued for consulting services 131,600 131,999
Share of income from equity investment 16,303 -
Changes in non-cash working capital
Accounts receivable 467,535 (99,091)
Inventory (101,588) 81,325
Prepaid and sundry assets (339,408) 85,190
Deferred taxes - (235,181)
Accounts payable (782,554) 412,935
Accrued severance 13,354 (58,026)
---------------------------------
Net Cash Flows Used in Operating Activities (1,703,648) (631,965)
---------------------------------
Cash Flows from Investing Activities
Investments in available for sale securities 106,156 -
Loans receivable - (9,849)
Acquisition of equipment, net (2,400) (14,006)
---------------------------------
Net Cash Flows Provided by (Used in) Investing Activities 103,756 (23,855)
---------------------------------
Cash Flows from Financing Activities
Payments of deferred financing fees - (240,000)
Proceeds from convertible debenture - net - 240,000
Repayment of promissory note - net - 40,000
Proceeds from common shares issued for repayment of convertible debenture 8,853,191 -
Repayment of convertible debentures (8,853,191) -
Repurchase of employees' stocks - (105,185)
Customer deposits - 196,064
Loans payable (638,883) 237,691
Shareholder loan - 150,570
---------------------------------
Net Cash Flows (Used in) Provided by Financing Activities (638,883) 519,140
---------------------------------
Foreign Exchange on Cash and Cash Equivalents 82,836 (1,516)
---------------------------------
Net Decrease in Cash and Cash Equivalents (2,155,939) (138,196)
Cash and Cash Equivalents - beginning of period 3,489,449 281,387
=================================
Cash and Cash Equivalents - end of period $ 1,333,510 $ 143,191
=================================
Supplementary Information for Consolidated Interim Statement of Cash Flows
Interest and income taxes paid
Interest paid $ 27,636 $ 209,541
---------------------------------
Income taxes paid $ 52,373 $ -
In April 2006, 500,000 common shares were issued for consulting services at the
value of $90,000.
In May 2006, the Company issued 44,300,542 common shares for the repayment of
$8,853,190 of the convertible debenture including interest.
In July 2006, 440,000 common shares were issued for consulting services at the
value of $70,340.
(The accompanying notes to the financial statements are an integral part of these statements.)
- 6 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
1. Operations and Business
Cintel Corp. and the Subsidiary, ("the Company"), was incorporated in the state
of Nevada on August 16, 1996 and on April 24, 2001 changed its name from Great
Energy Corporation International to Link2 Technologies, Inc. On September 30,
2003 the Company changed its name to Cintel Corp.
On September 30, 2003, the Company entered into a definitive Share Exchange
Agreement (the "Agreement") with Cintel Co., Ltd., ("Cintel Korea") a Korean
corporation and its shareholders. The Agreement provided for the acquisition by
the Company from the shareholders of 100% of the issued and outstanding capital
stock of Cintel Korea. In exchange, the shareholders of Cintel Korea received
16,683,300 shares of the Company. As a result, the shareholders of Cintel Korea
controlled 82% of the Company. While the Company is the legal parent, as a
result of the reverse-takeover, Cintel Korea became the parent company for
accounting purposes.
Upon completion of the share exchange, the business operations of Cintel Korea
constituted virtually all of the business operations of the Company. Cintel
Korea develops network solutions to address technical limitations to the
Internet. Cintel Korea has developed what it believes is the first Korean server
load balancing technology. Cintel Korea is now focused on the development of
advanced solutions for Internet traffic management. The business operations of
Cintel Korea are located in Seoul, Korea.
2. Summary of Significant Accounting Policies
The accounting policies of the Company are in accordance with generally accepted
accounting principles of the United States of America, and their basis of
application is consistent. Outlined below are those policies considered
particularly significant:
a) Basis of Financial Statement Presentation
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America with the
assumption that the Company will be able to realize its assets and
discharge its liabilities in the normal course of business.
b) Basis of Consolidation
The merger of the Company and Cintel Korea has been recorded as the
recapitalization of the Company, with the net assets of the Company brought
forward at their historical basis. The intention of the management of
Cintel Korea was to acquire the Company as a shell company listed on
NASDAQ. Management does not intend to pursue the business of the Company,
as such, accounting for the merger as the recapitalization of the Company
is deemed appropriate.
c) Unit of Measurement
The U.S. dollar has been used as the unit of measurement in these financial
statements.
- 7 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
d) Use of Estimates
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and related notes to financial
statements. These estimates are based on management's best knowledge of
current events and actions the Company may undertake in the future. Actual
results may ultimately differ from estimates, although management does not
believe such changes will materially affect the financial statements in any
individual year.
e) Revenue Recognition
For revenue from sales of finished goods and merchandise, the Company
recognizes revenues upon delivery, and when amount collectible can be
reasonably determined. For maintenance revenue, revenue is recognized when
the service is rendered and when amount collectible can be reasonably
determined.
f) Cash and Cash Equivalents
Cash includes currency, cheques issued by others, other currency
equivalents, current deposits and passbook deposits. Cash equivalents
include securities and short-term money market instruments that can be
easily converted into cash. The investments that mature within three months
from the investment date, are also included as cash equivalents.
g) Investments in Available for Sale Securities
Investments in available for sale securities are recorded in accordance
with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities". Investments in available for sale securities that are not held
principally for the purpose of selling in the near term are reported at
fair market value when it is readily determinable. Unrealized holding gains
and losses from investments in available for sale securities are excluded
from earnings and reported as a separate component of stockholders' equity.
h) Investments
Investments subject to significant influence have been recorded using the
equity method.
- 8-
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
i) Inventory
Inventory is stated at the lower of cost or net realizable value. Net
realizable value is determined by deducting selling expenses from selling
price.
The cost of inventory is determined on the first-in first-out method,
except for materials-in-transit for which the specific identification
method is used.
j) Equipment, net
Equipment is stated at cost. Major renewals and betterments are capitalized
and expenditures for repairs and maintenance are charged to expense as
incurred. Depreciation is computed using the straight-line method over a
period of 5 years.
k) Foreign Currency Translation
The Company's functional currency is the Korean won. Adjustments to
translate those statements into U.S. dollars at the balance sheet date are
recorded in cumulative other comprehensive (loss) income.
Foreign currency transactions of the Korean operation have been translated
to Korean Won at the rate prevailing at the time of the transaction.
Realized foreign exchange gains and losses have been charged to income in
the year.
l) Financial Instruments
Unless otherwise noted, it is management's opinion that the Company is not
exposed to significant interest, currency or credit risks arising from the
financial instruments.
Fair values of cash equivalents, short-term and long-term investments and
short-term debt approximate cost. The estimated fair values of other
financial instruments, including debt, equity and risk management
instruments, have been determined using market information and valuation
methodologies, primarily discounted cash flow analysis. These estimates
require considerable judgment in interpreting market data, and changes in
assumptions or estimation methods could significantly affect the fair value
estimates.
- 9 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
m) Income Tax
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes". Deferred income taxes are provided on a liability method
whereby deferred income tax assets are recognized for deductible temporary
differences, and deferred income tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred income tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred income tax assets will not be realized. Deferred income
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
n) Earnings (Loss) per Share
The Company adopted FAS No.128, "Earnings per Share" which requires
disclosure on the financial statements of "basic" and "diluted" earnings
(loss) per share. Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares
outstanding for the year. Diluted earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding plus common stock equivalents (if dilutive) related to stock
options and warrants for each year.
o) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance- Sheet Risk and Financial Instruments with Concentration of
Credit Risk", requires disclosure of any significant off-balance-sheet risk
and credit risk concentration. The Company does not have significant
off-balance-sheet risk or credit concentration. The Company maintains cash
and cash equivalents with major Korean financial institutions.
The Company provides credit to its clients in the normal course of its
operations. It carries out, on a continuing basis, credit checks on its
clients and maintains provisions for contingent credit losses which, once
they materialize, are consistent with management's forecasts.
Concentration of credit risk arises when a group of clients having a
similar characteristic such that their ability to meet their obligations is
expected to be affected similarly by changes in economic conditions. The
Company does not have any significant risk with respect to a single client.
- 10 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
p) Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an
amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). This
Statement permits fair value of remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation; clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"; establishes
a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring
bifurcation; clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and amended SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all
financial instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of an entity's first fiscal year
that begins after September 15, 2006. The Company is currently reviewing
the effect, if any, the proposed guidance will have on its consolidated
financial statements.
In March 2006, FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets which amends FAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
No. 156"). In a significant change to current guidance, SFAS No. 156
permits an entity to choose either of the following subsequent measurement
methods for each class of separately recognized servicing assets and
servicing liabilities: (1) Amortization Method or (2) Fair Value
Measurement Method. SFAS No. 156 is effective as of the beginning of an
entity's first fiscal year that begins after September 15, 2006. The
Company is currently reviewing the effect, if any, the proposed guidance
will have on its financial position.
In June 2006 FASB issued Financial Accounting Standards Interpretation No.
48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises' financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). FIN 48 prescribes a
recognition threshold and measurement attributable for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is currently
reviewing the effect, if any, FIN 48 will have on its financial position.
- 11 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
2. Summary of Significant Accounting Policies (cont'd)
p) Recent Accounting Pronouncements (cont'd)
In September 2006, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 was issued to provide consistency
in how registrants quantify financial statement misstatements. The Company
is required to and will initially apply SAB No. 108 in connection with the
preparation of its annual financial statements for the year ending December
31, 2006. The Company does not expect the application of SAB No. 108 to
have a material effect on its financial position and results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value Measurements,"
which is effective for calendar year companies on January 1, 2008. The
statement defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. The statement codifies
the definition of fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The standard clarifies the
principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop
those assumptions. The Company is currently assessing the potential impacts
of implementing this standard.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)" ("SFAS No. 158"). SFAS 158 requires
an employer to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. The funded status of
a benefit plan is defined as the difference between the fair value of the
plan assets and the plans benefit obligation. For a pension plan the
benefit obligation is the projected benefit obligation and for any other
postretirement benefit plan, such as a retiree health care plan, the
benefit obligation is the accumulated postretirement benefit obligation.
SFAS No. 158 requires an employer to recognize as a component of other
comprehensive income, net of tax, the gains and losses and prior service
costs or credits that arise during the period but that are not recognized
as components of net periodic benefit costs pursuant to SFAS No. 87. SFAS
No. 158 also requires an employer to measure the funded status of a plan as
of the date of its year-end. Additional footnote disclosure is also
required about certain effects on net periodic benefit cost for the next
year that arise from the delayed recognition of gains or losses, prior
service costs or credits, and transition asset or obligation. Except for
the year-end measurement requirement, SFAS No. 158 is effective for the
year ending December 31, 2006. The Company does not anticipate that the
adoption of this statement will have a material effect on its financial
condition or operations.
- 12 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
3. Cash and Cash Equivalents
a) In 2005, the Company provided $134,260 as security for one of the bank
loans as described in note 9. As at September 30, 2005, the amount of
loan outstanding was $393,190. In 2006, the bank loan was repaid.
4. Inventory
Inventory includes $421,549 (2005 - $5,427) of merchandise and $159,835
(2005 - $206,972) of raw materials.
5. Income Taxes
Corporate income tax rates applicable to the Korean subsidiary in 2006 and
2005 are 16.5 percent on the first 100 million Korean won ($105,700) of
taxable income and 29.7 percent on the excess. For the United States
operation, the corporate tax rate is approximately 34%. The Company
provided a valuation allowance equal to the deferred tax amounts resulting
from the net operating losses available for tax purposes in the United
States, as it is not more likely than not that they will be realized. Net
operating losses available for tax purposes from the Korean subsidiary can
be carried forward for five years to offset future taxable income. The U.S.
tax losses can be carried forward for fifteen years to offset future
taxable income. The Company has accumulated approximately $7,762,733 of
taxable losses, which can be used to offset future taxable income. The
utilization of the losses expires in years 2008 to 2010.
Under SFAS No. 109, income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax liabilities
and assets for future tax consequences of events that have been recognized
differently in the financial statements than for tax purposes. The Company
has deferred income tax assets arising from research and development
expenses. For accounting purposes, these amounts are expensed when
incurred. Under Korean tax laws, these amounts are deferred and amortized
on a straight-line basis over 5 years.
The Company has deferred income tax assets as follows:
2006 2005
---------------- --------------
Deferred Income Tax Assets
Research and development expenses amortized
over 5 years for tax purposes $ 265,671 $ 214,829
Other timing differences (55,272) 154,439
Net operating loss carryforwards 2,194,563 726,928
---------------------------------
2,404,962 1,096,196
Valuation Allowance 2,404,962 -
---------------------------------
$ - $ 1,096,196
=================================
- 13 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
6. Investments
Investments represent 500,000 shares, which is a 20% ownership in a private
Korean company.
7. Investments in Available for Sale Securities
2006 2005
---------------- -------------
Stock #1 $ 16,745 $ 48,495
Other miscellaneous 280 257
---------------------------------
$ 17,025 $ 48,752
=================================
Stock #1 represents a minority interest in a private Korean company which
is carried at cost.
8. Equipment, net
Equipment is comprised as follows:
2006 2005
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-----------------------------------------------------------
Furniture and fixtures $ 71,619 $ 39,418 $ 45,799 $ 28,074
Equipment 910,110 709,702 631,257 547,983
Vehicle 17,750 2,663 14,843 14,841
Software 733,304 531,934 696,737 385,878
-----------------------------------------------------------
$ 1,732,783 $ 1,283,717 $ 1,388,636 $ 976,776
-----------------------------------------------------------
Net carrying amount $ 449,066 $ 411,860
============
- 14 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
9. Loans Payable
2006 2005
Current Long-term Total Total
---------------------------------------------------------------
Bank loan $ - $ - $ - $ 968,590
Promissory note 39,000 - 39,000 39,000
Government loans 10,422 31,269 41,691 99,062
Discount of interest-free government loans - (4,294) (4,294) (7,842)
Vehicle loan 4,087 5,092 9,179 -
Note payable #1 - - - 479,500
Note payable (#2, 3 & 4) - - - 361,716
--------------------------------------------------------------
$ 53,509 $ 32,067 $ 85,576 $1,940,026
==============================================================
Promissory Note
The promissory note is non-interest bearing, unsecured, and due on demand.
Government Loans
The loans are non-interest bearing, unsecured, repayable in annual payments
of $10,422 and mature in October 2009.
Vehicle Loan
The vehicle loan is non-interest bearing, secured by the vehicle as
disclosed in note 8, and is repayable in 27 blended monthly installments of
$340. The loan matures in December 2008.
Future minimum annual payments are as follow;
2006 53,509
2007 14,502
2008 11,434
2009 6,131
----------------
Balance - September 30, 2005 $ 85,576
================
- 15 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
10. Accrued Severance
The Company's liability for severance pay is calculated pursuant to
applicable labour laws in Korea. Severance payment will be the monthly
average of the three most recent months' salary of the employees multiplied
by the number of years of employment as of the balance sheet date for all
employees.
11. Convertible Debentures
Pursuant to SFAS No. 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", the Company accounts for
the convertible debentures as a liability at face value and no formal
accounting recognition is assigned to the value inherent in the conversion
feature.
The convertible debentures outstanding during the year were unsecured and
non-interest bearing. The debenture holders had sixteen months from the
date of their agreements (the conversion date) to convert their debentures
into common stock of the Company. Any balances outstanding after the
conversion date are repayable twenty months after the conversion date (or
thirty six months after the date of the agreements).
Conversion Conversion
Price Date Maturity date Amount
-------------------------------------------------------------------
Convertible debenture #1 $ 0.35 6/15/2007 12/15/2008 $ 492,800
Convertible debenture #2 $ 0.04 4/17/2007 10/17/2008 440,000
Convertible debenture #3 $ 0.14 4/17/2007 10/17/2008 2,161,334
Convertible debenture #4 $ 0.35 5/17/2007 11/17/2008 5,759,057
-------------------------------------------------------------------
8,853,191
Less: conversions as at September 30, 2006 8,853,191
---------------
Total outstanding at at September 30, 2006 $ -
===============
The convertible debenture outstanding at September 30, 2005 had an annual
coupon rate of 5%. The convertible debenture was repaid in 2005.
- 16 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
12. Capital Stock
In January 2005, the Company issued 240,000 common shares for consulting
service at the value of $20,500.
In January 2005, the Company issued 2,262,424 common shares from escrow
upon the repayment of $40,000 of the convertible debenture.
In February 2005, the Company issued 622,200 common shares from escrow upon
the repayment of $50,000 of the convertible debentures.
In February 2005, 400,000 common shares were issued for consulting services
at the value of $44,000.
In March 2005, the Company issued 1,485,120 common shares from escrow upon
the repayment of $80,000 of the convertible debenture.
In March 2005, the Company repurchased 93,830 common shares for $105,259.
The excess of repurchase price over fair market value was recorded as an
employee benefit.
In March 2005, 1,905,136 common shares were issued upon the conversion of
$140,000 of convertible debenture.
In April 2005, the Company issued 1,311,769 common shares from escrow upon
the repayment of $40,000 of the convertible debenture.
In April 2005, 1,200,000 common shares were issued for consulting services
at the value of $48,000.
In April 2005, 712,500 common shares were issued upon the conversion of
$20,000 of convertible debenture.
In May 2005, 1,329,346 common shares were issued upon the conversion of
$50,000 of convertible debenture.
In May 2005, the Company issued 2,333,551 common shares from escrow upon
the repayment of $70,000 of the convertible debenture.
In June 2005, 150,000 common shares were issued for consulting services at
the value of $4,500.
In June 2005, the Company issued 3,268,031 common shares from escrow upon
the repayment of $80,000 of the convertible debenture.
In July 2005, the Company issued 704,225 common shares from escrow upon the
repayment of $20,000 of the convertible debenture.
- 17 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
12. Capital Stock (cont'd)
In September 2005, 500,000 common shares were issued for consulting
services at the value of $15,000.
In October 2005, 400,000 common shares were issued for consulting services
at the value of $36,000.
In December 2005, the Company issued 145,252 common shares for the
repayment of $38,492 of the convertible debenture including interest.
The balance of shares held in escrow at March 30, 2006 of 10,837,180 common
shares was returned to the Company.
In April 2006, 500,000 common shares were issued for consulting services at
the value of $90,000.
In May 2006, the Company issued 44,300,542 common shares for the repayment
of $8,853,190 of the convertible debenture including interest.
In July 2006, 440,000 common shares were issued for consulting services at
the value of $70,340.
Stock Warrants and Options
The Company has accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based Compensation - Transition and Disclosure."
The value of options granted has been estimated using the Black Scholes
option pricing model. The assumptions are evaluated annually and revised as
necessary to reflect market conditions and additional experience. The
following assumptions were used: 2006 2005
Interest rate 6.5% 6.5%
Expected volatility 70% 70%
Expected life in years 6 6
Expected dividend rate - -
In 1999, the Board of Directors of Cintel Korea adopted an option plan to
allow employees to purchase common shares of Cintel Korea.
- 18 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
12. Capital Stock (cont'd)
Stock Warrants and Options (cont'd)
In August 1999, the share option plan granted 96,000 stock options for the
common stock of Cintel Korea having a $0.425 nominal par value each and an
exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In
2003, an additional 30,000 stock options were cancelled.
In March 2000, 225,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.68. In 2002, 135,000 and in
2003, an additional 47,000 of these stock options were cancelled.
In February 2001, 30,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.72. In 2003, all of these stock
options were cancelled.
In March 2003, 65,000 stock options were granted having a $0.425 nominal
par value each and an exercise price of $0.71. In the same year, 15,000 of
these stock options were cancelled.
The options vest gradually over a period of 3 years from the date of grant.
The term of each option shall not be more than 8 years from the date of
grant. No options have vested during the nine month periods ended September
30, 2006 and 2005.
The stock options have not been included in the calculation of the diluted
earnings per share as their inclusion would be antidilutive.
The following table summarizes the stock option activity during the nine
month periods in 2006 and 2005:
2006 2005
----------- ----------
Outstanding, beginning of period $ 106,000 $ 106,000
Exercised - -
Cancelled - -
Forfeited - -
------------------------------
Outstanding, end of period $ 106,000 $106,000
==============================
Weighted average fair value of options granted during the period $ - $ -
==============================
Weighted average exercise price of common stock options,
beginning of period $ 0.62 $0.62
==============================
Weighted average exercise price of common stock options granted in the
period $ - $ -
==============================
Weighted average exercise price of common stock options, end of period $ 0.67 $ 0.67
==============================
Weighted average remaining contractual life of common stock options 1 year 2 years
==============================
- 19 -
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
13. Commitments and Contingencies
The Company entered into a contract with iMimic Networking, Inc. for the
use of the iMimic solution within Korea starting November 17, 2000. For the
use of this solution, the Company paid $70,000 as an upfront payment and
pays a $640 royalty for each product sold that uses the iMimic solution.
The Company is also required to pay an annual royalty fee of $10,000. The
contract has no fixed termination date.
The Company is committed to office spaces' lease obligations which expire
in December 2006 and February 2007. Future minimum annual payments
(exclusive of taxes and insurance) under the leases are as follows:
2006 $ 24,683
2007 2,000
----------------
$ 26,683
================
14. Subsequent Events
On October 24, 2006, the Company completed financing in an aggregate of
$15,284,295 principal amount in convertible bonds. The convertible bonds do
not bear interest if converted into shares of the Company's common stock.
If convertible bonds are not converted, then the Company shall pay interest
at the rate of 8% per annum provided that PSTS generates total revenues of
$65,800,000 and ordinary profit of $6,800,000 in 2007 and total revenue of
$95,400,000 and ordinary profit of $10,600,000 in 2008. If the foregoing
milestones are not achieved, interest shall be calculated at 10% per annum.
Interest shall be due and payable in cash on the maturity date of October
30, 2011. The convertible bonds are convertible into the Company's common
stock at any time after issuance through the date that is one month prior
to the maturity date, at a conversion price $0.50 per share.
On October 24, 2006, the Company entered into a Stock Purchase Agreement
with STS Semiconductor & Telecommunications Co., Ltd. ("STS"), a Korean
corporation, for the acquisition of 51% of the total equity interest of
Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. ("PSTS") for a
purchase price of $16,500,000 which was paid from the proceeds of the
convertible bond financing.
PSTS is a limited liability company organized in the People's Republic of
China with its principal offices in Wujiang, Jiangsu. PSTS was founded by
STS in China in 2004 by acquiring certain parts of the packaging production
lines from Samsung Electronics Corporation's China plant. PSTS began mass
production in 2005 and its main customers are Samsung Electronics and
Hynix, two of the largest semiconductor manufacturers in the world. PSTS's
main products are semiconductor packaging, NAND flash memory and LCD
assembly.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The information in this quarterly report on Form 10-QSB contains
forward-looking statements. All statements other than statements of historical
fact made in this report are forward looking. In particular, the statements
herein regarding industry prospects and future results of operations or
financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of Cintel Corp. (referred to herein as the
"Company," "we," "us," and "our") included herewith. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion
represents only the best present assessment of our management.
OVERVIEW
Management anticipates CinTel Corp will gain access into other related
businesses in addition to its current focus on the ITM (Internet Traffic
management) market with its long term goal of expansion into new advanced
technology sectors related to manufacturing of semiconductor components and
wireless processes. CinTel Corp is now shifting from its core business of ITM,
an increasingly competitive market due to changes in technologies and solution,
to one of the fastest growing markets in the technology realm. CinTel will
continue to expand its business into a high growth and profitable market with
the long term growth strategy of consolidation of various companies in the
semiconductor manufacturing sector. Management believes acquisition of several
profitable semiconductor companies will ensure that CinTel's stream of profits
will grow exponentially in the near future.
The Company can expect to show significant revenue results in the next year
with its enterprise level customers in the ITM sector and established customers
in its new semiconductor industry sectors. In accordance with the directive of
the Company's Board of Directors, management will use the balance of fiscal year
2006 to expand its products and markets. The Company is also taking steps to
establish several business partnerships in the United States. Additionally, the
Company plans to study other markets for entry where management believes the
Company will be able to leverage its distribution channels and product
strengths.
RESULTS OF OPERATIONS
Nine months period ended Sep 30, 2006 compared to the nine months ended Sep 30,
2005 (Unit: USD)
-------------------------------------------------------------
9/30/2006 9/30/2005
-------------------------------------------------------------
Revenue 4,123,023 1,250,913
-------------------------------------------------------------
Cost of sales 3,846,825 1,003,650
-------------------------------------------------------------
Gross Profit 276,198 247,263
-------------------------------------------------------------
Expenses 1,637,688 1,395,133
-------------------------------------------------------------
Operating (Loss) (1,361,490) (1,147,870)
-------------------------------------------------------------
Loss Before Income Taxes (1,317,403) (1,469,817)
-------------------------------------------------------------
The first nine months of 2006 and 2005 revenues totaled approximately $4.12
million and approximately $1.25 million, respectively, which reflects an
increase of approximately of $2.87 million. The main reason for the increase in
revenue for the first nine months of 2006, as compared to the nine months of
2005, was primarily attributed to the work with the Republic of Korea Air Force
for the supply of network equipment. The company generated revenue of
approximately $1.95 million from such work with the Republic of Korea Air Force
during the first nine months of 2006. In addition approximately $0.45 million of
the revenue generated during the first nine months of 2006 is derived from the
global system integration project in Hyundai Heavy Industries plants located in
Kuwait, in consortium with KT Corp. Approximately $ 0.70 million of revenue
generated during the first nine months of 2006 is derived from Shinhan Bank for
the supply of a Proxy Server solution. Approximately $0.5 million is derived
from supply of LG Hitachi Backbone Switches to Enpia (Building backbone
switching system for Online Stock Trading System). In the future, the company
expects significant new revenues by opening up new markets with a strong
strategic alliance with Hyundai HDS and KT Corp.
- 3 -
The increase in cost of sales and gross margins for the first nine months
of 2006 compared to the same period in 2005 was primarily attributable to the
relative increase in revenue.
Total expenses for the first nine months of 2006 and 2005 totaled
approximately $1.63 million and approximately $1.39 million, respectively,
resulting in an increase of 17.3%. In the 3rd quarter the company maintained
extensive research into new business ventures. Expenses related to future
business opportunity research continued to play a factor on profits but will
give a good return on the expense in the near future with the expansion
opportunities and revenues generated from our research. The company has also
seen increases in accounting and legal consulting services related to
acquisition preparation and execution in multiple countries.
The operating loss for the first nine months of 2006 and 2005 totaled $1.36
million and $1.14 million respectively. Total loss before income taxes the first
nine months of 2006 and 2005 totaled $1.31 million and $1.46 million
respectively.
Three months period ended Sep 30, 2006 compared to the three months ended Sep
30, 2005 (Unit: USD)
-------------------------------------------------------------
9/30/2006 9/30/2005
-------------------------------------------------------------
Revenue 542,309 704,940
-------------------------------------------------------------
Cost of sales 483,521 649,882
-------------------------------------------------------------
Gross Profit 58,788 55,058
-------------------------------------------------------------
Expenses 566,058 391,745
-------------------------------------------------------------
Operating (Loss) (507,270) (336,687)
-------------------------------------------------------------
Loss Before Income Taxes (529,639) (408,109)
-------------------------------------------------------------
For the three month period ending September 30, 2006 and 2005 revenues
totaled approximately $0.54 million and approximately $0.70 million,
respectively, which reflect a decrease of approximately $0.16 million. The main
reason for the decrease in revenue was primarily attributed to investment into
our new business model and the company's new direction.
The decrease in cost of sales for the three month period ending Sep. 30,
2006 compared to the same period in 2005 was primarily attributable to the
relative decrease in revenue.
Total expenses for the three months period ending Sep 30, 2006 and 2005
totaled approximately $0.56 million and approximately $0.39 million,
respectively, resulting in an increase of 44.5%. Despite our decrease in
revenues, the increase in expenses was primarily due to the increasing costs of
consulting service in order to establish the company's new vision and strategies
and establish a new business model.
The operating loss for the three month period ending Sep 30, 2006
and 2005 totaled $0.50 million and $0.33 million respectively. Total loss before
income taxes for the three month period ending Sep 30, 2006 and 2005 totaled
$0.52 million and $0.40 million respectively.
- 4 -
LIQUIDITY AND CAPITAL RESOURCES
As of Sep 30, 2006, CinTel had cash and cash-equivalents including short
term investment totaling $1.33 million. Management believes it has the resources
necessary to maintain its current business operations for at least twelve months
from the date this report was filed.
BUSINESS TRENDS
Component material, semiconductors, semiconductor packaging and wireless
processes are the planned new direction for CinTel Corp. Semiconductors are the
basic blocks used to create an increasing variety of electronic products and
system Improvements in semiconductor process and design technologies continue to
result in ever smaller, more complex and more reliable devices at a lower cost
per function. As performance has increased and size and costs have decreased,
semiconductors have become common components in products used in everyday life,
including personal computers, telecommunications systems, wireless handheld
devices, automotive products, industrial automation and control systems and
security applications. The fragile nature of semiconductors also requires
considerable efforts in packaging and transport of the products and components.
According to IC Insights, the percentage of semiconductor content in
electronic equipment increased from approximately 11 percent in 1989 to
approximately 21 percent in 2004. Nevertheless, the market for semiconductors
has historically been volatile. Supply and demand have fluctuated cyclically and
have caused pronounced fluctuations in prices and margins. Following a severe
downturn in 2001, the industry experienced a further period of low demand and
ongoing worldwide overcapacity during 2002. In 2003 and in particular in 2004,
the semiconductor market showed stronger performance. During our 2005 financial
year, global semiconductor market growth slowed significantly. However market
trends indicate improved forecast and contracts secured at this point indicate a
strong demand in the near future.
The ITM market has stabilized but is still seeing some significant
transformation from a pure caching appliance environment to a convergence of
more enterprise network traffic and application management features such as SSL
VPN, Application Acceleration (Web-enabled), WAN optimization, firewall and
content security. CinTel must incorporate these functions into its current
product line to better compete in the marketplace. With current and future
partners CinTel may continue to expand its offerings and move from being a niche
player to a total solution provider in the near future.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
SIGNIFICANT ACCOUNTING POLICIES
Currency Translation - The Company's functional currency is Korean Won.
Adjustments to translate those statements into U.S. dollars at the balance sheet
date are recorded in other comprehensive income. Foreign currency transactions
of the Korean operation have been translated to Korean Won at the rate
prevailing at the time of the transaction. Realized foreign exchange gains and
losses have been charged to income in the year.
Concentration of Credit Risk - SFAS No. 105, "Disclosure of Information
About Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentration of Credit Risk", requires disclosure of any
significant off-balance sheet risk and credit risk concentration. The Company
does not have significant off-balance sheet risk or credit concentration. The
Company maintains cash and cash equivalents with major Korean financial
institutions. The Company's provides credit to its clients in the normal course
of its operations. It carries out, on a continuing basis, credit checks on its
clients and maintains provisions for contingent credit losses which, once they
materialize, are consistent with management's forecasts. For other debts, the
Company determines, on a continuing basis, the probable losses and sets up a
provision for losses based on the estimated realizable value. Concentration of
credit risk arises when a group of clients having a similar characteristic such
that their ability to meet their obligations is expected to be affected
similarly by changes in economic conditions. The Company does not have any
significant risk with respect to a single client.
- 5 -
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
Payment" (Statement 123). This Statement requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which the
employee is required to provide service in exchange for the award requisite
service period (usually the vesting period). No compensation cost is recognized
for equity instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of compensation
cost if certain conditions are met; those conditions are much the same as the
related conditions in Statement 123. This Statement is effective for public
entities that do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005. This
Statement applies to all awards granted after the required effective date and to
awards modified, repurchased, or cancelled after that date. The cumulative
effect of initially applying this Statement, if any, is recognized as of the
required effective date and is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and
Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3
(Statement No. 154). Statement No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Statement No.
154 requires retrospective application of any change in accounting principle to
prior periods' financial statements. Statement No. 154 is effective for the
first fiscal period beginning after December 15, 2005. We do not expect the
implementation of Statement No. 154 to have a significant impact on our
consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that the information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and (ii)
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
We are not a party to any pending legal proceeding, nor is our property the
subject of a pending legal proceeding, that is not in the ordinary course of
business or otherwise material to the financial condition of our business. None
of our directors, officers or affiliates is involved in a proceeding adverse to
our business or has a material interest adverse to our business.
- 6 -
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit
Number Description
------ ------------------------------------------------------------------------
4.1 Standby Equity Distribution Agreement, dated August 4, 2004, between
Cornell Capital Partners, L.P. and the Company (Incorporated by
reference to the Company's registration statement on Form SB-2 (File
No. 333-119002), filed with the Securities and Exchange Commission on
September 15, 2004)
4.2 $240,000 principal amount Compensation Debenture, due August 4, 2007,
issued to Cornell Capital Partners, L.P., in connection with the
Standby Equity Distribution Agreement (Incorporated by reference to
the Company's registration statement on Form SB-2 (File No.
333-119002), filed with the Securities and Exchange Commission on
September 15, 2004)
4.3 Convertible Note in the principal amount of $40,000 issued to Sang
Yong Oh (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on October 21, 2005)
4.4 Convertible Note in the principal amount of $400,000 issued to Tai Bok
Kim (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on October 21, 2005)
4.5 Convertible Note in the principal amount of $9,640 issued to Meung Jun
Lee (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.6 Convertible Note in the principal amount of $28,930 issued to Jin Yong
Kim (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.7 Convertible Note in the principal amount of $48,300 issued to Su Jung
Jun (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.8 Convertible Note in the principal amount of $48,300 issued to Se Jung
Oh (Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on November 21, 2005)
4.9 Convertible Note in the principal amount of $48,300 issued to Sun Kug
Hwang (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.10 Convertible Note in the principal amount of $192,864 issued to Woo
Young Moon (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on November 21, 2005)
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4.11 Convertible Note in the principal amount of $336,000 issued to Joo
Chan Lee (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on November 21, 2005)
4.12 Convertible Note in the principal amount of $483,000 issued to Sang Ho
Han (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.13 Convertible Note in the principal amount of $483,000 issued to Jun Ro
Kim (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.14 Convertible Note in the principal amount of $483,000 issued to Tai Bok
Kim (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on November 21, 2005)
4.15 Convertible Note in the principal amount of $2,082,500 issued to Tai
Bok Kim (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2005)
4.16 Convertible Note in the principal amount of $280,000 issued to Joo
Chan Lee (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2005)
4.17 Convertible Note in the principal amount of $281,065 issued to Sang
Yong Oh (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2005)
4.18 Convertible Note in the principal amount of $246,400 issued to JungMi
Lee (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on December 20, 2005)
4.19 Convertible Note in the principal amount of $59,172 issued to Sung Min
Chang (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on December 20, 2005)
4.20 Convertible Note in the principal amount of $246,400 issued to Eun Suk
Shin (Incorporated by reference to the Company's Form 8-K filed with
the Securities and Exchange Commission on December 20, 2005)
4.21 Convertible Note in the principal amount of $492,800 issued to Overnet
Co., Ltd. (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2005)
4.22 Convertible Note in the principal amount of $98,620 issued to Yeun Jae
Jo (Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on December 20, 2005)
4.23 Convertible Note in the principal amount of $985,950 issued to Equinox
Partners Inc. (Incorporated by reference to the Company's Form 8-K
filed with the Securities and Exchange Commission on December 20,
2005)
4.24 Convertible Note in the principal amount of $788,950 issued to Kei
Wook Lee (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 20, 2005)
4.25 Convertible Note in the principal amount of $492,800 issued to Seok
Kyu Hong (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 30, 2005)
4.26 Convertible Note in the principal amount of $197,200 issued to Moon
Soo Park (Incorporated by reference to the Company's Form 8-K filed
with the Securities and Exchange Commission on December 30, 2005)
10.1 Distribution Agreement dated March 15, 2006 among Cintel Corp. and
InterSpace Computers, Inc. (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on May 3,
2006)
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10.2 Convertible Bonds Subscription Agreement between the Company and Axlon
Corporation dated October 24, 2006 (Incorporated by reference to the
Company's Form 8-K/A filed with the Securities and Exchange Commission
on October 31, 2006)
10.3 Convertible Bonds Subscription Agreement between the Company and
Emerging Memory & Logic Solutions, Inc. dated October 24, 2006
(Incorporated by reference to the Company's Form 8-K/A filed with the
Securities and Exchange Commission on October 31, 2006)
10.4 Convertible Bonds Subscription Agreement between the Company and KTB
China Optimum Fund dated October 24, 2006 (Incorporated by reference
to the Company's Form 8-K/A filed with the Securities and Exchange
Commission on October 31, 2006)
10.5 Convertible Bonds Subscription Agreement between the Company and
Emerging Memory & Logic Solutions, Inc. dated October 24, 2006
(Incorporated by reference to the Company's Form 8-K/A filed with the
Securities and Exchange Commission on October 31, 2006)
31.1 Certification by Chief Executive Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
31.2 Certification by Chief Financial Officer, required by Rule 13a-14(a)
or Rule 15d-14(a) of the Exchange Act
32.1 Certification by Chief Executive Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
32.2 Certification by Chief Financial Officer, required by Rule 13a-14(b)
or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63
of Title 18 of the United States Code
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CINTEL CORP.
Dated: November 20, 2006 By: /s/ Sang Don Kim
-----------------------------------
Sang Don Kim
Chief Executive Officer
Dated: November 20, 2006 By: /s/ Kyo Jin Kang
-----------------------------------
Kyo Jin Kang
Principal Financial Officer and
Principal Accounting Officer
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