UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number: 333-49388
[GRAPHIC OMITTED]
CHINA WIRELESS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
NEVADA 91-1966948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1746 COLE BOULEVARD, SUITE 225, GOLDEN, CO 80401-3210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 303-277-9968
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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: [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ] (NOT APPLICABLE. THE ISSUER'S SECURITIES ARE
NOT REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT.)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes: [ ] No: [x]
State issuer's revenues for its most recent fiscal year: $478,139
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $3,578,659 AS OF FEBRUARY 28, 2007
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 170,412,340 AS OF FEBRUARY 28, 2007.
Transitional Small Business Disclosure Format (Check one): Yes: [ ] No: [x]
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We caution readers regarding forward looking statements found in this
report and in any other statement made by, or on our behalf, whether or not in
future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward-looking
statements made by or on our behalf. We disclaim any obligation to update
forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT. We were originally incorporated in Nevada on
March 8, 1999 under the name AVL SYS International Inc ("AVL SYS"). On March 9,
2000, AVL SYS changed its name to I-Track, Inc ("ITI").
On March 22, 2003, ITI acquired all of the issued and outstanding
shares of Strategic Communications Partners, Inc., a Wyoming corporation
("SCP"), pursuant to the terms of a Share Exchange Agreement. A total of
19,000,000 restricted shares of ITI's common stock were issued to the
shareholders of SCP, resulting in the SCP shareholders as a group owning
approximately 88.4% of the outstanding shares of common stock. At this time, SCP
became a wholly owned subsidiary. On March 24, 2003, in connection with our
acquisition of SCP, ITI's name was changed to China Wireless Communications,
Inc.
BUSINESS OF ISSUER. Our business plan is to evaluate opportunities to
acquire companies in the information technology industry and to provide both
wireless and wired high-speed data and telecommunication systems to our
customers. In addition, we and our subsidiaries can provide wireless
connectivity for data and video surveillance networks.
On May 24, 2005, the Company entered into a letter agreement to acquire
51% of the stock of Tianjin Create IT Company Ltd.., a People's Republic of
China company ("Create Co."), for total consideration of $53,840, to be
comprised of (i) cash in the amount of $40,379.61 and (ii) 448,665 shares of the
Company's common stock valued at $0.03 per share, for a total of $13,460 in the
Company's common stock. On September 6, 2005, the Company paid $21,460 towards
the acquisition price ($13,460 in the Company's common stock and cash in the
amount of $8,000).
On May 18, 2006, the Company entered into an amended letter agreement
with the 49% owner of Create Co., whereby the parties agreed to increase the
acquisition cost of Create Co. to $126,767. Because the Company had previously
made a payment of $21,460, the remaining purchase amount owing was $105,307, as
of the May 18, 2006 amendment. The Company agreed to pay the remaining purchase
amount owing of $105,307 in cash no later than August 31, 2006.
On October 25, 2006, the Company and the 49% owner of Create Co.
further amended the purchase agreement whereby the Company agreed to a final
payment of $105,307, payable in (i) cash in the amount of $10,531 and (ii)
6,318,404 shares of the Company's common stock valued at $94,776, to take place
on December 31, 2006. The parties have agreed to further extend the date of the
final payment and expect the final payment to be made by the end of June 2007.
The Company has recorded the $105,307 additional purchase price for Create Co.,
in accounts payable and accrued expenses as of December 31, 2006.
Create Co. provides information technology systems integration and
internet protocol services to customers. It also provides IP routing equipment
and network cabling and its customers are principally in the People's Republic
of China. We acquired Create Co. in part because of its strategic location in
Tianjin City, the third largest city in China. Also, as a forward-looking
company with a customer base in the education, oil and gas, banking, brokerage,
commercial and government sectors, Create Co. provides an opportunity to
establish a presence in China.
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Additionally, during the 3rd quarter of 2006, we formed a wholly owned
subsidiary, CW Communications, Inc., a Colorado corporation ("CW
Communications"), which operates in north Texas. Through CW Communications, we
intend to leverage technical and sales opportunities presented by the
information technology side of our business in the areas of video surveillance
design, engineering and installation.
We will market the products and services of China Wireless, Create Co,
and CW Communications together where possible in order to provide the customer
with options in information technology, systems engineering, low voltage power,
backup systems for data network equipment, data and video cabling and video
surveillance equipment.
During the 4th quarter of 2006, we began to investigate other business
opportunities within the United States and China. Included in these
opportunities are the importation of consumer products and the development of
electronic products to fill a need in the law enforcement and security market.
INDUSTRY BACKGROUND. With over 130 million users, the People's Republic
of China (the "PRC" or "China") has surpassed Japan to become the world's second
largest Internet market. Many enterprises have installed high-speed local area
networks to support bandwidth-intensive applications, and the large monopoly
carriers have invested hundreds of millions of dollars in fiber optic networks
to provide massive backbone network capacity.
The opportunity to provide high-speed wireless broadband for customers
utilizing existing carrier transport as well as broadband radio transport will
now be part of our overall strategy to become an information technology
provider. We will utilize proven information technology to complete and meet end
users' business objectives. Our focus on potential customers will include
commercial business, universities and government enterprises.
The communications and information services industries are highly
competitive. Many of our existing and potential competitors have financial,
personnel, marketing and other resources significantly greater than ours. Many
of these competitors have the added competitive advantage of a larger existing
customer base. In addition, significant new competitors could arise as a result
of:
-the recent increased consolidation in the industry;
-further technological advances; and
-further deregulation and other regulatory initiatives.
If we are unable to compete successfully, our business could be materially
adversely affected.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Our operations and
partnerships are subject to various levels of government controls and
regulations in the PRC. As a result, we may be exposed to certain risks
associated with, among others, the political, economic and legal environment and
foreign currency exchange. Our results may be adversely affected by change in
the political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, and remittance abroad, and rates and methods of taxation,
among others. We cannot assure you that changes in political and other
conditions will not result in any adverse impact.
EMPLOYEES. As of March 31, 2007, we have 13 full-time employees,
including employees of Create Co.
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices are located at 1746 Cole Boulevard,
Suite 225, Golden, Colorado, where we lease approximately 800 square feet of
space pursuant to a written lease which expires in August 2007.
Create Co. leases space under an operating lease in Tianjin, China.
Rental expenses under the operating lease were $6,656 in 2006. The lease expires
in August 2007.
ITEM 3. LEGAL PROCEEDINGS.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock was approved for trading on the over-the-counter
bulletin board ("OTCBB") under the symbol "ITRK" on August 7, 2001. On December
2, 2002, the symbol was changed to "ITCK" when we implemented a 1-for-20 reverse
stock split. On March 28, 2003, our trading symbol was changed to "CWLC". The
following table sets forth the range of high and low closing bid quotations of
our common stock for each fiscal quarter shown:
BID OR TRADE PRICES
2005 FISCAL YEAR HIGH LOW
---------------- ---- ---
Quarter Ending 03/31/05........................... $ 0.06 $ 0.06
Quarter Ending 06/30/05........................... $ 0.03 $ 0.02
Quarter Ending 09/30/05........................... $ 0.04 $ 0.04
Quarter Ending 12/31/05........................... $ 0.02 $ 0.02
2006 FISCAL YEAR HIGH LOW
---------------- ---- ---
Quarter Ending 03/31/06........................... $ 0.18 $ 0.02
Quarter Ending 06/30/06........................... $ 0.15 $ 0.04
Quarter Ending 09/30/06........................... $ 0.04 $ 0.03
Quarter Ending 12/31/06........................... $ 0.03 $ 0.02
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
As of December 31, 2006, there were 259 registered shareholders of record of our
common stock
During the last three fiscal years, no cash dividends have been
declared on our common stock and we do not anticipate that dividends will be
paid in the foreseeable future.
During quarter ended December 31, 2006, there were no unregistered securities
issued.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW. We are an information technology company providing both
wireless and wired high-speed data and telecommunication systems to our
customers. In addition, we provide wireless connectivity for data and video
surveillance networks. In furtherance of our business plan, we acquired an
interest in Create Co., a systems integration and information technology company
located in Tianjin, China in 2005. Additionally, during the 3rd quarter of 2006,
we formed a wholly owned subsidiary, CW Communications, Inc., a Colorado
corporation ("CW Communications"), which operates in north Texas. Through CW
Communications, we intend to leverage technical and sales opportunities
presented by the information technology side of our business in the areas of
video surveillance design, engineering and installation. We intend to market the
products and services of China Wireless, Create Co, and CW Communications
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together where possible in order to provide the customer with options in
information technology, systems engineering, low voltage power, backup systems
for data network equipment, data and video cabling and video surveillance
equipment.
GOING CONCERN. In Note 2 of the Company's Financial Statements for the
year ended December 31, 2006, the Company's independent registered public
accounting firm noted that there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of us
as a going concern. We incurred net losses for the years ended December 31, 2006
and 2005 of $3,226,744 and $2,013,513, respectively, and at December 31, 2006
had an accumulated deficit of $13,820,485 and a working capital deficit of
$362,158. These conditions raise substantial doubt as to our ability to continue
as a going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Our
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Our ability to continue as a going concern is dependent upon the
successful implementation of our business plan and ultimately achieving
profitable operations. However, there is no assurance that we will be able to
raise the necessary capital to execute our business strategy. Our inability to
raise the required capital or implement our business strategy successfully could
adversely impact our business and prospects.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates, including those for the above-described items, are reasonable.
MINORITY INTEREST. Under generally accepted accounting principles when
losses applicable to the minority interest in a subsidiary exceed the minority
interest in the equity capital of the subsidiary, the excess is not charged to
the majority interest since there is no obligation of the minority interest to
make good on such losses. The Company, therefore, has included losses applicable
to the minority interest against its interest since the minority owners have no
obligation to make good on the losses. If future earnings do materialize, the
Company shall be credited to the extent of such losses previously absorbed. As
previously stated, we closed the acquisition of a 51% majority interest of
Create Co. on May 24, 2005.
STOCK-BASED COMPENSATION. Stock-based compensation. Effective January
1, 2006, WE adopted Statement of Financial Accounting Standards No. 123
(revised), "Share-Based Payment" (SFAS No. 123R), which requires the use of the
fair value method of accounting for all stock-based compensation, including
stock options. The statement was adopted using the modified prospective method
of application. Under this method, in addition to reflecting compensation
expense for new share-based awards, expense is also recognized to reflect the
remaining vesting period of awards that had been included in pro-forma
disclosures in prior periods. WE did not have any stock based compensation,
including options that would have required expensing under SFAS No. 123R for the
year ended December 31, 2006.
FOREIGN CURRENCIES. Transactions in foreign currencies are translated
at the rates of exchange on the dates of transactions. Monetary assets and
liabilities denominated in foreign currencies at year-end are translated at the
approximate rates ruling at the balance sheet date. Non-monetary assets and
liabilities are translated at the rates of exchange prevailing at the time the
asset or liability was acquired.
RESULTS OF OPERATIONS. Our net loss for the year ended December 31,
2006 was $3,226,744 compared with
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$2,013,513 for the year ended December 31, 2005, an increase of $1,213,231.
Operating expenses for the year ended December 31, 2006, were $2,381,542,
compared with $2,081,184 for the year ended December 31, 2005, an increase of
$300,358. The increases in our net loss and operating expenses were primarily
due to a loss on payment of expenses in our common stock of $854,900;
additionally we incurred a $341,433 increase in general and administrative
expenses in the year ended December 31, 2006 as we are integrating Create Co.
into our operations, and as we further expand our business plan.
During the year ended December 31, 2006, we generated sales revenues of
$478,139, compared with $338,215 for the year ended December 31, 2005, an
increase of $139,924.
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 2006, we had current
assets of $126,099 as compared to $101,623 at December 31, 2005, and current
liabilities of $488,257 at December 31, 2006, as compared to $497,544 at
December 31, 2005, resulting in working capital deficits of $362,158 and
$395,921 at December 31, 2006 and December 31, 2005, respectively.
During the year ended December 31, 2006, we used $250,042 of cash for
operating activities and $260,963 was provided by investing and financing
activities. Financing activities consisted of borrowings from our officers and
directors. By comparison for the year ended December 31, 2005, we used $160,025
of cash for our operating activities, while financing activities consisting of
proceeds from the issuance of our common stock and borrowings, providing cash of
$190,267. Investing activities during the year ended December 31, 2005 used cash
of $20,252, which consisted of the acquisition of fixed assets. We had no
investing activities during the year ended December 31, 2006.
We have been largely reliant upon loans from related parties in order
to meet our cash requirements and as of January 1, 2007, we entered into
individual Revolving Lines of Credit ("Revolver") agreements with two of our
directors, Henry Zaks and Pedro E. Racelis III. Each Revolver provides a $30,000
line of credit to the Company at 10% interest.
PLAN OF OPERATION. Our business plan is to evaluate opportunities to
acquire companies in the information technology industry and to provide both
wireless and wired high-speed data and telecommunication systems to our
customers. In addition, we provide wireless connectivity for data and video
surveillance networks.
We are focusing our efforts on becoming a viable information technology
company. We believe that the information technology business is developing
quickly in China and that there are North American technologies that can be
marketed to business customers in China. Create Co. is the foundation to
building our broad base information technology, products and services in China.
As we execute our business plan, we intend to utilize the leadership of Create
Co. to oversee and manage our operations in China. Create Co. operates in
Tianjin, the third largest city in China. Tianjin has a population of
approximately ten million people and is a major import and export center for
China. Major industries and markets located in Tianjin include educational,
industrial, international shipping port, medical, manufacturing and government.
Tianjin is also Beijing's gateway to the sea and has over 25 10,000-ton ship
berths. Tianjin's harbor is geographically the second largest in China. Further,
Tianjin is home to 31 of China's universities, including Tianjin University,
China's first modern university. The Tianjin area also includes the Tanggu
Economic Development Area, located where the Haihe River meets the Bohai Sea.
Create Co.'s customer base includes Nankai University, Tianjin Sea
Transportation Company, Tianjin Gas Company, DaGang Oil Field and Tianjin North
Food Company. Additionally, 20 of Tianjin City's 31 universities utilize
products or services provided by Create Co. We intend to expand our Create Co.
operation by adding to the sales force in order to better take advantage of
system integration opportunities available. The focus of our systems integration
efforts has been in the educational, transportation, natural gas and
manufacturing markets and our goal is to expand into other industries. In
addition, the pool of highly skilled engineering, marketing, sales, and
operations personnel in China is key to our success in growing our business.
Our wholly owned subsidiary, CW Communications, Inc., will focus on the
design and installation of video surveillance systems. Its current area of
operation is in the north Texas area around Dallas - Fort Worth. We believe that
there are business opportunities in the design and installation of video
surveillance that are complementary to our information technology business. We
believe that CW Communications, Inc.'s business model can also be employed in
the Chinese market by Create Co. as an additional service.
6
As of December 31, 2006, our working capital deficit was $362,158 and
our accumulated deficit was $13,820,485. Cash provided from our operations and
Revolving Lines of Credit are insufficient to cover the costs associated with
our plan of operation and our working capital requirements and we will need to
obtain additional funding to cover our cash requirements. We believe that such
additional funding will be in the form of equity financing from the sale of our
common stock or further debt financing. However, we cannot provide investors
with any assurance that we will be able to raise sufficient funding to cover our
cash requirements and we do not presently have any arrangements in place for any
future equity or debt financing.
OFF-BALANCE SHEET ARRANGEMENTS. We had no off-balance sheet
arrangements as of December 31, 2006.
NEW ACCOUNTING PRONOUNCEMENTS.
In February 2006, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - An
amendment of FASB Statements No. 133 and 140." This Statement resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interest in Securitized Financial Assets." This pronouncement
is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
Currently, the Company does not have any publicly traded derivative instruments
or participate in any hedging activities and, therefore, the adoption of SFAS
No. 155 is not expected to have a material impact on the Company's financial
position or results of operations.
In February 2006, the FASB issued Staff Position (FSP) No. FAS 123(R)-4
(As Amended) "Classification of Options and Similar Instruments Issued as
Employee Compensation That Allow for Cash Settlement upon the Occurrence of a
Contingent Event". This FSP addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement upon
the occurrence of a contingent event, which amends paragraphs 32 and A229 of
FASB Statement No. 123 (revised 2004), "Share-Based Payment". The adoption of
FSP No. FAS 123(R)-4 did not have a material impact on the Company's financial
position or results of operations.
In March 2006, the FASB issued SFAS No. 156: "Accounting For Servicing
of Certain Financial Instruments- an amendment of SFAS No. 140." This statement
establishes, among other things, the accounting for all separately recognized
servicing assets and servicing liabilities. This statement amends SFAS No. 140
to require that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. SFAS No. 156
permits, but does not require, the subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value. An entity
that uses derivative instruments to mitigate the risks inherent in servicing
assets and servicing liabilities is required to account for those derivative
instruments at fair value. Under SFAS No. 156, an entity can elect subsequent
fair value measurement to account for it's separately recognized servicing
assets and servicing liabilities. By electing that option, an entity may
simplify its accounting because this statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. SFAS No. 156 is effective for financial statements for fiscal
years beginning after September 15, 2006. Earlier adoption of SFAS No. 156 is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued any financial statements for that fiscal year. The adoption
of SFAS No 156 is not expected have a significant impact on the Company's
consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48
"Accounting for Uncertainty in Income Taxes," an interpretation of FASB
Statement No. 109. FIN 48 is effective for fiscal years beginning after December
15, 2006. Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts recognized
after the adoption should be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. Since the effective date
falls within the Company's fiscal year 2007, the Company did not adopt FIN 48 in
fiscal 2006.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
7
value is the relevant measurement attribute. Accordingly, SFAS 157 does not
require any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years, with earlier adoption permitted. The provisions of SFAS 157 should be
applied prospectively as of the beginning of the fiscal year in which it is
initially applied, with limited exceptions. The Company is currently evaluating
the provisions of SFAS 157.
In September 2006, the Staff of the SEC issued SAB No. 108:
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". SAB No. 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of determining whether
the current year's financial statements are materially misstated. The SEC staff
believes registrants must quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. This Statement is effective for fiscal years ending
after November 15, 2006. The adoption of SAB No. 108 did not have a significant
impact on the Company's consolidated financial statements.
In July 2006, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus and ratified Issue No. 06-2: "Accounting for Sabbatical
Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting
for Compensated Absences". SFAS No. 43 provides guidance for accounting for
compensated absences and states that an employer shall accrue a liability for
employees' compensation for future absences if certain conditions are met.
However, since certain compensated absences such as sabbatical leave do not
typically accrue until fully vested, there was uncertainty as to whether
employee rights to the compensated absence accumulate and meet the conditions of
SFAS No. 43. The consensus reached by the EITF has determined that sabbatical
and other similar benefits do accumulate and should be accrued for over the
requisite service period. Further, the EITF has called for adoption of the
consensus for fiscal years beginning after December 15, 2006. EITF 06-2 was
effective beginning January 1, 2007. The adoption of SAB No. 108 is not expected
to have a significant impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-including an amendment of FAS
115" (SFAS 159). SFAS 159 allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No 159 is not expected to have a significant impact on the Company's
consolidated financial statements.
ITEM 7. FINANCIAL STATEMENTS.
See pages beginning with page F1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 3, 2007, Sherb & Co., LLP ("Sherb") was appointed as our
registered independent public accountant for the year ended December 31, 2006.
On January 3, 2007 Bongiovanni and Associates ("Bongiovanni"), was dismissed as
our registered independent public accountant. The decisions to appoint Sherb and
dismiss Bongiovanni were approved by our board of directors on December 6, 2006.
During the fiscal years ended December 31, 2005 and 2004 and the
subsequent interim period up through the date of dismissal (January 3, 2007),
there were no disagreements with Bongiovanni on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Bongiovanni, would have caused Bongiovanni to make reference thereto in its
report on the our financial statements for such years. Further, there were no
reportable events as described in Item 304(a)(1)(iv)(B) of Regulation S-B
occurring within our two most recent fiscal years and the subsequent interim
period up through the date of dismissal (January 3, 2007).
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The audit report of Bongiovanni for our financial statements as of
December 31, 2005, contained a separate paragraph stating:
"The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in note 2 to the consolidated financial statements, the
Company has suffered losses from operations, has a stockholders'
deficit, has discontinued operations, has a negative cash flow from
operations, and has a negative working capital that raise substantial
doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in note 2 to the
consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty."
The audit report of Bongiovanni for our financial statements as of
December 31, 2004, contained a separate paragraph stating:
"The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in note 2 to the consolidated financial statements, the
Company has suffered losses from operations, has a stockholders'
deficit, has discontinued operations, and has a negative working
capital that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are
described in note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty."
During our two most recent fiscal years and the subsequent interim
period up through the date of engagement of Sherb (January 3, 2007), neither our
company nor anyone on its behalf consulted Sherb regarding the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on our financial statements.
Further, Sherb has not provided us with written or oral advice that was an
important factor considered us in reaching a decision as to any accounting,
auditing or financial reporting issues.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive
Officer / Chief Financial Officer conducted an evaluation of the effectiveness
of our disclosure controls and procedures as defined in Rule 15d-15(e)
promulgated under the Securities Exchange Act of 1934 as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive
Officer / Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of the
evaluation.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. In connection
with the evaluation of our internal controls, our management has concluded that
there were no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 8A(T). CONTROLS AND PROCEDURES
Not applicable.
ITEM 8B. OTHER INFORMATION.
None.
9
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
As of the date of this filing, our executive officers and directors
are:
NAME AGE POSITION
Pedro E. Racelis III 56 President, Chief Executive Officer,
Chief Financial Officer and Director
Michael A. Bowden 57 Director
Henry Zaks 63 Director
Brad Woods 47 Director
Robert McElhinney 48 Director
Iouri Onoufrienko 37 Director
Our Bylaws provide for a board of directors ranging from 1 to 12
members, with the exact number to be specified by the board. At present, we are
authorized to have a seven-member board and we presently have one vacancy on the
board, which we intend to fill during the second calendar quarter of 2007.
Vacancies in our board are filled by the board itself. Set forth below are brief
descriptions of the recent employment and business experience of our executive
officers and directors.
PETE RACELIS, PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER AND DIRECTOR. Mr. Racelis has been our President, Chief Executive
Officer, Chief Financial Officer and a director since June 2004. A veteran of
direct sales and management in multi-national companies for more than 21 years,
Mr. Racelis has extensive experience with telecommunications, operations,
management and organizational skills. Prior to joining the company in October
2002, Mr. Racelis sold hardware and software solutions to telecommunications
carriers, financial institutions, and commercial businesses both nationally and
internationally in North America. Mr. Racelis has held executive level positions
as Vice President/GM at Winstar Wireless (1995-1997), Director of Sales at Amati
Corporation (1997-1998), and Vice President at Stox.com (1998 - 2001).
MICHAEL A. BOWDEN, DIRECTOR. Mr. Bowden was our Chief Operating Officer
from February 2005 to January 2007 and has been a director since January 2005.
He has over 25 years of telecommunications experience in both highly technical
and major account sales environments. His experience includes supporting complex
projects ranging from $100K to $58M in annual revenue. Mr. Bowden was a
telecommunications consultant from August 2002 to February 2003. From December
2000 to August 2002, he was a senior sales engineer for Net.com, a Denver,
Colorado, company that provided telecommunications equipment to carriers. Mr.
Bowden was a technical support manager for Qwest Communications International
Inc. (formerly US West Communications), Denver, Colorado, from October 1998 to
December 2000.
HENRY ZAKS, DIRECTOR. Mr. Zaks has been a director since October 2003.
Since March 1973, he has been the President of Zaks-Shane, LTD and Health
Insurance Services, Inc. since December 1988. Both are Wisconsin-based
organizations that specialize in marketing business-to-business solutions to
both corporations and small companies. He has over 35 years' experience as a
sales professional.
BRAD WOODS, DIRECTOR. Mr. Woods served as our Interim President & CEO
from August 2003 to June 2004, and chief financial officer, secretary, and
treasurer from March 2003 to June 2004. He has extensive experience in
international investments, acquisitions, taxation, and computer applications
with both public and private companies.
10
Mr. Woods has also worked for Arthur Andersen & Co., where he executed projects
for and on behalf of clients in the oil and gas, financial services, leasing,
lodging, retail and light manufacturing industries. His experience includes
practicing before the Securities and Exchange Commission, both with existing
public companies and initial public offerings. He has also served as an advisor
to numerous companies.
ROBERT MCELHINNEY, DIRECTOR. Mr. McElhinney was appointed as a member
of our board of directors on January 19, 2007. Mr. McElhinney has 18 years of
experience in the manufacturing of commercial packaging and retail products and
has been involved in material resources planning, standard process controls,
operations and cost reduction projects. From 1986 to 2003, he served as
inventory control manager for Metal Packaging International, a manufacturing
company based in Northglenn, Colorado. During 2003 and 2004, Mr. McElhinney
served as operations manager for Amsco Windows, at their distribution center
based in Aurora, Colorado. He currently serves in a supervisory role with
Skywest Airlines, located in Denver, Colorado. Mr. McElhinney brings to our
board manufacturing and quality control experience to assist us with building a
program to manage our vendors and quality control. He earned a Bachelors degree
in Marketing from the University of Northern Colorado.
IOURI ONOUFRIENKO, DIRECTOR. Mr. Onoufrienko was appointed as a member
of our board of directors on January 19, 2007. Mr. Onoufrienko has 16 years of
international business experience, beginning as a trading manager in 1991 with a
Russian timber and paper manufacturing firm, where he managed the import and
export of commercial products in the European and North American markets. In
1996, Mr. Onoufrienko operated several service and support businesses that sold
products and services to major retail, educational institutions, and regional
hospitals in North America. Since 1999, he has been the owner of the regional
commercial flooring construction company, Onuffer Flooring, based in Thornton,
Colorado.
Our board members are paid $1,000 for each board meeting attended.
CONFLICTS OF INTEREST. Our officers and directors are, so long as they
are our officers or directors, subject to the restriction that all opportunities
contemplated by our plan of operation which come to their attention, either in
the performance of their duties or in any other manner, will be considered
opportunities of, and be made available to us and the companies that they are
affiliated with on an equal basis. A breach of this requirement will be a breach
of the fiduciary duties of the officer or director. If we or the companies with
which the officers and directors are affiliated both desire to take advantage of
an opportunity, then said officers and directors would abstain from negotiating
and voting upon the opportunity. However, all directors may still individually
take advantage of opportunities if we should decline to do so. Except as set
forth above, we have not adopted any other conflict of interest policy with
respect to such transactions.
COMMITTEES. In fiscal 2006, the board of directors did not have a
standing nominating or compensation committee, rather the entire board of
directors acted in such capacity. Additionally, Mr. Henry Zaks is the Chairman
of the Audit Committee. We do not have an audit committee financial expert.
CODE OF ETHICS. In February 2007, our board adopted our Code of Ethics
that applies to our directors and all of our employees, including our Chief
Executive Officer and our Chief Financial Officer. A copy of our Code of Ethics
may be obtained from the company without charge, upon written request to:
China Wireless Communications, Inc.
1746 Cole Boulevard, Suite 225
Golden, Co 80401-3210
Attention: Investor Relations
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. We are not
subject to Section 16(a) of the Securities Exchange Act of 1934.
11
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information the remuneration of our
chief executive officers and our executive officers or directors who earned in
excess of $100,000 per annum during any part of our last two fiscal years:
--------------------------------------------------------------------------------------------------------
Name and principal position Year Salary ($) Stock Awards ($) Total ($)
--------------------------------------------------------------------------------------------------------
Pedro E. Racelis, III 2005 144,000 128,000 272,000
President, Chief Executive Officer, Chief 2006 144,000 145,000 289,000
Financial Officer and Director (1)
--------------------------------------------------------------------------------------------------------
Michael Bowden
Director and former Chief Operating 2005 120,000 500,000 620,000
Officer (2) 2006 120,000 116,000 236,000
--------------------------------------------------------------------------------------------------------
(1) Mr. Racelis became our President, Chief Executive Officer, Chief
Financial Officer and a director in June 2004.
(2) Mr. Bowden was our Chief Operating Officer from February 2005 until
January 2007, and has served as a director since January 2005.
There have been no grants of stock appreciation rights or benefits
under long-term incentive plans or other forms of compensation involving our
officers, through December 31, 2006.
We reimburse our officers and directors for reasonable expenses
incurred in the performance of their duties. The members of our board of
directors are compensated at $1,000 per meeting.
EMPLOYMENT AGREEMENTS. In June 2004, Pedro E. Racelis III was appointed
as President and Chief Executive Officer of the Company and we entered into an
employment agreement with Mr. Racelis at that time. Salary for Mr. Racelis in
2005 was $144,000. On March 1, 2006, we entered into a new employment agreement
with Mr. Racelis for a term of six years renewable for one year after the
original term expires. Under the terms of the new employment agreement, Mr.
Racelis will be paid an annual salary of $250,000, with increases of 10%
annually. Mr. Racelis did not accept the increase in salary in 2006.
STOCK PLAN. On January 31, 2003, our shareholders adopted the 2003
Stock Plan, which provides for the granting of both incentive stock options and
nonstatutory stock options and stock purchase rights to officers, directors,
employees, and independent contractors. The total number of shares of common
stock that may be issued under this plan shall not exceed 15% of shares
outstanding.
The board of directors or one or more committees designated by the
board administers this plan, and has the authority and discretion to do the
following:
o determine the fair market value;
o select the employees, directors, or consultants to whom options and
stock purchase rights may be granted;
o determine the number of shares of common stock to be covered by each
option and stock purchase right granted under the Plan;
o approve forms of agreement for use under the Plan;
o determine the terms and conditions of an option or stock purchase right
granted under the Plan;
o construe and interpret the terms of the Plan and awards granted under
the Plan;
o prescribe, amend, and rescind rules and regulations relating to the
Plan;
o modify or amend each option or stock purchase right;
o allow optionees to satisfy withholding tax obligations by electing to
have the company withhold from the shares to be issued upon exercise of
an option or stock purchase right that number of shares having a fair
12
market value equal to the minimum amount required to be withheld;
o authorize any person to execute on behalf of the company any instrument
required to effect the grant of an option or stock purchase right; and
o make all other determinations deemed necessary or advisable for
administering the Plan.
We may grant incentive stock options with the exercise price being 100%
of the bid price on the date of grant, and nonstatutory stock options with the
exercise price being not less than 85% of the bid price on the date of grant.
The options are subject to any vesting, special forfeiture conditions, rights of
repurchase, rights of first refusal, and other transfer restrictions as may be
determined by the board or committee. Options granted cannot exceed a term of
ten years, except in the case of incentive stock options granted to holders of
10% of more of our total combined voting power of all classes of stock, which
cannot exceed a term of five years. The options terminate upon the earliest of
(1) the stated expiration date, (2) 30 days after the termination of the
optionee's service for any reason other than total and permanent disability, (3)
six months after the termination of the optionee's service by reason of total
and permanent disability, or (4) six months after the optionee's death.
Unless earlier terminated by the board of directors, this plan will
terminate January 30, 2013.
As of December 31, 2006, there were no outstanding options to purchase
shares of our common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
Common Stock of the Company, as of February 28, 2007:
---------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
---------------------------------------------------------------------------------------------------------------------
Pedro E. Racelis III (3)
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401 11,126,188 6.5%
---------------------------------------------------------------------------------------------------------------------
Michael A Bowden (4)
1746 Cole Boulevard, Suite 225 8,560,365 5.0%
Golden, Colorado 80401
---------------------------------------------------------------------------------------------------------------------
Brad Woods
1746 Cole Boulevard, Suite 225 -0- 0.0%
Golden, Colorado 80401
---------------------------------------------------------------------------------------------------------------------
Henry Zaks (5)
1746 Cole Boulevard, Suite 225 8,041,424 4.7%
Golden, Colorado 80401
---------------------------------------------------------------------------------------------------------------------
Robert McElhinney
1746 Cole Boulevard, Suite 225 -0- 0%
Golden, Colorado 80401
---------------------------------------------------------------------------------------------------------------------
Iouri Onoufrienko
1746 Cole Boulevard, Suite 225 -0- 0%
Golden, Colorado 80401
---------------------------------------------------------------------------------------------------------------------
All officers and directors as a Group (6 persons) 27,727,977 16.2%
---------------------------------------------------------------------------------------------------------------------
13
-----------
(1)>F1> To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) This table is based on 170,412,340 shares of Common Stock outstanding
as of February 28, 2007. If a person listed on this table has the right
to obtain additional shares of Common Stock within sixty (60) days from
February 28, 2007, the additional shares are deemed to be outstanding
for the purpose of computing the percentage of class owned by such
person, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
(3) 11,126,188 shares are held in the name of Global Sales Strategies
Inc., a Colorado corporation 100% owned and controlled by Pedro E.
Racelis III.
(4) 2,260,365 of these shares are held in the name of Michael A. Bowden
individually; 6,250,000 shares are held in the name of MBE Ltd., a
Colorado corporation 100% owned and controlled by Michael A. Bowden; an
additional 50,000 shares are 100% vested warrants, exercisable at a
price of $0.50. On January 19, 2007, Mr. Bowden resigned as an officer
of the Company, and on March 12, 2007 Mr. Bowden returned 6,000,000
shares of Common Stock to the Company which had been paid to Mr. Bowden
as compensation. The shares were then cancelled by the Company.
(5) 7,804,582 of these shares are held in the name of Henry Zaks; an
additional 236,842 of these shares are 100% vested warrants,
exercisable at a price of $0.40.
CHANGES IN CONTROL. There are no agreements known to management that may
result in a change of control of our company.
EQUITY COMPENSATION PLANS. As of December 31, 2006, our equity compensation
plan information is as follows:
-------------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted-average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, options, warrants and remaining available for
Plan Category warrants and rights rights future issuance
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans None None 25,561,851
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not None None None
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
Total None None 25,561,851
-------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
RELATED PARTY TRANSACTIONS. Other than as disclosed below, none of our
present directors, officers or principal shareholders, nor any family member of
the foregoing, nor, to the best of our information and belief, any of our former
directors, officers or principal shareholders, nor any family member of such
former directors, officers or principal shareholders, has or had any material
interest, direct or indirect, in any transaction, or in any proposed transaction
which has materially affected or will materially affect us.
a. PEDRO E. RACELIS, III (PRESIDENT AND CEO). During May 2006, Pedro
E. Racelis, III, the Company's President and CEO, made loan advances to the
Company of $15,500 and $3,612. These loans accrued interest at 8% per annum,
were unsecured and were due on July 2, 2006 and December 1, 2006, for the
$15,500 and $3,612 advance, respectively. At the request of the President and
CEO, the note in the amount of $15,500, plus accrued interest, was approved for
conversion into 310,000 shares of the Company's restricted common stock on
October 5, 2006. This note
14
payable was converted at the market price on the date of conversion. The $3,612
advance remains unpaid as of December 31, 2006.
In the fourth quarter of the year ended December 31, 2006, Mr. Racelis,
made loan advances to the Company totaling $21,038. These loans were received in
three advances, they are unsecured and accrue interest at 8% per annum. These
advances are payable upon demand until such time as the Company has drawn up a
formal loan payable document.
b. HENRY ZAKS (DIRECTOR). Prior to joining the Company Board, Henry
Zaks was compensated as a consultant to review administration and accounting
functions of the Company. During the year ended December 31, 2005, Mr. Zaks
converted notes payable of $30,000 into shares of common stock at a conversion
price of $0.05 per share, and he converted notes payable of $20,000 into 857,085
shares of common stock at a conversion price of $0.029 per share. The conversion
rate for both these conversions was at the market price on the dates of their
conversion.
During the year ended December 31, 2006, Mr. Zaks made loan advances of
$76,742 to the Company. All loan advances payable from Mr. Zaks accrued interest
at 8% per annum, prior to conversion, and were due at various dates, except for
the last loan advance, which was not formalized into a note payable. All loans
were unsecured. On November 7, 2006 all loan advances, plus accrued interest,
were approved for conversion into 1,810,837 shares of the Company's common
stock, except for the last loan advance made on November 11, 2006, which was
forgiven, along with accrued interest, on December 31, 2006. All conversions
were at the market rate on the date of conversion. The forgiveness of the note
payable has been accounted for as a capital contribution, as Mr. Zaks is an
officer of the Company
The following is a list of loans payable made from Mr. Zaks to the
Company.
Amount
Converted
With
Date Date Accrued Date Date
Amount Issued Due Interest Shares Converted Forgiven
------------ ------------- ------------ ------------- ------------ ----------- -------------
$ 10,000 3/22/2006 10/31/2006 $ 10,546 458,520 11/7/2006
4,137 4/13/2006 10/31/2006 4,324 187,998 11/7/2006
1,400 4/27/2006 10/31/2006 1,462 63,557 11/7/2006
7,680 5/1/2006 12/1/2006 7,939 198,486 11/7/2006
23,217 5/3/2006 10/2/2006 24,127 482,542 11/7/2006
3,600 5/15/2006 10/31/2006 3,722 161,810 11/7/2006
2,000 6/14/2006 12/1/2006 2,047 51,177 11/7/2006
4,708 9/28/2006 3/1/2007 4,755 206,747 11/7/2006
20,000 11/13/2006 n/a 12/31/2006
------------ ------------ ------------
$ 76,742 $ 58,922 1,810,837
c. MICHAEL BOWDEN (DIRECTOR). During the years ended December 31,
2006 and 2005 Michael Bowden, a director and former Chief Operating Officer of
the Company, made loan advances to the Company at various dates of $149,071 and
$12,698, respectively. These loans payable accrued interest at 8% per annum, and
unsecured), and were due on various repayments date, except for the last advance
of $3,200 on December 27, 2006. On November 13, 2006, the Company approved the
conversion of $24,310 in loan advances, plus $940 of accrued interest, into
564,903 shares of the Company's common stock at approximately $0.04 per share.
The conversion rate for this conversion was at the market price on the date of
conversion. All other loan advances from the year ended December 31, 2006,
including the last advance on December 27, 2006, which was not formalized into a
note payable, were forgiven by Mr. Bowden. The forgiveness of the note payable
has been accounted for as a capital contribution, as Mr. Bowden is an officer of
the Company.
15
The following table reconciles the loans payable for Mr. Bowden that
were received, converted into Common stock and forgiven during the years ended
December 31, 2006 and 2005:
Amount
Converted
With
Date Date Accrued Date Date
Amount Issued Due Converted Shares Converted Forgiven
------------ ------------- ------------ ------------- ------------ -------------- -------------
$ 12,698 8/1/2005 7/2/2006 $ 13,270 265,401 11/13/2006
73,059 5/3/2006 10/2/2006 7/5/2006
1,612 6/15/2006 12/1/2006 1,666 41,656 11/13/2006
10,000 6/26/2006 12/31/2006 10,314 257,846 11/13/2006
6,300 7/27/2006 1/31/2007 11/17/2006
5,000 9/26/2006 3/1/2007 11/17/2006
30,000 11/8/2006 12/1/2006 11/8/2006
6,000 11/8/2006 12/1/2006 11/17/2006
3,900 11/14/2006 12/1/2006 11/30/2006
4,800 12/11/2006 12/31/2007 12/15/2006
5,200 12/27/2006 1/31/2007 12/29/2006
3,200 12/27/2006 2/15/2007 12/31/2006
------------ ------------- ------------
$ 161,769 $ 25,250 564,903
As of December 31, 2006, there were no outstanding notes payable to Mr.
Bowden. On January 19, 2007, Mr. Bowden resigned as an officer of the Company.
On January 1, 2007, the Company entered into individual Revolving Lines
of Credit ("Revolver") agreements with Henry Zaks and Pedro E. Racelis III. Each
Revolver provides a $30,000 line of credit to the Company at 10% interest.
FUTURE TRANSACTIONS
All future affiliated transactions will be made or entered into on
terms that are no less favorable to us than those that can be obtained from any
unaffiliated third party.
DIRECTOR INDEPENDENCE
Our common stock trades on the OTC Bulletin Board. As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent. Since we are not currently subject to corporate governance
standards relating to the independence of our directors, we choose to define an
"independent" director in accordance with the NASDAQ Global Market's
requirements for independent directors (NASDAQ Marketplace Rule 4200). The
NASDAQ independence definition includes a series of objective tests, such as
that the director is not an employee of the company and has not engaged in
various types of business dealings with the company. We believe that Henry Zaks,
Robert McElhinney and Iouri Onoufrienko each qualify as an independent director
under the above definition. We do not list that definition on our Internet
website.
16
ITEM 13. EXHIBITS
(a) EXHIBITS:
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
2.1 Share Exchange Agreement dated as of March 17, 2003 by and
between i-Track, Inc. and Strategic Communications Partners, Inc.
(1)
--------------------------------------------------------------------------------
3.1 Articles of Incorporation (2)
--------------------------------------------------------------------------------
3.2 Bylaws (2)
--------------------------------------------------------------------------------
3.3 Certificate of Amendment to Articles of Incorporation (3)
--------------------------------------------------------------------------------
3.4 Certificate of Amendment to Articles of Incorporation (4)
--------------------------------------------------------------------------------
10.1 2003 Stock Plan, as amended (5)
--------------------------------------------------------------------------------
10.2 Employment Agreement dated April 23, 2004 with Pedro E. Racelis
III (6)
--------------------------------------------------------------------------------
10.3 Consulting Agreement with Jiaxin Consulting Group, Inc. dated
December 8, 2004 (8)
--------------------------------------------------------------------------------
10.4 Letter agreement with Tianjin Create IT Company Ltd. dated May
24, 2005 (9)
--------------------------------------------------------------------------------
10.5 Employment Agreement dated July 20, 2005 with Michael A. Bowden
(10)
--------------------------------------------------------------------------------
10.6 Promissory Note, dated August 1, 2005 in the amount of $12,698
payable to Michael Bowden (10)
--------------------------------------------------------------------------------
10.7 Employment Agreement dated March 1, 2006 with Michael A. Bowden
(10)
--------------------------------------------------------------------------------
10.8 Employment Agreement dated March 1, 2006 with Pedro E. Racelis
III (10)
--------------------------------------------------------------------------------
10.9 Amendment to Letter agreement with Tianjin Create IT Company Ltd.
dated May 18, 2006 (10)
--------------------------------------------------------------------------------
10.10 Promissory Note, dated May 3, 2006 in the amount of $15,500
payable to Pedro E. Racelis III (10)
--------------------------------------------------------------------------------
10.11 Promissory Note, dated May 3, 2006 in the amount of $23,217
payable to Henry Zaks (10)
--------------------------------------------------------------------------------
10.12 Promissory Note, dated May 3, 2006 in the amount of $73,059
payable to Michael Bowden (10)
--------------------------------------------------------------------------------
10.13 Promissory Note, dated May 30, 2006 in the amount of $3,612
payable to Pedro E. Racelis III (11)
--------------------------------------------------------------------------------
10.14 Promissory Note, dated June 16, 2006 in the amount of $2,000
payable to Henry Zaks (11)
--------------------------------------------------------------------------------
10.15 Promissory Note, dated June 16, 2006 in the amount of $1,612
payable to Michael A. Bowden (11)
--------------------------------------------------------------------------------
10.16 Promissory Note, dated June 26, 2006 in the amount of $10,000
payable to Michael A. Bowden (11)
--------------------------------------------------------------------------------
10.17 Promissory Note, dated June 27, 2006 in the amount of $7,680
payable to Henry Zaks (11)
--------------------------------------------------------------------------------
10.18 Forgiveness of Promissory Note, dated July 5, 2006 in the amount
of $73,059 payable to Michael A. Bowden (12)
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
10.19 Promissory Note, dated July 27, 2006 in the amount of $6,300
payable to Michael A. Bowden (12)
--------------------------------------------------------------------------------
10.20 Promissory Note, dated September 26, 2006 in the amount of $5,000
payable to Michael A. Bowden (12)
--------------------------------------------------------------------------------
10.21 Promissory Note, dated September 28, 2006 in the amount of $4,708
payable to Henry Zaks (12)
--------------------------------------------------------------------------------
10.22 Conversion Election Letter dated October 5, 2006 from Pedro E.
Racelis III (12)
--------------------------------------------------------------------------------
10.23 Conversion Election Letter dated October 30, 2006 from Henry Zaks
(12)
--------------------------------------------------------------------------------
10.24 Amendment to Letter Agreement Tianjin Create IT Company Ltd.
dated November 7, 2006 (12)
--------------------------------------------------------------------------------
10.25 Conversion Election Letter dated November 7, 2006 from Henry Zaks
--------------------------------------------------------------------------------
10.26 Conversion Election Letter dated November 7, 2006 from Henry Zaks
--------------------------------------------------------------------------------
10.27 Promissory Note, dated November 8, 2006 in the amount of $30,000
payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.28 Promissory Note, dated November 8, 2006 in the amount of $6,000
payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.29 Forgiveness of Promissory Note, dated November 8, 2006 in the
amount of $30,000 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.30 Promissory Note, dated November 10, 2006 in the amount of $20,000
payable to Henry K. Zaks
--------------------------------------------------------------------------------
10.31 Conversion Election Letter dated November 13, 2006 from Michael
A. Bowden
--------------------------------------------------------------------------------
10.32 Conversion Election Letter dated November 13, 2006 from Michael
A. Bowden
--------------------------------------------------------------------------------
10.33 Conversion Election Letter dated November 13, 2006 from Michael
A. Bowden
--------------------------------------------------------------------------------
10.34 Promissory Note, dated November 14, 2006 in the amount of $3,900
payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.35 Forgiveness of Promissory Note, dated November 17, 2006 in the
amount of $6,300 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.36 Forgiveness of Promissory Note, dated November 17, 2006 in the
amount of $5,000 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.37 Forgiveness of Promissory Note, dated November 17, 2006 in the
amount of $6,000 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.38 Forgiveness of Promissory Note, dated November 30, 2006 in the
amount of $3,900 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.39 Promissory Note, dated December 11, 2006 in the amount of $4,800
payable to Michael A. Bowden
-------------------------------------------------------------------------------
10.40 Forgiveness of Promissory Note, dated December 15, 2006 in the
amount of $4,800 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.41 Promissory Note, dated December 27, 2006 in the amount of $5,200
payable to Michael A. Bowden
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
10.42 Promissory Note, dated December 2, 2006 in the amount of $3,200
payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.43 Forgiveness of Promissory Note, dated December 29, 2006 in the
amount of $5,200 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.44 Forgiveness of Promissory Note, dated December 31, 2006 in the
amount of $20,000 payable to Henry Zaks
--------------------------------------------------------------------------------
10.45 Forgiveness of Promissory Note, dated December 31, 2006 in the
amount of $3,200 payable to Michael A. Bowden
--------------------------------------------------------------------------------
10.46 Revolving Line of Credit Agreement and Promissory Note, dated
January 1, 2007 in the amount of $30,000 payable to Pedro E.
Racelis III
--------------------------------------------------------------------------------
10.47 Revolving Line of Credit Agreement and Promissory Note, dated
January 1, 2007 in the amount of $30,000 payable to Henry Zaks
--------------------------------------------------------------------------------
16.1 Letter from Bongiovanni and Associates, dated January 11, 2007
(13)
--------------------------------------------------------------------------------
21.1 Subsidiaries of the registrant
--------------------------------------------------------------------------------
31.1 Rule 15d-14(a) Certification
--------------------------------------------------------------------------------
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated March 17, 2003 filed March 18, 2003.
(2) Incorporated by reference from the exhibits to the Registration
Statement on Form SB-1 filed on November 6, 2000, File No. 333-49388.
(3) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated March 22, 2003, filed March 31, 2003.
(4) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated November 22, 2004, filed November 24, 2004.
(5) Incorporated by reference to the exhibits to the registrant's annual
report on Form 10-KSB for the year ended December 31, 2002, filed April
9, 2003.
(6) Incorporated by reference to the exhibits to the registrant's
registration statement on Form S-8, File No. 333-104457, filed April
27, 2004.
(7) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated April 15, 2003, filed April 22, 2003.
(8) Incorporated by reference to the exhibits to the registrant's annual
report on Form 10-KSB for the year ended December 31, 2004, filed April
15, 2005.
(9) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated May 24, 2005, filed June 6, 2005.
(10) Incorporated by reference to the exhibits to the registrant's annual
report on Form 10-KSB for the year ended December 31, 2005, filed May
22, 2006.
(11) Incorporated by reference to the exhibits to the registrant's quarterly
report on Form 10-QSB for the quarter ended June 30, 2006, filed August
4, 2006.
(12) Incorporated by reference to the exhibits to the registrant's quarterly
report on Form 10-QSB for the quarter ended September 30, 2006, filed
November 14, 2006.
(13) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K/A dated January 3, 2007, filed January 11, 2007.
19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On January 3, 2006, Bongiovanni & Associates C.P.A. was dismissed as
our independent public accountants. Our board of directors approved the
dismissal of Bongiovanni & Associates C.P.A. Bongiovanni & Associates C.P.A. had
audited our consolidated balance sheet as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2005 and for the period from January 1, 2004 to
December 31, 2004.
On January 3, 2007, we engaged Sherb and Co., LLP based in Boca Raton,
Florida, as our principal accountant to audit our financial statements for the
year ending December 31, 2006. Our board of directors approved the engagement of
Sherb and Co.
AUDIT FEES
For the fiscal year ended December 31, 2006, Sherb and Co., LLP is
expected to bill approximately $28,000 for the audit of our annual financial
statements. For the fiscal year ended December 31, 2005, Bongiovanni &
Associates C.P.A. billed $58,397 for the audit of our annual financial
statements.
For the fiscal year ended December 31, 2007, Sherb and Co., LLP is
expected to bill approximately $4,000 for the review of our Form 10-QSB filings.
For the fiscal year ended December 31, 2006, Bongiovanni & Associates C.P.A.
billed $4,750 for the review of our Form 10-QSB filings. For the fiscal year
ended December 31, 2005, Bongiovanni & Associates C.P.A. billed $18,000 for the
review of our Form 10-QSB filings.
AUDIT-RELATED FEES
There were no fees billed for services reasonably related to the
performance of the audit or review of our financial statements outside of those
fees disclosed above under "Audit Fees" for fiscal years 2006 and 2005.
TAX FEES
For the fiscal year ended December 31, 2006, Sherb and Co., LLP is
expected to bill $7,500 for tax compliance, tax advice, and tax planning
services. For the fiscal year ended December 31, 2005, Bongiovanni & Associates
C.P.A. billed $8,000 for tax compliance, tax advice, and tax planning services,
respectively.
ALL OTHER FEES
There were no other fees, other than those described above.
PRE-APPROVAL POLICIES AND PROCEDURES
Prior to engaging our accountants to perform a particular service, our
board of directors obtains an estimate for the service to be performed. The
board of directors in accordance with procedures for the company approved all of
the services described above.
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHINA WIRELESS COMMUNICATIONS, INC.
Date: April 12, 2007 By: /s/ PEDRO E. RACELIS III
----------------------------------------------
Pedro E. Racelis III, President, Chief
Executive Officer and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
President, Chief Executive Officer
(Principal Executive Officer) and
/s/ PEDRO E. RACELIS III Chief Financial Officer (Principal April 12, 2007
---------------------------------- Financial and Accounting Officer)
Pedro E. Racelis III
/s/ HENRY ZAKS Director April 12, 2007
----------------------------------
Henry Zaks
/s/ ROBERT MCELHINNEY Director April 12, 2007
----------------------------------
Robert McElhinney
/s/ IOURI ONOUFRIENKO Director April 12, 2007
----------------------------------
Iouri Onoufrienko
/s/ MICHAEL A. BOWDEN Director April 12, 2007
----------------------------------
Michael A. Bowden
Director
----------------------------------
Brad Woods
21
CONTENTS
================================================================================
REPORTS OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRMS...............................................F-1-3
CONSOLIDATED STATEMENTS OF OPERATIONS............................F-4
CONSOLIDATED BALANCE SHEET.......................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS............................F-6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT..................F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................F-8
================================================================================
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
China Wireless Communications, Inc.
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401-3208
To the Board of Directors and Stockholders of China Wireless Communications,
Inc.
We have audited the accompanying consolidated balance sheet of China Wireless
Communications, Inc. (the "Company") and subsidiaries as of December 31, 2006
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statements presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 2006 and the consolidated results of their
operations and cash flows for the year ended December 31, 2006 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered losses from
operations, has a stockholders' deficit, has discontinued operations, and has a
negative working capital that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Sherb and Co., LLP,
Certified Public Accountants
Boca Raton, Florida
February 17, 2007
F-2
BONGIOVANNI & ASSOCIATES, P.A.
17111 KENTON DRIVE, SUITE 100-B
CORNELIUS, NORTH CAROLINA 28031
PHONE (704) 892-8733
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
China Wireless Communications, Inc.
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401-3208
To the Board of Directors and Stockholders of China Wireless Communications,
Inc.
We have audited the accompanying consolidated balance sheet of China Wireless
Communications, Inc. (the "Company") and subsidiaries as of December 31, 2005
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statements presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 2005 and the consolidated results of their
operations and cash flows for the year ended December 31, 2005 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered losses from
operations, has a stockholders' deficit, has discontinued operations, and has a
negative working capital that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BONGIOVANNI & ASSOCIATES, CPA'S
Bongiovanni & Associates, CPA's
Charlotte, North Carolina
May 22,2006
F-3
China Wireless Communications, Inc.
Consolidated Statements of Operations
Year ended December 31,
-------------------------------------------
2006 2005
-------------------- -------------------
Sales $ 478,139 $ 338,215
Cost of Sales 454,587 383,162
-------------------- -------------------
Gross profit (Loss) 23,552 (44,947)
-------------------- -------------------
Operating expenses:
Consulting expense 1,886,801 1,927,876
General and administrative expenses 494,741 153,308
-------------------- -------------------
Total operating expenses 2,381,542 2,081,184
-------------------- -------------------
Loss from operations (2,357,990) (2,126,131)
Other income (expense)
Other income 28,403 132,783
Loss on payment of expenses in common stock (854,900) -
Interest expense (42,257) (20,165)
-------------------- -------------------
Total non-operating income (868,754) 112,618
-------------------- -------------------
Net Loss $ (3,226,744) $ (2,013,513)
==================== ===================
Other Comprehensive income:
Foreign currency exchange gain 2,514 0
-------------------- -------------------
Comprehensive Loss $ (3,224,230) $ (2,013,513)
==================== ===================
Net loss per share, basic and diluted $ (0.025) $ (0.028)
==================== ===================
Weighted average common shares outstanding,
basic and fully diluted 128,712,765 71,618,722
==================== ===================
The financial statements should be read in conjunction with the
accompanying notes.
F-4
China Wireless Communications, Inc.
Consolidated Balance Sheet
December 31, 2006
ASSETS
Current assets
Cash and cash equivalents $ 28,214
Accounts receivable 33,849
Prepaid expenses 13,559
Other receivables 50,477
--------------
Total current assets 126,099
Fixed assets, net 7,693
--------------
$ 133,792
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 261,676
Interest payable 49,456
Loans payable 139,600
Loans payable - related parties 37,525
--------------
Total current liabilities 488,257
--------------
Stockholders' deficit:
Preferred stock, par value $0.01 per share, 1,000,000 shares of preferred
stock authorized, none issued and outstanding -
Common stock, par value $0.001 per share, 250,000,000 shares of common
stock authorized, 148,038,284 shares of stock issued and outstanding 148,038
Additional paid-in capital 13,315,468
Accumulated deficit (13,820,485)
Accumulated other comprehensive income 2,514
--------------
Total stockholders' deficit (354,465)
--------------
$ 133,792
==============
The financial statements should be read in conjunction with the
accompanying notes.
F-5
China Wireless Communications, Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
----------------------------------------
2006 2005
------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,226,744) $ (2,013,513)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 2,070 10,488
Common stock issued for compensation 2,997,305 1,927,876
Forgiveness of loans payable - (220,831)
(Increase) decrease in operating assets: Accounts receivable (21,362) -
Prepayments and other receivables and Inventory (29,068) (47,454)
Due from related party - (39,389)
Accounts payables and accrued expenses 16,754 167,110
Advances from customers (56,930) 56,930
Interest payable 28,544 (1,242)
------------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (289,431) (160,025)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets - (20,252)
Due from related party 39,389 -
------------------- -----------------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: 39,389 (20,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock - 143,694
Proceeds from loans payable - related parties 265,963 46,573
Repayments of loans payable - related parties - -
Repayments of loans payable - unrelated party (5,000) -
------------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 260,963 190,267
------------------- -----------------
Effect of exchange rate on cash 2,514 -
------------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,435 9,990
CASH AND CASH EQUIVALENTS - beginning of year 14,779 4,789
------------------- -----------------
CASH AND CASH EQUIVALENTS - end of year $ 28,214 $ 14,779
=================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ -
=================== =================
Income taxed paid $ - $ -
=================== =================
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debt into notes payable $ - $ -
=================== =================
Conversion of notes and interest payable into common stock $ 99,672 $ 71,644
=================== =================
Forgiveness of debt $ 158,947 $ -
=================== =================
The financial statements should be read in conjunction
with the accompanying notes.
F-6
China Wireless Communications, Inc.
Consolidated Statement of Stockholders' Deficit
Common stock Additional Other
-------------------------- Paid-in Accumulated Comprehensive
Number Amount Capital Deficit Income Total
------------- ----------- ------------ -------------- ------------- -------------
Balances at December 31, 2004 47,167,569 $ 47,167 $ 8,088,846 $ (8,580,228) $ - $ (444,215)
Common stock issued for services 38,926,923 38,927 1,888,949 - - 1,927,876
Common stock issued for cash 3,692,526 3,693 140,001 - - 143,694
Net loss for year ended December 31, 2005 - - - (2,013,513) - (2,013,513)
------------ ----------- ------------ -------------- ------------- -------------
Balances at December 31, 2005 89,787,018 89,787 10,117,796 (10,593,741) - (386,158)
Common stock issued for services 55,565,526 55,565 2,941,739 2,997,304
Common stock issued for conversion
of loans payable 2,685,740 2,686 96,986 99,672
Forgiveness of notes payable and
accrued interest - directors 158,947 158,947
Net loss for year ended December 31, 2006 (3,226,744) (3,226,744)
Foreign currency translation adjustment 2,514 2,514
------------ ----------- ------------ -------------- ------------- -------------
Balances at December 31, 2006 148,038,284 $ 148,038 $ 13,315,468 $ (13,820,485) $ 2,514 $ (354,465)
============ =========== ============ ============== ============ =============
The financial statements should be read in conjunction
with the accompanying notes.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Wireless Communications, Inc. ("China Wireless" or "CWC") was
originally incorporated under the laws of the State of Nevada on March
8, 1999 under the name of i-Track, Inc. On March 21, 2003, China
Wireless entered into an agreement with AVL Information Systems Ltd.
("AVL"), a related entity, whereby China Wireless distributed to AVL
all its assets and the related entity assumed all liabilities of the
China Wireless. Accordingly, as of March 21, 2003, China Wireless
entirely ceased its prior business operations.
Pursuant to a share exchange agreement effective on March 22, 2003, the
China Wireless acquired SCP, a Wyoming corporation incorporated on
August 13, 2002, by issuance of 19,000,000 restricted shares of the
China Wireless common stock to the shareholders of SCP, resulting in
the SCP shareholders as a group owning approximately 88.4% of the
outstanding shares of common stock of China Wireless. As a result, SCP
became a wholly-owned subsidiary of China Wireless.
For financial reporting purposes, the acquisition of SCP by China
Wireless was treated as a reverse acquisition whereby SCP was
considered as the acquirer, i.e. the surviving entity, for financial
reporting purposes. On this basis, the historical financial statements
prior to March 22, 2003 represent the financial statements of SCP. The
historical shareholders' equity accounts of China Wireless have been
retroactively restated in 2003 and prior years to reflect the issuance
of 19,000,000 shares of common stock since inception of SCP plus the
original 2,500,000 shares of common stock of China Wireless just prior
to the reverse acquisition, with corresponding adjustments to
additional paid-in capital.
On March 24, 2003, China Wireless formally changed its name from
i-Track, Inc. to China Wireless Communications, Inc. China Wireless,
CWC, SCP or any other subsidiary of China Wireless are referred to
hereafter as the "Company", unless reference is made to a respective
company for reference to events surrounding that company.
On May 24, 2005, the Company entered into a letter agreement to acquire
51% of the stock of Tianjin Create IT Company Ltd., a People's Republic
of China company ("Create Co."), for total consideration of $53,840, to
be comprised of (i) cash in the amount of $40,379.61 and (ii) 448,665
shares of the Company's common stock valued at $0.03 per share, for a
total of $13,460 in the Company's common stock. On September 6, 2005,
the Company paid $21,460 towards the acquisition price ($13,460 in the
Company's common stock and cash in the amount of $8,000).
On May 18, 2006, the Company entered into an amended letter agreement
with the 49% owner of Create Co., whereby the parties agreed to
increase the acquisition cost of Create Co. to $126,767. Because the
Company had previously made a payment of $21,460, the remaining
purchase amount owing was $105,307, as of the May 18, 2006 amendment.
The Company agreed to pay the remaining purchase amount owing of
$105,307 in cash no later than August 31, 2006.
On October 25, 2006, the Company and the 49% owner of Create Co.
further amended the purchase agreement whereby the Company agreed to a
final payment of $105,307, payable in (i) cash in the amount of $10,531
and (ii) 6,318,404 shares of the Company's common stock valued at
$94,776, to take place on December 31, 2006. The parties have agreed to
further extend the date of the final payment and expect the final
payment to be made by the end of June 2007.
The Company has recorded the $105,307 additional amount owing of the
$126,767 purchase price for Create Co., in accounts payable and accrued
expenses as of December 31, 2006.
Create Co. provides information technology systems integration and
internet protocol services to customers. It also provides IP routing
equipment and network cabling and its customers are principally in the
People's Republic of China.
During the year ended December 31, 2006, the Company formed a wholly
owned subsidiary, CW Communications, Inc., a Colorado corporation ("CW
Communications"), which operates in north Texas. Through CW
Communications, the Company intends to leverage technical and sales
opportunities presented by the
F-8
information technology side of their business in the areas of video
surveillance design, engineering and installation.
2. BASIS OF PRESENTATION
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("USGAAP").
Going concern - The Company has suffered recurring losses from
operations, has negative working capital, has a negative cash flow from
operations, and has a stockholders' deficit as of December 31, 2006. In
addition, the Company has yet to generate an internal cash flow from
its business operations and has generated operating losses since its
inception. These factors raise substantial doubt as to the ability of
the Company to continue as a going concern. Management's plans with
regard to these matters encompass the following actions: 1) obtain
funding from new investors to alleviate the Company's working
deficiency, and 2) implement a plan to increase cash flows. The
Company's continued existence is dependent upon its ability to resolve
its liquidity problems and increase profitability in its current
business operations. However, the outcome of management's plans cannot
be ascertained with any degree of certainty. The accompanying
consolidated financial statements do not include any adjustments that
might result from the outcome of these risks and uncertainties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting. The consolidated financial statements have been
prepared at historical cost under the accrual basis of accounting. Cost
in relation to assets represents the cash paid or the fair value of the
assets, as appropriate.
(b) Principles of consolidation. The consolidated financial statements
include the financial information of the Company and its subsidiaries.
The results of subsidiaries acquired or disposed of during the period
are consolidated from or to their effective dates of acquisition or
disposal, respectively. All material intercompany balances and
transactions have been eliminated on consolidation.
Comprehensive Income (Loss) - The Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in the
consolidated financial statements.
(c) Revenue recognition. The Company follows SEC Staff Accounting Bulletin
number 104 which establishes guidance on revenue recognition. Revenue
is recognized when it is probable that the economic benefits will flow
to the Company and when the revenue and cost, if applicable, can be
measured reliably.
Service revenue is recognized in the period when services are rendered
and that revenues on delivered items cannot be recognized if remaining
services to be performed are "essential to the functionality" of
delivered items.
(d) Income taxes. Provision for income and other related taxes have been
provided in accordance with the tax rates and laws in effect in various
countries of operations.
Deferred taxes are provided using the liability method for all
significant temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carry forwards. The tax
consequences of those differences are classified as current or
non-current based on the classification of the related assets or
liabilities in the financial statements.
(e) Operating leases. Leases where substantially all of the rewards and
risks of ownership of assets remain with the leasing company are
accounted for as operating leases. Rentals payable under operating
leases are recorded in the accompanying consolidated statement of
operations on a straight-line basis over the lease term.
(f) Earnings (Loss) per share. Basic earnings (loss) per common share are
computed by dividing earnings (loss) available to common stockholders
by the weighted average number of common shares outstanding for the
periods. The calculation of diluted earnings (loss) per share is based
on earnings (loss) available to common shareholders and on the weighted
average number of common shares outstanding adjusted to reflect
potentially dilutive securities. The Company's stock warrants and stock
options are anti-dilutive due to the net loss per share. There were no
adjustments required to net loss for the periods presented in the
computation of diluted earnings per share. There were 2,497,954 common
stock equivalents (CSE) excluded from the computation of diluted loss
per share.
F-9
(g) Foreign currencies. Transactions in currencies other than functional
currencies during the period are translated into the respective
functional currencies at the applicable rates of exchange prevailing at
the time of the transactions. Monetary assets and liabilities
denominated in currencies other than functional currencies are
translated into respective functional currencies at the applicable
rates of exchange in effect at the balance sheet date.
On consolidation, assets and liabilities of subsidiaries denominated in
respective functional currencies are translated into United States
Dollars at the exchange rate as of the balance sheet date. The share
capital and retained earnings are translated at exchange rates
prevailing at the time of the transactions. Revenues, costs and
expenses denominated in respective functional currencies are translated
into United States Dollars at the weighted average exchange rate for
the period. The effects of foreign currencies translation adjustments
are included as a separate component of accumulated other comprehensive
income.
(h) Management's use of estimates. The preparation of consolidated
financial statements in conformity with USGAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Such estimates are not limited to depreciation, taxes and
contingencies. Actual results could differ from those estimates.
(i) Fair value of financial instruments. The estimated fair values for
financial instruments under SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments", are determined at discrete points in time
based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which include cash,
accounts receivable, prepaid expenses, advances to suppliers, other
receivables, accounts payable and accrued expenses, interest payable,
advances from customers and notes payable, approximate their carrying
values in the consolidated financial statements.
(j) Cash and cash equivalents. Cash equivalents include all highly liquid
investments, generally with original maturities of three months or less
that are readily convertible to known amount of cash and which are
subject to an insignificant risk of changes in value.
(k) Fixed assets and depreciation. Fixed assets are recorded at cost less
accumulated depreciation and impairment. Repairs and maintenance
expenditures, which are not considered improvements and do not extend
the useful life of property, plant and equipment, are expensed as
incurred. The cost and related accumulated depreciation applicable to
fixed assets sold or no longer in service are eliminated from the
accounts and any gain or loss is included in the consolidated statement
of operations.
Depreciation is calculated to write off the cost of fixed assets over
their estimated useful lives from the date on which they become fully
operational and after taking into account of their estimated residual
values, using the straight-line method, at the following rates per
annum:
Vehicles 20%
Office equipment 20%
The Company has recorded depreciation expense of $2,070 and $10,488 for
the years ended December 31, 2006 and 2005, respectively.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the accounts and any gain or loss
resulting from their disposal is included in the consolidated statement
of operations.
The Company recognizes an impairment loss on fixed assets when
evidence, such as the sum of expected future cash flows (undiscounted
and without interest charges), indicates that future operations will
not produce sufficient revenue to cover the related future costs,
including depreciation, and when the carrying amount of asset cannot be
realized through sale. Measurement of the impairment loss is based on
the fair value of the assets.
Impairment of long lived assets - In accordance with SFAS No. 144, the
Company reviews and evaluates its long-lived assets for impairment
whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances
exist, including those noted above, the Company compares the assets'
carrying amounts against the estimated undiscounted cash flows to be
generated by those
F-10
assets over their estimated useful lives. If the carrying amounts are
greater than the undiscounted cash flows, the fair values of those
assets are estimated by discounting the projected cash flows. Any
excess of the carrying amounts over the fair values are recorded as
impairments in that fiscal period. No impairment exists as of December
31, 2006.
(n) Accounts receivable. Accounts receivable are generally reported net of
an allowance for uncollectible accounts. As of December 31, 2006, the
Company has not recorded an allowance as all the receivables are deemed
collectable at this time.
(o) Minority interest. Under generally accepted accounting principles when
losses applicable to the minority interest in a subsidiary exceed the
minority interest in the equity capital of the subsidiary, the excess
is not charged to the majority interest since there is no obligation of
the minority interest to make good on such losses. The Company,
therefore, has included losses applicable to the minority interest
against its interest since the minority owners have no obligation to
make good on the losses. If future earnings do materialize, the Company
shall be credited to the extent of such losses previously absorbed. As
previously stated, we closed the acquisition of a 51% majority interest
of Create Co. on May 24, 2005.
(p) Stock-based compensation. Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised),
"Share-Based Payment" (SFAS No. 123R), which requires the use of the
fair value method of accounting for all stock-based compensation,
including stock options. The statement was adopted using the modified
prospective method of application. Under this method, in addition to
reflecting compensation expense for new share-based awards, expense is
also recognized to reflect the remaining vesting period of awards that
had been included in pro-forma disclosures in prior periods. The
Company did not have any stock based compensation, including options
that would have required expensing under SFAS No. 123R for the year
ended December 31, 2006.
(q) New Accounting Pronouncements:
- In February 2006, the Financial Accounting Standard Board
("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - An amendment of FASB Statements No.
133 and 140." This Statement resolves issues addressed in SFAS
No. 133 Implementation Issue No. D1, "Application of Statement
133 to Beneficial Interest in Securitized Financial Assets."
This pronouncement is effective for all financial instruments
acquired or issued after the beginning of an entity's first
fiscal year that begins after September 15, 2006. Currently,
the Company does not have any publicly traded derivative
instruments or participate in any hedging activities and,
therefore, the adoption of SFAS No. 155 is not expected to
have a material impact on the Company's financial position or
results of operations.
- In February 2006, the FASB issued Staff Position (FSP) No. FAS
123(R)-4 (As Amended) "Classification of Options and Similar
Instruments Issued as Employee Compensation That Allow for
Cash Settlement upon the Occurrence of a Contingent Event".
This FSP addresses the classification of options and similar
instruments issued as employee compensation that allow for
cash settlement upon the occurrence of a contingent event,
which amends paragraphs 32 and A229 of FASB Statement No. 123
(revised 2004), "Share-Based Payment". The adoption of FSP No.
FAS 123(R)-4 did not have a material impact on the Company's
financial position or results of operations.
- In March 2006, the FASB issued SFAS No. 156: "Accounting For
Servicing of Certain Financial Instruments- an amendment of
SFAS No. 140." This statement establishes, among other things,
the accounting for all separately recognized servicing assets
and servicing liabilities. This statement amends SFAS No. 140
to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if
practicable. SFAS No. 156 permits, but does not require, the
subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value. An entity that
uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to
account for those derivative instruments at fair value. Under
SFAS No. 156, an entity can elect subsequent fair value
measurement to account for it's separately recognized
servicing assets and servicing liabilities. By electing that
option, an entity may simplify its accounting because this
statement permits income statement recognition of the
potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in
the same accounting period. SFAS No. 156 is effective for
financial statements for fiscal years beginning after
September 15, 2006. Earlier adoption of
F-11
SFAS No. 156 is permitted as of the beginning of an entity's
fiscal year, provided the entity has not yet issued any
financial statements for that fiscal year. The adoption of
SFAS No 156 is not expected have a significant impact on the
Company's consolidated financial statements.
- In June 2006, the FASB issued FASB Interpretation (FIN) No. 48
"Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109. FIN 48 is effective
for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the statements
of financial position prior to the adoption of FIN 48 and the
amounts recognized after the adoption should be accounted for
as a cumulative-effect adjustment recorded to the beginning
balance of retained earnings. Since the effective date falls
within the Company's fiscal year 2007, the Company did not
adopt FIN 48 in fiscal 2006.
- In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement
attribute. Accordingly, SFAS 157 does not require any new fair
value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within
those fiscal years, with earlier adoption permitted. The
provisions of SFAS 157 should be applied prospectively as of
the beginning of the fiscal year in which it is initially
applied, with limited exceptions. The Company is currently
evaluating the provisions of SFAS 157.
- In September 2006, the Staff of the SEC issued SAB No. 108:
"Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements". SAB No. 108 provides guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of
determining whether the current year's financial statements
are materially misstated. The SEC staff believes registrants
must quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is
material. This Statement is effective for fiscal years ending
after November 15, 2006. The adoption of SAB No. 108 did not
have a significant impact on the Company's consolidated
financial statements.
- In July 2006, the Emerging Issues Task Force ("EITF") of the
FASB reached a consensus and ratified Issue No. 06-2:
"Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for Compensated
Absences". SFAS No. 43 provides guidance for accounting for
compensated absences and states that an employer shall accrue
a liability for employees' compensation for future absences if
certain conditions are met. However, since certain compensated
absences such as sabbatical leave do not typically accrue
until fully vested, there was uncertainty as to whether
employee rights to the compensated absence accumulate and meet
the conditions of SFAS No. 43. The consensus reached by the
EITF has determined that sabbatical and other similar benefits
do accumulate and should be accrued for over the requisite
service period. Further, the EITF has called for adoption of
the consensus for fiscal years beginning after December 15,
2006. EITF 06-2 was effective beginning January 1, 2007. The
adoption of SAB No. 108 is not expected to have a significant
impact on the Company's consolidated financial statements.
- In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial
Liabilities-including an amendment of FAS 115" (SFAS 159).
SFAS 159 allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at
fair value that are not otherwise required to be measured at
fair value. If a company elects the fair value option for an
eligible item, changes in that item's fair value in subsequent
reporting periods must be recognized in current earnings. SFAS
159 is effective for fiscal years beginning after November 15,
2007. The adoption of SFAS No 159 is not expected to have a
significant impact on the Company's consolidated financial
statements.
4. INCOME TAXES
The Company's parent and their US subsidiaries are subject to the top
applicable Federal, State and Local tax statues. The Company's
subsidiaries in China are governed by the Income Tax Law of the Peoples
Republic of
F-12
China concerning Foreign Investment Enterprises and Foreign Enterprises
and local income tax laws (the "PRC Income Tax Law").
The components of loss for income tax purposes consist of the
following:
Year Ended December 31,
----------------------------------
2006 2005
-------------- --------------
US Operations $ (3,190,000) $ (2,011,000)
Chinese Operations (37,000) (3,000)
-------------- --------------
$ (3,227,000) $ (2,014,000)
============== ==============
The table below summarizes the reconciliation of the Company's income
tax benefits computed at the Federal statutory rate, netted against
reconciling items and a valuation allowance. The Company has not
provided a provision for income taxes, as the Company has incurred
losses for both its US and Chinese operations. Any benefit to be
derived from these losses has been fully reserved, as the Company
cannot reasonably estimate the future benefit from these net operating
losses.
Year Ended December 31,
------------------------------------
2006 2005
---------------- --------------
Income tax benefit at Federal statutory rate $ (1,097,000) $ (685,000)
State income tax benefit, net of Federal benefit (107,000) (66,000)
Permanent Differences 1,118,000 719,000
US operating loss not available against foreign 2,000 -
Foreign operating loss not available against for US tax
purposes 12,000 1,000
Increase in valuation allowance 72,000 31,000
---------------- --------------
$ - $ -
================ ==============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
"SFAS 109". SFAS 109 requires the recognition of deferred tax assets
and liabilities for both the expected impact of differences between the
financial statements and the tax basis of assets and liabilities, and
for the expected future tax benefit to be derived from tax losses and
tax credit carry forwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.
For their US Operations, the Company has not recorded any net deferred
tax assets, due to the uncertainty of recoverability on such assets.
The Company's Chinese Operations are governed by the Income Tax Law of
the Peoples Republic of China concerning Foreign Investment Enterprises
and Foreign Enterprises and local income tax laws (the "PRC Income Tax
Law"). Pursuant to the PRC Income Tax Law, foreign owned enterprises
are subject to tax at a statutory rate of approximately 33% (30% state
income tax plus 3% local income tax). Pursuant to the PRC Income Tax
Law, the Company's wholly owned subsidiary was exempted from PRC
enterprise income tax for the year ended December 31, 2005. For the
year ended December 31, 2006 the wholly owned subsidiary was subject to
a 50% PRC enterprise rate. The Company's Chinese operations did not
achieve income for tax purposes, accordingly a tax provision was not
provided for the Chinese operations for the years ended December 31,
2006 and 2005. Net operating tax losses for Chinese companies are
generally allowed to be used to offset future income, generally these
net operating losses expire after five years.
The Company has net operating loss ("NOL") carryforwards for United
States income tax purposes at December 31, 2006 expiring through the
year 2026. Management estimates the NOL as of December 31, 2006 to be
approximately $1,393,000. The utilization of the Company's NOL's may be
limited because of a possible change in ownership as defined under
Section 382 of Internal Revenue Code. The Company has recorded a
valuation allowance for benefit available from these NOL's, as it is
more likely than not that realization will not occur.
NOL carryforwards $ 520,000
Valuation allowance (520,000)
-----------
Deferred tax asset, net of allowance with regards to NOL's $ -
===========
F-13
5. LOANS PAYABLE
a.) During the year ended December 31, 2005 a total of $220,831 in
loans and interest payable were forgiven by three Chinese
companies. This forgiveness is included in other income.
b.) Between the years ended December 31, 2003 through December 31,
2005, the Company received loan advances of $139,600. These
loan advances accrue interest at 8% per annum, are unsecured
and were due to be repaid at various dates between the years
end December 31, 2003 through December 31, 2005. These loan
advances, and accrued interest of approximately $49,500 were
settled in January 2007 with the issuance of 9,452,811 shares
of the Company's common stock. These loan advances were
converted at the market price on the date of conversion. In
addition, the Company granted warrants to purchase 2,000,000
shares of the Company's common stock at $0.06 per share to the
loan holders. These warrants expire on January 12, 2009. These
warrants will be valued using the Black-Scholes valuation
method. These warrants will be expensed as a settlement of
debt charge. There were a total of four loan holders; each
loan holder received 500,000 warrants, irrespective of the
total loan advances payable balance due to the loan holder.
6. LOANS PAYABLE - RELATED PARTIES
a.) PEDRO E. RACELIS, III (COMPANY PRESIDENT AND CEO) -
During May 2006, Pedro E. Racelis, III, the Company President
and CEO, made loan advances to the Company of $15,500 and
$3,612. These loans accrued interest at 8% per annum, are
unsecured and is were due on July 2, 2006 and December 1,
2006, for the $15,500 and $3,612 advance, respectively. At the
request of the President and CEO, the note in the amount of
$15,500, plus accrued interest, was approved for conversion
into the 310,000 shares of the Company's restricted common
stock on October 5, 2006. This note payable was converted at
the market price on the date of conversion. The $3,612 advance
remains unpaid as of December 31, 2006.
In the fourth quarter of the year ended December 31, 2006, Mr.
Racelis, made loan advances to the Company totaling $21,038.
These loans were received in three advances, they are
unsecured and accrue interest at 8% per annum. These advances
are payable upon demand until such time as the Company has
drawn up a formal loan payable document.
b.) HENRY ZAKS (DIRECTOR) -
Prior to joining the Company Board, Henry Zaks was compensated
as a consultant to review administration and accounting
functions of the Company. During the year ended December 31,
2005, Mr. Zaks converted notes payable of $30,000 into 600,000
shares of common stock at a conversion price of $0.05 per
share, and he converted notes payable of $20,000 into 857,085
shares of common stock at a conversion price of $0.029 per
share. The conversion rate for both these conversions was at
the market price on the dates of their conversion.
During the year ended December 31, 2006 Mr. Zaks made loan
advances of $76,742 to the Company. All loan advances payable
from Mr. Zaks accrued interest at 8% per annum, prior to
conversion, and were due at various dates, except for the last
loan advance which was not formalized into a note payable. All
loans were unsecured. On November 7, 2006 all loan advances,
plus accrued interest, were approved for conversion into
1,810,837 shares of the Company's common stock, except for the
last loan advance made on November 11, 2006, which was
forgiven, along with accrued interest, on December 31, 2006.
All conversions were at the market rate on the date of
conversion. The forgiveness of the note payable has been
accounted for as a capital contribution, as Mr. Zaks is an
officer of the Company.
F-14
The following is a list of loans payable made from Mr. Zaks to
the Company.
Amount
Converted
With
Date Date Accrued Date Date
Amount Issued Due Interest Shares Converted Forgiven
------------ ------------- ------------ ------------- ------------ ----------- -------------
$ 10,000 3/22/2006 10/31/2006 $ 10,546 458,520 11/7/2006
4,137 4/13/2006 10/31/2006 4,324 187,998 11/7/2006
1,400 4/27/2006 10/31/2006 1,462 63,557 11/7/2006
7,680 5/1/2006 12/1/2006 7,939 198,486 11/7/2006
23,217 5/3/2006 10/2/2006 24,127 482,542 11/7/2006
3,600 5/15/2006 10/31/2006 3,722 161,810 11/7/2006
2,000 6/14/2006 12/1/2006 2,047 51,177 11/7/2006
4,708 9/28/2006 3/1/2007 4,755 206,747 11/7/2006
20,000 11/13/2006 n/a 12/31/2006
------------ ------------ -----------
$ 76,742 $ 58,922 1,810,837
MICHAEL BOWDEN (DIRECTOR) -
During the years ended December 31, 2006 and 2005 Michael
Bowden, a director and former Chief Operating Officer of the
Company, made loan advances to the Company at various dates of
$149,071 and $12,698, respectively. These loans payable
accrued interest at 8% per annum, and unsecured), and were due
on various repayments date, except for the last advance of
$3,200 on December 27, 2006. On November 13, 2006, the Company
approved the conversion of $24,310 in loan advances, plus $940
of accrued interest, into 564,903 shares of the Company's
common stock at approximately $0.04 per share. The conversion
rate for this conversion was at the market price on the date
of conversion. All other loan advances from the year ended
December 31, 2006, including the last advance on December 27,
2006, which was not formalized into a note payable, were
forgiven by Mr. Bowden. The forgiveness of the note payable
has been accounted for as a capital contribution, as Mr.
Bowden is an officer of the Company
The following table reconciles the loans payable for Mr.
Bowden that were received, converted into Common stock and
forgiven during the years ended December 31, 2006 and 2005:
Amount
Converted
With
Date Date Accrued Date Date
Amount Issued Due Interest Shares Converted Forgiven
------------ ------------- ------------ ------------- ------------ ----------- -------------
$ 12,698 8/1/2005 7/2/2006 $ 13,270 265,401 11/13/2006
73,059 5/3/2006 10/2/2006 7/5/2006
1,612 6/15/2006 12/1/2006 1,666 41,656 11/13/2006
10,000 6/26/2006 12/31/2006 10,314 257,846 11/13/2006
6,300 7/27/2006 1/31/2007 11/17/2006
5,000 9/26/2006 3/1/2007 11/17/2006
30,000 11/8/2006 12/1/2006 11/8/2006
6,000 11/8/2006 12/1/2006 11/17/2006
3,900 11/14/2006 12/1/2006 11/30/2006
4,800 12/11/2006 12/31/2007 12/15/2006
5,200 12/27/2006 1/31/2007 12/29/2006
3,200 12/27/2006 n/a 12/31/2006
------------ ------------ -----------
$ 161,769 $ 25,250 564,903
As of December 31, 2006, there were no outstanding notes payable to Mr.
Bowden. On January 19, 2007, Mr. Bowden resigned as an officer of the
Company.
F-15
8. COMMITMENTS AND CONTINGENCIES
On March 1, 2006, the Company entered into a new employment agreement
with Mr. Racelis as President and Chief Executive Officer for a term of
six years renewable for one year after the original term expires. Under
the terms of the new employment agreement, Mr. Racelis will be paid an
annual salary of $250,000, with increases of 10% annually. Mr. Racelis
did not accept the increase in salary in 2006.
The Company leases certain office premises under non-cancelable
operating leases. All leases are for a term of less than one year.
Rental expenses under operating leases were $2,700 and $7,214 for the
years ended December 31, 2006 and 2005, respectively.
Create Co. leases office space under an operating lease in the city of
Tianjin, People's Republic of China. Rental expenses under the
operating lease was $6,656 for the year ended December 31, 2006. This
lease expires in August, 2007.
9. EMPLOYEE RETIREMENT BENEFIT PLANS
As stipulated by the rules and regulations in the PRC, the Company is
required to contribute to a state-sponsored social insurance plan for
all of its employees who are residents of PRC at a rate of 20% of an
agreed amount with each of its employee, subject to limits set out by
the PRC government. The Company has no further obligations for the
actual pension payments or post-retirement benefits beyond the annual
contributions. The state sponsored retirement plan is responsible for
the entire pension obligations payable to all employees.
The pension expense for the years ended December 31, 2006 and 2005, was
$-0- and $-0-, respectively.
10. REPORT ON SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in respect of its operating
segments. The Company's income is substantially derived from the
operation in a single business segment which is the provision of
broadband data, video and voice communications services. In addition,
the Company's services are only provided to customers in the PRC.
Therefore, no geographical segment information is presented.
11. OPERATING RISKS
(a) Country risks:
The Company may be exposed to the risks as a result of its
operations being carried out in the PRC. These include risks
associated with, among others, the political, economic and
legal environment and foreign currency exchange. The Company's
results may be adversely affected by change in the political
and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The Company's management does not believe these risks to be
significant. There can be no assurance, however, those changes
in political and other conditions will not result in any
adverse impact.
(b) Cash balances
The Company maintains its cash balances with various banks and
trust companies located in the PRC. In common with local
practice, such amounts are not insured or otherwise protected
should the amounts placed with the banks and trust companies
be non-recoverable. The Company has not experienced any losses
with regards to their cash accounts, and believes that they
are not exposed to any significant risk for cash on deposit.
12. STOCK WARRANTS
Upon completion of the reverse acquisition of SCP by China Wireless on
March 22, 2003, as detailed in Note #1, the Company exchanged existing
warrants of 670,000 into 1,953,125 warrants. These warrants were
originally
F-16
issued to non-employees. Each warrant entitles the holder to purchase
one share of the Company's common stock at $1.00 per share. None of
these warrants have been exercised. All these warrants expired on July
1, 2006.
In June 2004, the Company issued 261,112 warrants to non-employees in
connection with a private placement sale of the Company's common stock.
Each warrant entitles its holder to purchase one share of the Company's
common stock at $0.45 to $0.50 per share. Michael Bowden, the former
COO and a director of the Company holds 50,000 of these warrants, that
where were issued to him prior to his employment as an officer with the
Company. None of these warrants has been exercised. These warrants are
exercisable until and prior to June 25, 2007.
Henry Zaks, a director of the Company holds 236,842 warrants issued
July 8, 2004 exercisable at $0.40 per share. These warrants are
exercisable until and prior to July 8, 2007.
The following table sets forth the Company's stock warrant and option
activity during the years ended December 31, 2006 and 2005:
Weighted Weighted
Shares average Shares average
underlying exercise underlying exercise
warrants price options price
------------ ------------------------------------------------
Outstanding at January 1, 2005 2,451,079 $ 0.94 $
Granted - -
Exercised - -
Expired or cancelled - -
------------ ------------------------------------------------
Outstanding at December 31, 2006 2,451,079 $ 0.94 $
Granted - -
Exercised - -
Expired or cancelled 1,953,125 1.00
------------ ------------------------------------------------
Outstanding at December 31, 2006 497,954 $ 0.44 $
============ ================================================
Exercisable at December 31, 2006 497,954 $ 0.44 $
============ ================================================
Weighted
average Weighted
Range of Number of remaining average
exercise options contractual exercise
prices outstanding life price
---------------- ------------- ---------------- -------------
$ 0.40 - 0.50 497,954 1/2 years $ 0.44
13. STOCKHOLDERS' EQUITY
At various times during the year ended December 31, 2006 the Company
issued 55,565,526 shares of common stock for services valued at
$2,142,405. These shares were issued at the market prices on the dates
of issuance ranging from $0.02 to $0.125 per share. Total compensation
for the year ended December 31, 2006 amounted to $2,962,750. The excess
value of the common stock over the market price has been accounted for
as a loss on payment of expenses.
At various times during the year ended December 31, 2005 the Company
issued 38,926,923 shares of common stock for services. These shares
were issued at the market prices on the dates of issuance ranging from
$0.02 to $0.10 per share. Total compensation for the year ended
December 31, 2005 amounted to $1,927,876.
At various times during the year ended December 31, 2005 the Company
sold 3,692,526 shares of common stock for cash. These shares were sold
at the market prices on the dates of sale ranging from $0.02 to $0.10
per share. Total proceeds from these sales to $143,694 for the year
ended December 31, 2005.
On November 22, 2004, the Company amended it Articles of Incorporation
to increase its authorized common shares to 250,000,000 with a
continued par value of $.001 per share.
F-17
14. SUBSEQUENT EVENTS
On January 19, 2007 the board of directors of the registrant approved
compensation for the members of the Board of Directors at $1,000 per
meeting.
Mr. Henry Zaks, already a member of the board of directors of the
Company, was appointed Chairman of the Audit Committee of the Company
effective January 19, 2007.
In the first quarter of 2007, the Company issued 6,318,404 shares of
common stock to the shareholders of Create Co. as part of our
acquisition price.
F-18