UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2009
 
OR
 
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _______ to _______

Commission file number 333-134883

CHINA TEL GROUP, INC.
( Exact name of Registrant as specified in its charter)

Nevada
98-0489800
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
8105 Irvine Center Drive, Suite 820, Irvine, California  92618
(Address of principal executive offices) (zip code)
 
949-585-9268
(Registrant's telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes  [_] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.)
[_] Yes  [_] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer [_]
Accelerated filer [_]
 
Non-accelerated filer [X]
Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [_] Yes [X] No

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date:  As of  November 9, 2009 the registrant had 170,863,298 shares of its Series A common stock outstanding with a par value of $0.001 and 66,909,088 shares of its Series B common stock outstanding with a par value of $0.001.
 

 
 

 

CHINA TEL GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 
 
     
PAGE
PART I.
FINANCIAL INFORMATION
 
    3
       
Item 1.
Financial Statements
 
    3
 
  
Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
 
    3
 
  
Condensed Consolidated Statements of Loss for the three and nine months ended September 30, 2009, three months ended September 30, 2008, April 4, 2008 (date of inception) through September 30, 2008 and from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)
 
    4
 
  
Condensed Consolidated Statement of Stockholders’ Deficit for the period from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)
 
    5
 
  
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009, April 4, 2008 (date of inception) through September 30, 2008 and from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)
 
    7
 
  
Notes to Condensed Consolidated Financial Statements (unaudited)
 
    8
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
   27
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
   35
       
Item 4.
Controls and Procedures
 
   35
       
Item 4(T).
Controls and Procedures
 
   36
       
PART II.
OTHER INFORMATION
 
   36
       
Item 1.
Legal Proceedings
 
   36
       
Item 1A.
Risk Factors
 
   37
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
   37
       
Item 3.
Defaults Upon Senior Securities
 
   37
       
Item 4.
Submission of Matters to a Vote of Security Holders
 
   37
       
Item 5.
Other Information
 
   37
       
Item 6.
Exhibits
 
   38
 

 
2

 

PART I – FINANCIAL STATEMENTS

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30,
   
December 31,
 
   
2009
   
2008
 
ASSETS
 
(unaudited)
       
Current assets:
           
Cash
  $ 18,121     $ 6,578  
Accounts receivable, net of provision for bad debts of $4,695
    89,179       -  
Accounts receivable, other
    8,742       -  
Inventory
    7,693       -  
Note receivable
    2,915,016       3,039,123  
Prepaid expenses
    163,946       -  
Deferred financing costs, net of accumulated amortization of $3,000,883 and $386,188, respectively
    870,919       3,203,608  
Total current assets
    4,073,616       6,249,309  
                 
Property, plant and equipment, net of accumulated depreciation of $1,278,598
    591,112       -  
                 
Other assets:
               
Intangible assets, net of accumulated amortization of $142,536
    119,214       -  
Goodwill
    797,156       -  
Investments, at cost
    196,000,000       5,000,000  
Total other assets
    196,916,370       5,000,000  
                 
Total assets
  $ 201,581,098      $ 11,249,309   
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 61,026,093     $ 42,632,534  
Unearned revenue
    23,040       -  
Line of credit
    141,593       -  
Advances from shareholders
    231,471       -  
Notes payable, related party
    1,050,000          
Notes payable
    191,245,463       -  
Convertible debentures, net of unamortized discount of $1,570,128 and $12,568,303, respectively
    22,549,557       21,535,101  
Derivative liability
    4,144,550       26,165,886  
Total current liabilities
    280,411,767       90,333,521  
                 
Long term debt
               
Mandatory redeemable Series B common stock
    66,909       66,909  
Total liabilities
  $ 280,478,676     $ 90,400,430  
                 
Stockholders' deficit:
               
Preferred stock, no par value, 25,000,000 shares authorized, no shares issued and outstanding
    -       -  
Common stock:
               
Series A common stock; $0.001 par value, 500,000,000 shares authorized, 163,497,600 and 89,458,947 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively
    163,498       89,459  
Additional paid in capital
   
65,099,150
      30,079,383  
Accumulated deficit
   
(144,190,270
)     (109,319,963 )
Accumulated other comprehensive income
    30,044       -  
Total China Tel Group, Inc.'s stockholders' deficit
    (78,897,578 )     (79,151,121 )
Non controlling interest
    -       -  
Total stockholder's deficit
    (78,897,578 )     (79,151,121 )
                 
Total liabilities and stockholders' deficit
  $ 201,581,098     $ 11,249,309  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3

 
CHINA TEL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(a development stage company)
(Unaudited)
 
                     
From April 4, 2008
   
From April 4, 2008
 
   
Three months
   
Three months
   
Nine months
   
(date of inception)
   
(date of inception)
 
   
ended
   
ended
   
ended
   
Through
   
Through
 
   
September 30, 2009
   
September 30, 2008
   
September 30, 2009
   
September 30, 2008
   
September 30, 2009
 
         
( restated )
         
( restated )
   
( restated )
 
                               
REVENUE
  $ 258,528     $ -     $ 457,766     $ -     $ 457,766  
Cost of sales
    235,816       -       364,247       -       364,247  
Gross profit
    22,712       -       93,519       -       93,519  
                                         
OPERATING EXPENSES:
                                       
Selling, general and administrative expenses
    18,801,147       1,943,302      
25,205,098
      5,027,872      
33,023,427
 
Depreciation and amortization
    41,476       -       58,880       -       58,880  
Research and development costs
    30,000       11,016,074       9,757,038       44,012,899       61,585,210  
Total operating expenses
    18,872,623       12,959,376      
35,021,016
      49,040,771      
94,667,517
 
                                         
Net loss from operations
    (18,849,911 )     (12,959,376 )     ( 34,927,497 )     (49,040,771 )    
(94,573,998
)
                                         
OTHER INCOME (EXPENSES):
                                       
Other income (expenses)
    (36,120 )     -       (36,907 )     -       (36,907 )
Gain (loss) on foreign currency transactions
    25,967               25,967               25,967  
Loss on investments, related party
    -       -       -       -       (6,636,410 )
(Loss) gain on change in fair value of debt derivative
    11,997,895       -       22,021,336       -       9,938,836  
Interest expense
    (9,256,200 )     (2,213,106 )     (21,953,206 )     (28,279,301 )     (52,557,687 )
                                         
Net loss before provision for income taxes
    (16,118,369 )     (15,172,482 )    
(34,870,307
)     (77,320,072 )    
(143,840,199
)
                                         
Income taxes
    -       -       -       -       -  
                                         
Net (Loss)
    (16,118,369 )     (15,172,482 )    
(34,870,307
)     (77,320,072 )     (143,840,199 )
                                         
Non controlling interest
    -       -       -       -       -  
                                         
NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.
  $ (16,118,369 )   $ (15,172,482 )   $
(34,870,307
)   $ (77,320,072 )   $ (143,840,199 )
                                         
Net loss per common share (basic and fully diluted)
  $ (0.13 )   $ (0.17 )   $ (0.33 )   $ (1.04 )   $ (1.56 )
Weighted average number of shares outstanding, basic and fully diluted
    125,166,675       87,439,040      
105,894,140
      74,428,713      
92,565,014
 
                                         
Comprehensive Loss:
                                       
Net Loss
  $ ( 16,118,369 )   $ (15,172,482 )   $
(34,870,307
)   $ (77,320,072 )   $ (143,840,199 )
Foreign currency translation gain
    30,044       -       30,044       -       30,044  
                                         
Comprehensive Loss:
    ( 16,088,325 )     (15,172,482 )    
(34,840,263
)     (77,320,072 )    
(143,810,155
)
Comprehensive loss attributable to the non controlling interest
    -       -       -       -       -  
Comprehensive loss attributable to China Tel Group, Inc.
  $ ( 16,088,325 )   $ (15,172,482 )   $
(34,840,263
)   $ (77,320,072 )   $
(143,810,155
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
4

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
 
   
CHINA TEL GROUP, INC.
             
   
Preferred stock
   
Common stock
   
Additional
   
Other
          Non-    
Total
 
               
Series A
   
Paid in
   
Comprehensive
   
Accumulated
   
controlling
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Deficit
   
Interest
   
Deficit
 
Balance, April 4, 2008 (date of inception)
    -     $ -       -     $ -     $ -     $ -     $ -     $ -     $ -  
Effect of merger with China Tel Group, Inc. (formerly Mortlock Ventures, Inc.) and assumption of liabilities as of April 4, 2008
    -       -       86,117,088       86,117       (153,026 )     -       (350,071 )     -       (416,980 )
Beneficial conversion feature relating to issuance of convertible debentures
    -       -       -       -       27,060,987       -       -       -       27,060,987  
Issuance of Series A common stock in exchange for convertible debentures
    -       -       1,471,663       1,472       1,396,608       -       -       -       1,398,080  
Issuance of Series A common stock in settlement of debt
    -       -       1,870,196       1,870       1,774,814       -       -       -       1,776,684  
Net loss
    -       -       -       -       -       -       (108,969,892 )     -       (108,969,892 )
Balance, December 31, 2008
    -       -       89,458,947       89,459       30,079,383       -       (109,319,963 )     -       (79,151,121 )
Issuance of Series A common stock in January 2009 in exchange for services rendered
    -       -       1,000,000       1,000       479,000       -       -       -       480,000  
Issuance of Series A common stock in January 2009 in exchange for previously incurred debt
    -       -       1,573,158       1,573       1,492,927       -       -       -       1,494,500  
Issuance of Series A common stock in February 2009 in exchange for services rendered
    -       -       986,526       987       393,624       -       -       -       394,611  
Issuance of Series A common stock in February  2009 in exchange for previously incurred debt
    -       -       204,861       205       194,413       -       -       -       194,618  
Issuance of Series A common stock in March 2009 in exchange for services rendered
    -       -       4,040,000       4,040       2,067,560       -       -       -       2,071,600  
Issuance of Series A common stock in March  2009 in exchange for previously incurred debt
    -       -       406,113       406       385,401       -       -       -       385,807  
Subtotal
    -   $   -       97,669,605     $ 97,670     $ 35,092,308     $ -     $ (109,319,963 )   $ -     $ (74,129,985 )
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
5

 
CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
   
CHINA TEL GROUP, INC.
             
   
Preferred stock
   
Common stock
   
Additional
   
Other
               
Total
 
               
Series A
   
Paid in
   
Comprehensive
   
Accumulated
   
Non controlling
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Deficit
   
Interest
   
Deficit
 
Balance forward
    -     $ -       97,669,605     $ 97,670     $ 35,092,308     $ -     $ (109,319,963 )   $ -     $ (74,129,985 )
Issuance of Series A common stock in March 2009 as deposit toward purchase of an investment
    -       -       1,000,000       1,000       429,000       -       -       -       430,000  
Issuance of Series A common stock in May  2009 in exchange for previously incurred debt
    -       -       211,500       211       200,713       -       -       -       200,924  
Issuance of Series A common stock in June  2009 in exchange for previously incurred debt
    -       -       263,158       263       249,737       -       -       -       250,000  
Issuance of Series A common stock in June 2009 in exchange for services rendered
    -       -       2,900,000       2,900      
1,075,100
      -       -       -      
1,078,000
 
Issuance of Series A common stock in July 2009 in exchange for services rendered
    -       -       7,403,149       7,403       5,945,116       -       -       -       5,952,519  
Issuance of Series A common stock in August 2009 in exchange for services rendered
    -       -       8,153,115       8,153       6,094,339       -       -       -       6,102,492  
Issuance of Series A common stock in August 2009 in exchange for convertible debentures and related interest
    -       -       23,991,144       23,991       7,247,020       -       -       -       7,271,011  
Issuance of Series A common stock in September 2009 in exchange for services rendered
    -       -       4,364,134       4,365       4,059,520       -       -       -       4,063,885  
Issuance of Series A common stock in September 2009 in exchange for convertible debentures and related interest
    -       -       14,541,795       14,542       4,198,720       -       -       -       4,213,262  
Issuance of common stock for services to be rendered
    -       -      
3,000,000
     
3,000
      (3,000     -       -       -       -  
Equity based compensation
    -       -       -       -      
510,577
      -       -       -      
510,577
 
Foreign currency translation gain
    -       -       -       -       -       30,044       -       -       30,044  
Net loss
    -       -       -       -       -       -      
(34,870,307
)     -      
(34,870,307
)
Balance, September 30, 2009
    -     $ -       163,497,600     $ 163,498     $
65,099,150
    $ 30,044     $
(144,190,270
)   $ -     $ (78,897,578 )
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
6

 
CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
 
         
From April 4, 2008
   
From April 4, 2008
 
   
Nine months
   
(date of inception)
   
(date of inception)
 
   
Ended
   
Through
   
Through
 
   
September 30, 2009
   
September 30, 2008
   
September 30, 2009
 
         
( restated )
   
( restated )
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net loss
  $
(34,870,307
)   $ (77,320,072 )   $
(143,840,199
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                       
Depreciation and amortization
    58,880       -       58,880  
Non controlling interest
    -       -       -  
Amortization of financing costs
    2,614,695       -       3,000,883  
Accretion of convertible debt
    10,998,175       -       12,513,258  
Gain on change in fair value of debt derivative
    (22,021,336 )     -       (9,938,836 )
Common stock issued in exchange for services
   
20,653,684
      -      
20,653,684
 
Beneficial conversion feature in conjunction with the issuance of convertible debentures
    -       27,060,987       27,060,987  
(Increase) decrease in:
                       
Accounts receivable
    60,549       -       60,549  
Inventory
    (3,881 )     -       (3,881 )
Note receivable
    124,107               124,107  
Prepaid expenses
    (27,110 )             (27,072 )
Increase (decrease) in:
                       
Accounts payable and accrued liabilities
    21,452,838       27,358,464       65,736,137  
Unearned revenue
    (11,810 )     -       (11,810 )
Net cash used in operating activities
    (971,516 )     (22,900,621 )     (24,613,313 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Cash from acquisition of Perusat S.A.
    19,419       -       19,419  
Proceeds received in connection with reverse merger
    -       -       55,404  
Investment in Chinacomm
    -       (5,000,000 )     (5,000,000 )
Net cash provided by (used in) investing activities
    19,419       (5,000,000 )     (4,925,177 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Proceeds from advances from shareholders
    231,471       -       231,471  
Payments made to notes payable
    (41,902 )     -       (41,902 )
Proceeds from notes payable, related party
    775,000       -       775,000  
Net proceeds from issuance of convertible debentures
    -       28,198,938       28,592,971  
Net cash provided by financing activities
    964,569       28,198,938       29,557,540  
                         
Effect of currency rate change on cash
    (929 )     -       (929 )
                         
Net increase in cash and cash equivalents
    11,543       298,317       18,121  
                         
                         
Cash and cash equivalents, beginning of the period
    6,578       -       -  
Cash and cash equivalents, end of the period
  $ 18,121     $ 298,317     $ 18,121  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                 
Cash paid during the period for interest
  $ -     $ -     $ -  
Cash paid during the period for taxes
  $ -     $ -     $ -  
                         
NON CASH INVESTING AND FINANCING ACTIVITIES
                       
Common stock issued in settlement of debt
  $ 14,010,122     $
4,322,844
    $
18,332,966
 
Common stock issued for services rendered
  $ 19,443,107     $ -     $ 19,443,107  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
7

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the presentation of the accompanying financial statements are as follows:

General

The accompanying unaudited condensed consolidated financial statements of China Tel Group, Inc., (“Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Accordingly, the results from operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2008 financial statements and footnotes thereto included in the Company's Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on May 15, 2009.

Basis and Business Presentation

The Company (formerly Mortlock Ventures, Inc.) was incorporated under the laws of the State of Nevada on September 19, 2005 for the purpose of acquiring and developing mineral properties. On April 8, 2008, the Company changed its name to China Tel Group, Inc. and began focusing on the telecommunications industry.

The Company is in the development stage, as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities, and its efforts have been principally devoted to developing a broadband wireless telecommunications network in several cities in the Peoples Republic of China (“PRC”).  To date, the Company has generated minimal sales revenues, has incurred expenses and has sustained losses.  Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise.  Since the Company’s inception through September 30, 2009, the Company has accumulated losses of $144,190,270 .  (Reference in this report to “Since the Company’s inception” refers to April 4, 2008, the date Trussnet Nevada was formed and the date used for financial activities for accounting purposes in this report.)

The consolidated financial statements include the accounts of the Company,  its wholly-owned subsidiaries, Trussnet USA, Inc., a Nevada corporation, (“Trussnet”), Gulfstream Capital Partners, Ltd, and majority owned subsidiary, Perusat S.A..  All significant intercompany balances and transactions have been eliminated in consolidation.

Reverse Merger and Corporate Restructure

On May 21, 2008, the Company consummated a reverse merger by entering into a reorganization and merger agreement (“Merger”) with the shareholders of Trussnet, pursuant to which the shareholders of Trussnet exchanged all of the issued and outstanding capital stock of Trussnet for 66,909,088 shares of Series A common stock of the Company, representing 77.7% of the Company’s outstanding Series A common stock and 66,909,088 Series B common stock, after the return to treasury and retirement of 57,600,000 shares of common stock (categorized as Series A common stock) of the Company held by certain shareholders of the Company.  This took place concurrently with the Merger.


 
8

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Series B common stock is non transferable, not participating with any declared dividends with voting rights in all matters in which shareholders have a right to vote at a 10 votes per each share of Series B common stock.  The Series B common stock is redeemable on May 23, 2023 at par value of $0.001 per share.

As a result of the Merger, there was a change in control of the Company.  In accordance with Accounting Standards Codification subtopic 815-10 (“ASC 815-10”), Business Combinations, the Company was the acquiring entity.  In substance, the Merger is a recapitalization of the Company’s capital structure, rather than a business combination.
 
For accounting purposes, the Company accounted for the transaction as a reverse acquisition, with the Company as the surviving entity.  The total purchase price and carrying value of net assets acquired was $-0-.  The Company did not recognize goodwill or any intangible assets in connection with the transaction.

The results of operations of Mortlock Ventures, Inc., until the Merger, are included in the Company's condensed consolidated statement of losses.
 
All reference to common stock shares and per share amounts have been retroactively restated to effect the reverse acquisition, as if the transaction had taken place as of the beginning of the earliest period presented.

The total consideration paid was $-0- and the significant components of the transaction are as follows:
 
Mortlock Ventures, Inc.
Summary Statement of Financial Position
At May 21, 2008
   
Current Assets:
       
Cash
 
$
55,404
 
Other assets:
       
Prepaid expenses
   
38
 
Advances receivable
   
2,616,105
 
         
Current Liabilities:
       
Accounts payable
   
(125,919
)
Convertible debentures
   
(2,395,699
)
Subscriptions received
   
(500,000
)
Net liabilities assumed
 
$
(350,071
)

Acquisition of Perusat S.A

On April 15, 2009, the Company completed the purchase of 95% of the outstanding shares of Perusat S.A.  The total purchase price was $705,000, consisting of an aggregate of 1,000,000 shares of the Company’s common stock and a note payable of $275,000.

The common stock, valued at the date of closing, was $430,000 and was not registered under the Securities Act of 1933, as amended.

In accordance with ASC 815-10, the purchase method of accounting was used to account for the acquisition of Perusat.  The results of operations of Perusat have been included in the Consolidated Statements of Losses since the date of acquisition.
 

 
9

 

CHINA TEL GROUP, INC.
(a development stage company)
(NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

In accordance with ASC 815-10, the total purchase price was allocated to the estimated fair value, as determined by management, of the assets acquired and liabilities assumed, as follows:
 
Cash
 
$
19,419
 
Current assets acquired
   
352,566
 
Property, plant and equipment, net
   
612,893
 
Software licenses, net
   
124,357
 
Total assets:
 
$
1,109,235
 
Less:
       
Liabilities assumed
   
(1,201,391
)
Non controlling interest
   
-
 
Net:
   
(92,156
Goodwill acquired
   
797,156
 
Total purchase price
 
$
705,000
 

The Company identified software as identifiable intangible assets with estimated life of 10 years.

Goodwill in the amount of $797,156 represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired and their associated costs and expenses.
 
Estimates

The preparation of the financial statements are in conformity with United States generally accepted accounting principles, which require management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.

Revenue Recognition

For revenue from product sales and services, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10 ”) requires that four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the selling price is fixed and determinable; and (iv) collectibility is reasonably assured.  Determination of criteria (iii) and (iv) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25 ”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.  The effect of implementing ASC 605-25 on the Company's financial position and results of operations was not significant.


 
10

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Revenue arises from sale of local and long distance service access where payments are received before the service has been rendered.  The Company sells our products separately and in various bundles that contain multiple deliverables.  They include long distance and prepaid phone cards, along with other products and services.  In accordance with ASC 605-25, sales arrangements with multiple deliverables are divided into separate units of accounting, if the deliverables in the arrangement meet the following criteria: (i) the product has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of undelivered items; and (iii) delivery or performances of any undelivered item is probable and substantially in our control.  The fair value of each separate element is generally determined by prices charged when sold separately.  In certain arrangements, the Company offers these products bundled together.  If there is any discount from the combined fair value of the individual elements, the discount is allocated to the portion of the revenues attributable to the individual elements.  As per ASC 605-25, if fair value of all undelivered elements in an arrangement exists, but fair value does not exist for a delivered element, then revenue is recognized using the residual method.  Under the residual method, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee (after allocation of 100 percent of any discount to the delivered item) is recognized as revenue. 

As of September 30, 2009, the Company had unearned revenue of $23,040.

Cash and Cash Equivalents

For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
 
Fair Values

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments.  The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments.  All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.  Where practicable, the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise, only available information pertinent to fair value has been disclosed.

Effective January 1, 2008, we adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) which permits entities to choose to measure many financial instruments and certain other items at fair value.  Neither of these statements had an impact on the Company’s consolidated financial position, results of operations or cash flows.

Accounting For Bad Debt and Allowances

Bad debts and allowances are provided based on historical experience and management's evaluation of outstanding accounts receivable.  Management evaluates past due or delinquency of accounts receivable based on the open invoices aged on due date basis.  Allowance for doubtful accounts at September 30, 2009 was $4,695.

Inventories

The inventory consists of finished goods substantially ready for resale purposes.  The Company purchases the merchandise on delivered duty paid basis.


 
11

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Property, Plant and Equipment
 
Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets.
 
The estimated useful lives of property, plant and equipment are as follows:

Buildings
 
33 years
 
Machinery and equipment
 
10 years
 
Vehicles
 
4 years
 
Fur  Furniture and fixtures
 
10 years
 
Computers
 
4 years
 
 
The Company evaluates the carrying value of items of property, plant and equipment to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  The carrying value of an item of property, plant and equipment is considered impaired when the projected undiscounted future cash flows related to the asset are less than its carrying value.  The Company measures impairment based on the amount by which the carrying value of the respective asset exceeds its fair value.  Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved.

Long-Lived Assets

The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”).  ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.  The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows.  Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Income Taxes

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”)  ASC 740-10 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

Comprehensive Income

The Company adopted Statement of Accounting Standards Codification subtopic 220-10, Comprehensive Income (“ASC 220-10”). ASC 220-10 establishes standards for the reporting and displaying of comprehensive income and its components.  Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources.  It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.  ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities.


 
12

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Functional Currency

The functional currency of the Companies is the U. S. dollar.  When a transaction is executed in a foreign currency, it is re-measured into U. S. dollars based on appropriate rates of exchange in effect at the time of the transaction.  At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the Companies are adjusted to reflect the current exchange rate.  The resulting foreign currency transactions gains (losses) are included in general and administrative expenses in the accompanying consolidated statements of operations.

Net Loss Per Share

The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”)  This requires the computation, presentation and disclosure requirements of earnings per share information.  Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding.  Stock options and warrants have been excluded as common stock equivalents in the diluted earnings per share, because they are either anti-dilutive or their effect is not material.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables.  The Company places its cash and temporary cash investments with high credit quality institutions.  At times, such investments may be in excess of the FDIC insurance limit.

Stock Based Compensation

Effective for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10 ”)  This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values.

As of September 30, 2009, there were no outstanding employee stock options.

Research and Development

The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10 ”).  Under ASC 730-10, all research and development costs must be charged to expense as incurred.  Accordingly, internal research and development costs are expensed as incurred.  Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved.  Company-sponsored research and development costs related to both present and future products, and services are expensed in the period incurred.  The Company incurred research and development expenses of $30,000 and $9,757,038 for the three and nine month periods ended September 30, 2009, respectively; $11,016,074 for the three months and from April 4, 2008 (since the Company’s inception) through September 30, 2008, respectively and $61,585,210 from April 4, 2008 (since the Company’s inception) through September 30, 2009.


 
13

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Investments

The Company entered into a Framework Agreement whereby the Company, through its subsidiary, Gulfstream Capital Partners, Ltd., agreed to acquire 49% interest in ChinaComm Cayman for a total purchase price of $196 million.   At December 31, 2008, pursuant to an agreement between the parties, the Company has paid $5,000,000 toward the purchase and on March 9, 2009, issued a promissory note for $191,000,000.  See Note 6 for a complete discussion of this agreement.

The Company did not evaluate for impairment, and the fair value of the cost-method investment is not estimated, since there is no identified events or changes in circumstances that may have a significant adverse effect on the fair value and the Company determined in accordance with ASC 825-10 that it was not practicable to estimate the fair value of the investment.

Liquidity

As shown in the accompanying financial statements, the Company incurred loss from operations of $34,870,307 for the nine month period ended September 30, 2009 and $143,840,199 since the Company’s date of inception through September 30, 2009.

N ew Accounting Pronouncements
 
With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in the Annual Report that are of material significance, or have potential material significance, to the Company.
 
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with United States generally accepted accounting practices.  Rules and interpretive releases of the United Sates Securities and Exchange Commission (“SEC”), under authority of Federal securities laws, are also sources of authoritative United States generally accepted accounting principals for SEC registrants.  All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates (“ASUs”).  The FASB will not consider ASUs as authoritative in their own right.  ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been updated for the Codification.


 
14

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 
Effective January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements and Disclosures – Overall (“ASC 820-10”) with respect to its financial assets and liabilities.  In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations .  The updated guidance provided a one year deferral of the effective date of ASC 820-10 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company adopted the provisions of ASC 820-10 for non-financial assets and non-financial liabilities effective January 1, 2009, and such adoption did not have a material impact on the Company’s results of operations or financial condition.
 
Effective April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information (“ASC 820-10-65”).  ASC 820-10-65 provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for an asset or liability have significantly decreased.  ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  The adoption of ASC 820-10-65 did not have an impact on the Company’s results of operations or financial condition.
 
Effective April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall – Transition and Open Effective Date Information (“ASC 825-10-65”). ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements, as well as in annual financial statements, and also amends ASC 270-10 to require those disclosures in all interim financial statements.  The adoption of ASC 825-10-65 did not have a material impact on the Company’s results of operations or financial condition.
 
Effective April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall (“ASC 855-10”). ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued.  This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented.  Adoption of ASC 855-10 did not have a material impact on the Company’s consolidated results of operations or financial condition. The Company has evaluated subsequent events through November 11, 2009, the date the financial statements were issued.
 
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities.  ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques.  ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability.  ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
 

 
15

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
 
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition ) (“ASU 2009-13”) and ASU 2009-14, Certain Arrangements That Include Software Elements , (amendments to FASB ASC Topic 985, Software ) (“ASU 2009-14”).  ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy.  The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method.  ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted.  The Company does not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on the Company’s results of operations or financial condition.

FASB ASC 855, Subsequent Events (“ASC 855” and formerly referred to as FAS-165), modified the subsequent event guidance. The three modifications to the subsequent events guidance are: (i) to name the two types of subsequent events either as recognized or non-recognized subsequent events; (ii) to modify the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statement are issued or available to be issued; and (iii) to require entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date, i.e. whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively.
 
FASB ASC 105, Generally Accepted Accounting Principles (“ASC 105”) and formerly referred to as FAS 168) establishes the Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with United States generally accepted accounting principals. . Rules and interpretive releases of the SEC under authority of Federal securities laws are also sources of authoritative generally accepted accounting principals for SEC registrants.  ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

NOTE 2 - GOING CONCERN MATTERS
 
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As shown in the accompanying condensed consolidated financial statements, the Company incurred a net loss of $34,870,307 for the nine month period ended September 30, 2009.  Additionally, the Company has negative working capital of $276,338,151 as of September 30, 2009.  These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
  
The Company’s continued existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

NOTE 3 – NOTE RECEIVABLE

In conjunction with the sale of convertible debentures, the Company’s broker/dealer issued a promissory note for $3,039,123 representing non forwarded proceeds received from convertible note subscribers.  The Company has entered into an agreement pursuant to which the Company’s broker/dealer will provide to the Company Series A common stock of the Company held by the broker/dealer. During the nine months ended September 30, 2009, the Company collected $124,107 towards the note leaving $2,915,016 unpaid at September 30, 2009.
 

 
16

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

On July 8, 2009, the Company filed a complaint for: (i) reformation of contract; (ii) specific performance of contract; (iii) damages for breach of contract; (iv) damages for promissory fraud; and (v) declaratory relief in the Superior Court for the State of California, County of Orange, against Westmoore Management, LLC, Westmoore Capital Group, LLC, Capital Asset Lending, a corporation, Matthew Jennings (collectively, “Westmoore”) and Aspen Stock Transfer Agency, Inc. stemming from the failure of Westmoore to perform its obligations under a Settlement Agreement and Mutual Releases executed by Westmoore and the Company on May 15, 2009.  Aspen Stock Transfer, the Company’s stock transfer agent, was named in the litigation for the sole purpose of being included in potential court orders to restrict the transfer of the Company’s shares held by Westmoore.

On or about September 25, 2009, the Company, Westmoore and Aspen Stock Transfer entered into a Stipulation for Preliminary Injunction and Regarding Mechanics of Third-Party Investors providing for an injunction to enjoin the transfer of any shares of the Company held by Westmoore (“Stipulation”).  The Stipulation further provided for the mechanics to resolve issues regarding the validity of the convertible notes held by the subscribers whose purchase funds were the subject of the lawsuit.  The Company and Westmoore are currently soliciting responses from the subscribers of the convertible notes at issue to determine the disposition of the convertible notes and the eventual resolution or continuation of the litigation.
 
The execution of the Stipulation has resulted in an injunction enjoining the Company's stock transfer agent from transferring the Company's Series A common stock by various Westmoore entities.  The Company is not reserving for the note receivable due to the injunction on a sufficient number of the Company's Series A common stock to satisfy the note receivable.

NOTE 4 –PREPAID EXPENSES

Prepaid expenses at September 30, 2009 are comprised of the following:

Prepaid insurance
 
$
1,590
 
Prepaid payroll taxes
   
149,794
 
Deferred charges
   
6,289
 
Other prepaid expenses
   
6,273
 
Total prepaid expenses
 
$
163,946
 

NOTE 5 – DEFERRED FINANCING COSTS

Deferred financing costs are amortized ratably over a 13.5 month period in conjunction with the related convertible notes.  The Company charged $1,026,057 and $2,614,685 to operations for the three and nine month periods ended September 30, 2009, respectively; $-0- from April 4, 2008 (date of inception) through September 30, 2008 and 3,000,883 from April 4, 2008 (date of inception) through September 30, 2009.
 
NOTE 6- DEPOSITS AND INVESTMENTS
 
The Company, on March 9, 2009, acquired 49% of the authorized shares of ChinaComm Cayman, through its wholly owned subsidiary Gulfstream Capital Partners, Ltd., for a purchase price of $196 million from Trussnet Capital Partners (HK) Ltd.  Trussnet Capital Partners (HK) Ltd., of which Tay Yong Lee is the sole shareholder, provided bridge financing for this transaction.  The Company paid $5 million of the purchase price in cash and paid the balance of the $191 million by delivering a promissory note secured by the ChinaComm Cayman shares acquired in the transaction.  The promissory note bears interest of 8% per annum, payable quarterly, has a due date of March 9, 2010 and is non-recourse, except for the pledged collateral.  Upon payment of this note, Trussnet Capital Partners (HK) Ltd. will deliver the funds to ChinaComm Cayman, which will in turn capitalize Yunji and Trussnet Dalian. The Company accounts for the investment under the equity method of accounting.

A summary of the investment activity is as follows:

Fair value of the investment:

 
September 30, 2009
 
Fair value of the investment
$196,000,000
 
 

 
17

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Details of the Company’s equity method investment as of September 30, 2009 are as follows:

Name of business:
 
ChinaComm Cayman
Place of incorporation:
 
Cayman Islands
Principal Activity:
 
Wireless communication in the PRC
Percentage Ownership Interest:
 
49%

As of September 30, 2009, ChinaComm Cayman was an inactive entity with no assets, liabilities or operating activities, except for contractual rights in the operation of the Chinacomm Network.

The Company did not evaluate for impairment, and the fair value of the equity-method investment is not estimated, since there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and the Company determined, in accordance with ASC 825-10, that it is not practicable to estimate the fair value of the investment.

NOTE 7 – INTANGIBLE ASSETS

Intangible assets are comprised of software and other licenses and are amortized over the estimated life of 10 years.  The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or indicate that impairment exists.

For the three and nine months ended September 30, 2009; the Company recorded amortization of $6,544 and $10,235, respectively, as a charge to current period operations.

NOTE 8 – CONVERTIBLE NOTES

Convertible notes as of September 30, 2009 are comprised of the following:

   
Gross
Principal
Amount
   
Less:
Unamortized
Discount
   
Net
 
10% convertible notes payable, unsecured are due December 31, 2008; accrued and unpaid interest due at maturity; convertible note holder has the option to convert note principal together with accrued and unpaid interest to the Company’s common stock at a rate of $0.95 per share. The Company is currently in default.
 
$
13,721,442
   
$
-
   
$
13,721,442
 
10% amended and restated convertible notes payable are due December 31, 2009, with interest payable at maturity. The amended and restated convertible notes are convertible into the Company’s common stock at the lower of (a) $0.95 per share or (b) 80% of the volume weighted average of the closing bid price for the shares on the Over The Counter Bulletin Board Exchange for the ten (10) day period prior to the convertible note holder’s election to convert.
 
$
10,398,243
     
1,570,128
   
$
8,828,115
 
Total
   
24,119,685
     
1,570,128
     
22,549,557
 
Less current maturities
   
(24,119,685
)
   
(1,570,128
)
   
22,549,557
)
Long term portion
 
$
-
   
$
-
   
$
-
 


 
18

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

The Company entered into a Convertible Note Purchase Agreement and an Amended and Restated Convertible Note Purchase Agreement with accredited investors during the year ended December 31, 2008 for the issuance of an aggregate of $35,501,482 of convertible notes.  The convertible notes accrue interest at 10% per annum, payable at maturity and were due on December 31, 2008.  The convertible note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of $0.95 per share of common stock. The effective interest rate at the date of inception was 420.61% per annum.
 
In accordance with Accounting Standards Codification subtopic 470-20, Debt; Debt With Conversion And Other Options (“ASC 470-20”), the Company recognized an imbedded beneficial conversion feature present in the convertible notes.  The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.  The Company recognized and measured an aggregate of $27,060,987 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid-in capital and a discount against the convertible notes.  The debt discount attributed to the beneficial conversion feature is amortized ratably to operations as interest expense over the term of the convertible notes.
 
Since the Company’s date of inception through September 30, 2009, the Company amortized $27,060,987 as interest expense.
 
On November 17, 2008, the Company also entered into an amended and restated convertible note purchase agreement with certain convertible note holders for the modification of certain terms and conditions contained in the previously issued convertible note purchase agreements.  The Company issued an aggregate of $20,979,572 in amended and restated convertible notes in exchange for $17,389,776 of previously issued convertible notes, a 20% inducement premium and accrued interest.  The amended and restated convertible note purchase agreements accrue interest at 10% per annum, payable at maturity and are due on December 31, 2009.  The amended and restated convertible note holders have an option to convert any unpaid note principal to the Company’s common stock at the lower of (a) $0.95 per share or (b) 80% of the volume weighted average of the closing bid price for the shres on The Over The Counter Bulletin Board Exchange for the ten (10) day period prior to the convertible note holder’s election to convert.  The effective interest rate at the date of inception was 304.22%.

The Company's identified embedded derivatives related to the amended and restated convertible note purchase agreements entered into on November 17, 2008.  These embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the amended and restated convertible note purchase agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.  At the inception of the amended and restated convertible note purchase agreements, the Company determined a fair value $14,083,386 of the embedded derivative.  The fair value of the embedded derivative was determined using the Black Scholes Option Pricing Model based on the following assumptions:  dividend yield: -0-%, volatility 144.76%, risk free rate: 1.08%, expected term of four hundred and nine (409) days.
 

 
19

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

NOTE 9- NOTES PAYABLE

Notes payable at September 30, 2009 were comprised of the following:

Promissory note,  secured (see below)
 
$
191,000,000
 
Note payable, due 9/15/2010, with monthly payments of $3,769 including interest, secured by financed equipment (currently in default)
   
141,357 
 
Note payable, due 2/28/2010, with monthly payments of $940 including interest, secured by financed equipment
   
7,463
 
Note payable, due 1/22/2010, with monthly payments of $8,889 including interest at 14%, secured by equipment
   
38,961
 
Note payable, due 1/22/2010, with monthly payments of $10,901 including interest at 14%, secured by equipment
   
57,682
 
Total
   
191,245,463
 
Less current portion:
   
(191,245,463
)
Long term portion:
 
$
-
 

On March 9, 2008, the Company issued a promissory note for $191,000,000 as partial payment for 49% interest in ChinaComm Cayman (Note 5).  The promissory note is due on March 9, 2010; bears an interest rate of 8% per annum with quarterly payments due June 9, 2008, September 9, 2009, January 9, 2010 and March 9, 2010.  The promissory note is secured by the Company’s acquired interest in ChinaComm Cayman.
 
NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company's derivative financial instruments consisted of embedded derivatives related to the 10% amended and restated convertible notes issued November 17, 2008.  The embedded derivatives included certain conversion features.  The accounting treatment of derivative financial instruments required that the Company record the derivatives at their fair values as of the inception date of the amended and restated convertible notes (estimated at $14,083,386) and at fair value as of each subsequent balance sheet date.    Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.  At September 30, 2009, the conversion-related derivatives were valued using the Black Scholes Option Pricing Model, with the following assumptions: dividend yield of 0%; annual volatility of 161.35%; and risk free interest rate of 0.14% and recorded non-operating income of $22,021,336 representing the change in fair value from December 31, 2008.  The derivatives were classified as short-term liabilities.  The derivative liability at September 30, 2009 is $4,144,550.
 

 
20

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

NOTE 11 - NON CONTROLLING INTEREST

Acquisition of Perusat S.A

On April 15, 2009, the Company acquired a 95% interest in Perusat S.A., organized under the laws of the Country of Peru.

The following table summarizes the changes in Non Controlling Interest from April 15, 2009 (date of acquisition) to September 30, 2009:

Balance as of April 15, 2009 (date of acquisition) (negative)
 
$
-
 
Period loss applicable to non controlling interest from the date of acquisition through September 30, 2009
   
-
 
Adjustment to non controlling interest due to losses in excess of book value
   
-
 
Balance as of September 30, 2009
 
$
-
 

NOTE 12 – MANDATORY REDEEMABLE SERIES B COMMON STOCK
 
The Company is authorized to issue 66,909,000, $0.001 par value Series B common stock.  The general attributes are:
 
Voting Rights
 
Each share of Series B common stock is entitled to ten (10) votes in all matters for any action that the Series A common stockholders are entitled to vote.
 
Non Participatory
 
The Series B common stock does not participate in any declared dividends for any class of stock.
 
Liquidation Preference
 
The Series B common stockholders have the same liquidation rights as the Series A common stockholders.

Transferability
 
The Series B common stock is non transferable.
 
Mandatory Redemption
 
The Series B common stock will be redeemed in 2023 at par value ($0.001) per share, therefore classified outside of equity for reporting purposes
 
NOTE 13 – STOCKHOLDERS EQUITY
 
The Company is authorized to issue 500,000,000 shares of Series A common stock.  As of September 30, 2009, there were 158,497,600 shares issued and outstanding.
 
During the year ended December 31, 2008, the Company issued 1,471,663 shares of common stock in exchange for convertible notes.
 
During the year ended December 31, 2008, the Company issued 1,870,196 shares of common stock in settlement of outstanding accounts payable.

 
21

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

During the nine month period ended September 30, 2009, the Company issued an aggregate of 31,846,924 shares of common stock amounting to $20,021,336 for services rendered.  The value of common stock issued for services was based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered.
 
During the nine month period ended September 30, 2009, the Company issued an aggregate of 2,658,790 shares of common stock in exchange of outstanding accounts payable. 

During the nine month period ended September 30, 2009, the Company issued an aggregate of 38,532,939 shares of common stock in exchange of convertible debentures and related accrued interest. 

During the nine month period ended September 30, 2009, the Company issued 1,000,000 shares of Series A common stock in connection with the acquisition of 95% interest in Perusat S.A. (See Note 1).

NOTE 14- RELATED PARTY TRANSACTIONS

The Company has the following material related party transactions:
 
    Note payable dated April 15, 2009, non interest bearing, due on demand; unsecured
 
$
275,000
 
    Note payable dated June 27, 2009, 15% per annum interest,  originally due July 15, 2009; unsecured, currently in default
   
375,000
 
Note payable dated May 20, 2009, 8% per annum interest, due December 1, 2009; unsecured
   
200,000
 
    Note payable dated April 1, 2009, 8% per annum interest, due originally October 1, 2009; unsecured, currently in default
   
100,000
 
Note payable due September 17, 2009, 8% per annum interest, due March 17, 2010
   
100,000
 
Total
 
$
1,050,000
 
 
Some of the Directors and Officers of the Company were previously equity owners of Trussnet USA, Inc., a Delaware corporation (“Trussnet Delaware”). Trussnet Delaware and its affiliates have performed approximately $61.5 million in contract services, representing substantially all of the Company’s operations, including the deployment services provided to Chinacomm Communications Co. Ltd.

The Company has not paid Trussnet Delaware for a significant portion of the services provided.  As of September 30, 2009, that amount is approximately $41.5 million.  Trussnet Delaware has also advanced funds for the Company’s operations in anticipation of the Company’s funding.  Except for that implied extension of credit, the Company believes that all such services were provided at prices and on terms and conditions that are the same as those that would result from arm’s-length negotiations with unrelated parties.  As the Company has no employees, the Company believes there is only a de minimis value to the Company’s shared use of the Trussnet Delaware office space.
 

 
22

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

NOTE 15 – FAIR VALUE MEASUREMENT

The Company adopted the provisions of ASC 825-10 on January 1, 2008 (“ASC 825-10”).  ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.  ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
 
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the consolidated financial statements.

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value, because of their short-term maturity.

The following table sets forth the Company’s short and long-term investments as of September 30, 2009, which are measured at fair value on a recurring basis by level within the fair value hierarchy.  As required by ASC 825-10, these are classified based on the lowest level of input that is significant to the fair value measurement:

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of September 30, 2009:


 
23

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

   
Quoted Prices in Active Markets for Identical Instruments
Level 1
   
Significant Other Observable Inputs
Level 2
   
Significant Unobservable Inputs
Level 3
   
Total
 
Assets:
                       
Cash
 
$
18,121
   
-
   
$
 -
   
18,121
 
Equity Based Investments
 
 
 -
   
 
-
   
 
196,000,000
   
 
196,000,000
 
Total assets
 
18,121
   
 -
   
$
196,000,000
   
196,018,121
 
Liabilities:
                               
Debt Derivative
 
 -
   
-
   
$
(4,144,550
)
 
(4,144,550
)

The Company’s cash instrument consists primarily of checking and money market securities and is classified within Level 1 of the fair value hierarchy because it is valued using quoted market prices.  The cash instrument is included in current assets in the accompanying condensed consolidated balance sheets.
 
The Company's derivative liability was valued using pricing models, and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. These financial liabilities do not trade in liquid markets, and, as such, model inputs cannot generally be verified and do involve significant management judgment.  Such instruments are typically classified within Level 3 of the fair value hierarchy.  The change in fair value of the derivative liability is included as a component of other income in the condensed consolidated statements of loss.
 
At September 30, 2009, the carrying amounts of the convertible notes payable approximate fair value because the entire convertible notes have been classified to current maturity.

NOTE 16 – RESTATEMENT

The Company restated their Statement of Losses for the periods for the three months ended September 30, 2008 from April 4, 2008 (since the Company’s date of inception) through September 30, 2008 and the Statement of Cash Flows from April 4, 2008 (since the Company’s date of inception) through September 30, 2008 to properly classify research and development costs of $32,996,825 from construction in process to a current period expense and to correct the calculation of the beneficial conversion features relating to issued convertible debentures.  The effects on the statements are as follows:


 
24

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Condensed Consolidated Statement of Losses
Three months ended September 30, 2008

Operating Expenses:
 
As Previously
Reported
   
Adjustment
   
Reference
   
As Restated
 
Selling, General and Administrative
 
$
1,943,302
         
$
     
$
1,943,302
 
Research and Development
   
-
     
11,016,074
             
11,016,074
 
Total Operating Expenses
   
1,943,302
     
11,016,074
   
(a)
     
12,959,576
 
Net Loss from Operations
   
(1,943,302
)
   
(11,016,074
)
           
(12,959,576
 
Interest Expense
   
(9,561,638
)
   
7,348,532
   
(b)
     
(2,213,106
)
                                 
Net Loss Before Income Taxes
   
(11,504,940
)
   
(3,667,542
)
           
(15,172,482
)
                                 
Provision for Income Taxes
   
-
     
-
             
-
 
                                 
Net Loss
 
$
(11,504,940
)
 
$
(3,667,542
)
 
(a),(b)
   
$
(15,172,482
)
 

Condensed Consolidated Statement of Losses
From April 4, 2008 (date of inception) to September 30, 2008

Operating Expenses:
 
As Previously
Reported
   
Adjustment
   
Reference
   
As Restated
 
Selling, General and Administrative
 
$
5,027,872
         
$
     
$
5,027,872
 
Research and Development
   
-
     
44,012,899
             
44,012,899
 
Total operating expenses
   
5,027,872
     
44,012,899
   
(a)
     
44,012,899
 
Net Loss from Operations
   
(5,027,872
)
   
(44,012,899
)
           
(49,040,771
 
Interest Expense
   
(56,051,988
)
   
27,772,687
   
(b)
     
(28,279,301
)
                                 
Net Loss Before Income Taxes
   
(61,079,860
)
   
(16,240,212
)
           
(77,320,072
)
                                 
Provision for Income Taxes
   
-
     
-
             
-
 
                                 
Net Loss
 
$
(61,079,860
)
 
$
(16,240,212
)
 
(a),(b)
   
$
(77,320,072
)


 
25

 

CHINA TEL GROUP, INC.
(a development stage company)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009

Condensed Consolidated Statement of Cash Flows
From April 4, 2008 (date of inception) to September 30, 2008

   
As Previously
                   
   
Reported
   
Adjustment
   
Reference
   
As Restated
 
Cash Flows from Operating Activities:
                       
Net Loss for the Period
 
$
(61,079,860
)
 
$
(16,240,212
)
   
(a),(b)
   
$
(77,320,072
)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
                               
Beneficial Conversion Feature in Conjunction with the Issuance of Convertible Debentures
   
46,406,344
     
(19,345,357
)
   
(b)
     
27,060,987
 
Amortization of Debt Discount
   
8,427,330
     
(8,427,330
)
   
(b)
         
(Increase) Decrease in:
                               
Construction in Process
   
(44,012,899
)
   
44,012,899
     
(a)
     
-
 
Increase (Decrease) in:
                               
Accounts Payable and Other Current Liabilities
   
27,358,464
     
-
             
27,358,464
 
Net Cash used in Operating Activities
   
(22,900,621
)
   
-
             
(22,900,621
)
                                 
Cash Flows from Investing Activities:
                               
Investment in Chinacomm
   
(5,000,000
)
   
 -
             
(5,000,000
)
Net Cash used in Investing Activities
   
(5,000,000
)
   
-