FORM 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2005
or
|_| Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
--------------- ---------------
|
Commission File number 000-50120
GLOBAL NATIONAL COMMUNICATIONS CORP.
(Exact name of small business issuer as specified in its charter)
NEVADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2/F Hang Wei Bldg.
Road 2
North Hi-Tech Park
|
Shenzhen, Guang9dong
Peoples Republic of China
(Address of principal executive offices)
(86755) 26994588
(Issuer's telephone number)
Check 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.
Yes |_| No |X|
As of June 30, 2005 there were 25,000,000 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
INDEX
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Consolidated Financial Statements: (unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to the Condensed Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceeding
Item 2. Changes In Securities and Small Business Issuer Purchases of
Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission Of Maters To a vote Of Security Holders
Item 5. Other Information
SIGNATURES
2
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Global National Communications Corporation and Subsidiary
Consolidated Balance Sheets
June 30, 2005
Assets
------
2005
-----------
Current Assets
Cash and Cash Equivalents US$ 184,911
Accounts Receivable, Net of Provision 15,313,480
Other Receivable, Net of Provision 5,046,155
Short Term Investment 12,077
Prepayments 709,973
Deferred Expenses 17,915
Inventory 3,252,612
-----------
Total Current Assets 24,537,123
Fixed Assets
Property, Plant and Equipment 3,591,696
Less: Accumulated Depreciation (821,261)
-----------
Fixed Assets, Net 2,770,435
Other Assets
Loans Receivable 1,237,237
Intangible Assets, Net of Accumulated Amortization 6,533,062
Investment in Subsidiary 0
Deferred Assets 54,262
-----------
Total Other Assets 7,824,561
-----------
Total Assets US$ 35,132,119
===========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank Loans US$ 2,271,607
Notes Payable 0
Accounts Payable 7,196,764
Advances from Customers 1,427,224
Other Payables 6,043,336
Accrued Expenses 1,102,758
-----------
Total Current Liabilities 18,041,689
Long-Term Liabilities
Convertible Debenture Obligation 2,205,000
Long-Term Liabilities 141,363
Deferred Grants 424,293
-----------
Total Liabilities 20,812,346
Shareholders' Equity
Share Capital 250
Paid In Capital 26,147,767
Reserves 527,156
Retained Earnings (Deficit) (12,355,399)
-----------
Total Shareholders' Equity 14,319,774
-----------
Total Liabilities and Shareholders' Equity US$ 35,132,119
===========
|
Global National Communications Corporation and Subsidiary
Consolidated Statements of Operations
For The Third Quarter Ending June 30, 2005 and 2004
2005 Q3 2005 YTD 2004 Q3 2004 YTD
----------- ----------- ----------- -----------
Sales US$ 7,840,678 17,735,150 US$ 7,983,487 15,162,320
Sales Tax and Others (184) (1,060) (5,631) (8,236)
----------- ----------- ----------- -----------
Net Sales US$ 7,840,494 17,734,090 US$ 7,977,856 15,154,084
Cost of Sales 5,889,280 13,836,979 6,624,487 12,468,286
----------- ----------- ----------- -----------
Gross Profit 1,951,214 3,897,111 1,353,369 2,685,798
Expenses:
Selling and Distribution Expenses 48,074 142,326 19,691 54,796
General and Administrative Expenses 334,477 859,230 196,796 432,621
Financial Expenses 64,864 194,848 107,194 236,144
Conversion Premium Expense 468,563 468,563 0 0
Compensation Expense Stock Warrants 2,631,116 2,631,116 0 0
Bad Debt Expense 710,615 408,891 (318,650) (684,966)
----------- ----------- ----------- -----------
Total Expenses 4,257,709 4,704,974 5,030 38,595
Operating Income (2,306,495) (807,863) 1,348,339 2,647,203
Other Income 7,709 28,662 6,183 16,221
Non-Operating Expenses (56,879) (76,949) (50,035) (58,700)
----------- ----------- ----------- -----------
Income (Loss) Before Provision for Income Taxes (2,355,665) (856,150) 1,304,489 2,604,724
Provision for Income Taxes 0 95,087 97,837 203,578
----------- ----------- ----------- -----------
Net Income (Loss) US$ (2,355,665) (951,237) US$ 1,206,653 2,401,146
=========== =========== =========== ===========
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Global National Communications Corporation and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For The Third Quarter Ending June 30, 2005 and 2004
Common Stock
---------------------------- Paid in
Shares Amount Capital
------------ ------------ ------------
Beginning Balance - Sep 30, 2003 US$ 20,000,000 $ 200 $ 2,415,259
Net Income (Loss) -- --
Additions to Reserve -- --
Paid In Capital Contributions -- 62,803
-------------------------------------------------------------------------------------------
Ending Balance - June 30, 2004 20,000,000 200 2,478,062
===========================================================================================
Beginning Balance - Sep 30, 2004 20,000,000 200 14,623,065
Net Income (Loss)
Share Capital 2,000,000 20 2,020,513
Additions to Reserve -- --
Capital Distribution (123,460)
Beneficial Conversion Premium on Debentures 468,563
Compensation Expense - Stock Warrants
Attached to Debentures 2,631,116
Share Capital - Teltone Agreement 8,360,000 84 6,527,970
Cancelled Shares - Teltone Agreement 5,360,000 (54)
--
-------------------------------------------------------------------------------------------
Ending Balance - June 30, 2005 US$ 25,000,000 250 26,147,767
===========================================================================================
Retained
Earnings Shareholders'
Reserves (Deficit) Equity
------------ ------------ ------------
Beginning Balance - Sep 30, 2003 US$ $ 189,101 ($ 40,420) $ 2,564,140
Net Income (Loss) -- 2,401,146 2,401,146
Additions to Reserve 109,654 (33,313) 76,341
Paid In Capital Contributions -- -- 62,803
------------------------------------------------------------------------------------------
Ending Balance - June 30, 2004 298,755 2,327,413 5,104,430
==========================================================================================
Beginning Balance - Sep 30, 2004 425,929 (11,302,935) 3,746,259
Net Income (Loss) (951,237) (951,237)
Share Capital -- -- 2,020,533
Additions to Reserve 101,227 (101,227) 0
Capital Distribution (123,460)
Beneficial Conversion Premium on Debentures 468,563
Compensation Expense - Stock Warrants
Attached to Debentures 2,631,116
Share Capital - Teltone Agreement 6,528,054
Cancelled Shares - Teltone Agreement (54)
-- -- 0
------------------------------------------------------------------------------------------
Ending Balance - June 30, 2005 US$ 527,156 (12,355,399) 14,319,774
==========================================================================================
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Global National Communications Corporation and Subsidiary
Statements of Cash Flows
For The Third Quarter Ending June 30, 2005 and 2004
2005 2004
----------- -----------
Cash Flows from Operating Activities
Net Income (Loss) US$ (951,237) US$ 2,401,146
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation (59,198) 186,271
Changes in Assets and Liabilities:
Accounts Receivable (8,576,724) (4,689,200)
Other Receivables (3,252,512) 1,333,333
Inventory (558,158) 3,316,208
Prepayments (684,633) (1,030,081)
Deferred Expenses 123,788 (38,264)
Deferred Assets 14,656 12,241
Accounts and Other Payables 3,493,070 2,046,509
Advances from Customers 949,027 (369,172)
Accrued Expenses 1,038,129 17,728
Other Liabilities (34,402) 424,293
----------- -----------
Net Cash Flows from Operating Activities (8,498,194) 3,611,014
Cash Flows from Investing Activities
Acquisition of Property and Equipment 996,952 (2,241,954)
Cash Purchase of Short Term Investment 0 (60,386)
Decrease (Increase) in Loans Receivable 190,520 (1,452,349)
Investment in Intangible Assets (6,521,120) (42,922)
----------- -----------
Net Cash Flows from Investing Activities (5,333,648) (3,797,611)
Cash Flows from Financing Activities
Proceeds from sale of Debentures 2,205,000 0
Repayment of Borrowings (38,544) (663,293)
Proceeds from Share Issuance 50 139,143
Paid in Capital from Share Issuance 1,897,053 0
Paid in Capital from Beneficial Conversion Premium 468,563 0
Paid in Capital from Compensation on Stock Warrants 2,631,116 0
Paid in Capital Issued for Intellectual Property 6,527,970 0
----------- -----------
Net Cash flows from Financing Activities 13,691,208 (524,150)
Net Increase (Decrease) in Cash (140,634) (710,748)
Cash - Beginning of the period 325,545 1,761,902
----------- -----------
Cash - End of the Qtr US$ 184,911 US$ 1,051,154
=========== ===========
Supplemental Cash Flow Disclosures:
----------- -----------
Interest Paid 257,978 258,620
=========== ===========
|
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
ORGANIZATION AND PRINCIPAL ACTIVITIES
Global National Communications Corp (GNCC). was organized under the laws of the British Virgin Islands. Currently, GNCC has two wholly owned subsidiaries, i.e., Shenzhen Guonuo Industrial Company Ltd., and Shenzhen Century Teltone Company Ltd. They are all located in Shenzhen Hi-Tech Park, PRC, and were incorporated in Guangdong province of the PRC.
GNCC is a manufacturer of telecommunications devices, digital television parts, MP3 recorders and accessories. Their major market is in the PRC.
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
A. PRINCIPALS OF CONSOLIDATION
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. All Intercompany transactions have been eliminated in consolidation.
B. CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include cash on hand and demand deposits with banks with an original maturity of three months or less.
C. TRADE RECEIVABLE
In order to determine the value of the Company's accounts receivable, the Company records a provision for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of future performance.
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
D. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the weighted-average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The estimated useful lives are:
Buildings 20 Years Machinery 5 - 10 Years Motor vehicles 5 Years Office equipment and other 3 - 5 Years |
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, receivables, accounts payable and accrued expenses and debt, approximates their fair value at June 30, 2005 and 2004 due to the relatively short-term nature of these instruments.
G. INTANGIBLES
Intangibles are carried at cost and are amortized on the straight-line method over the life assigned to the intangible.
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
H. INCOME TAXES
Taxes are calculated in accordance with taxation principles currently effective in the PRC. The Company accounts for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
I. GOVERNMENT SUBSIDIES
Subsidies from the government are recognized at their fair values when received. Usually, the government subsidies are credited to Other Income account.
J. RELATED PARTIES
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.
For the nine months ended on June 30, 2005 a shareholder had advanced the company $500,000 in conjunction with an agreement with Shenzen Teltone Communications Co. Ltd. For the nine month period ended June 30, 2004 there were no related party transactions.
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
K. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting records in Renminbi ("RMB"), the PRC's currency, being the functional currency. Translation of amounts from RMB in United States dollars ("US$") has been made at the exchange rate of 1 U.S. Dollar to 8.28 RMB for the respective quarters ended June 30, 2005 and 2004:
Foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing rate at the balance sheet date. Non-monetary transactions are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
L. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates.
M. REVENUE RECOGNITION
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectibility is probable. The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company reduces revenue for estimated product returns. Revenue is presented net of any sales tax and value added tax.
N. EMPLOYEES' BENEFITS
Mandatory contributions are made to the Government's health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments. The cost of these payments is charged to the statement of income in the same period as the related salary cost.
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
O. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine the value of the Company's accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable.
P. WARRANTIES
The Company recognizes the cost of product warranties at the time expense is incurred. Warranty costs are included in cost of sales. The Company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company's estimates, the Company may be required to revise its estimated product warranty liability. At this time, the Company has not accrued a warranty obligation, since warranty costs to date have not been material.
Q. COMMITMENTS AND CONTINGENCIES
(1). Contingent Liabilities
By June 30, 2005 GNCC was not a guarantor for any businesses.
(2). Legal Proceedings
The Company is not currently a party to any threatened or pending legal proceedings.
(3). Commitments
The Company rents offices and a manufacturing plant. The leases are for a two and a three year term ending October and November 2005, respectively. Rent expense for the quarter ended on June 30, 2005 and 2004 was $9,142 and $11,739 respectively.
R. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
GNCC faces a number of risks and challenges since its operations are in the PRC. The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes 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.
DEBENTURES AND WARRANTS
On April 7, 2005, Global National Communications Corp. (the Registrant") entered into a Securities Purchase Agreement with Investors thereto providing for the issuance by the Registrant to the Purchasers of up to $7,000,000 8% Fixed Price Convertible Debentures (the "Debentures"). Subject to certain provisions described below, the Debentures are convertible, at the option of the holder, at a conversion price of $4.00 (the "Conversion Price"). If at the close of trading on the tenth trading day following the effective date of the Registration Statement (defined below), the closing price of the Registrant's common stock is less than $5.00 or the volume weighted average price for the previous ten trading days is less than $5.00, the Conversion Price will be reset to $3.50. The term of the Debentures is three years from the date of issuance. Commencing six months from the closing the Registrant is required to reduce the principal amount on the Debentures by 1/10th per quarter, payable in cash or shares if the shares are: (1) covered by the Registration Statement (defined below); and (2) the closing price for the Registrant's shares is at least 110% of the Conversion Price for each of the five trading days prior to the payment date. The Registrant may redeem the Debentures upon at least twenty days prior written notice, assuming the shares issuable upon conversion of the Debentures have been registered and the trading price of the Registrant's shares, subject to volume limitations, exceeds 200% of the Conversion Price for a period of ten days.
As a condition to the closing, certain of the Registrant's shareholders entered into a pledge agreement (the "Pledge Agreement") pursuant to which such shareholders agreed to pledge 100,000 shares as collateral for each $1,000,000 of the Debentures sold.
In connection with the Debentures, the Registrant shall issue warrants (the "Warrants") to purchase up to 100% of the shares issuable upon conversion of the Debentures. The Warrants have an exercise price of $4.50 per shares.
On April 7, 2005, the Registrant also entered into a Registration Rights Agreement with the investors signatory thereto, which provides that on or prior to 45 days after a closing, of which one occurred on April 7, 2005, the Registrant shall prepare and file with the Commission a registration statement ("Registration Statement") covering the resale of all of the Registration Securities (defined as the shares issuable upon conversion of the Debentures and the shares issuable upon exercise of the Warrants). If the registration statement is not filed within 45 days or is, for any reason, not declared effective within 120 days, the Registrant shall pay liquidated damages to the investors. Such damages shall be paid in cash in an amount equal to 0.5% of the aggregate amount of the Debentures purchased by the investor for the first 30 days (or part thereof) after either the filing date or effective date of the Registration Statement, and for any subsequent 30-day period (or part thereof), thereafter. The investors have contractually agreed to restrict their ability to convert the Debentures and exercise the warrants and receive shares of the Registrant's common stock such that the number of shares of the Registrant held do not exceed 9.9% of the Registrant's issued and outstanding shares.
On April 7, 2005, pursuant to the Securities Purchase Agreement, the Company sold $2,205,000 of the Debentures and issued Warrants to purchase up to 100% of the shares issuable upon conversion of the Debentures. As of June 30, 2005 the company had accrued $41,160 for interest and $14,333 for liquidating damages in conjunction with the company's failure to file its' Registration Statement. The debentures were issued with a beneficial conversion premium of $468,563 and the attached warrants were calculated to have a compensation value of $2,631,116. Both of these amounts were recorded as additional paid in capital.
INTELLECTUAL PROPERTY PURCHASE AND CONTINGENTLY ISSUABLE SHARES
Pursuant to an Asset Purchase Agreement dated as of June 6, 2005 (the "Purchase Agreement") between Shenzhen Century Teltone Technology Co. Ltd. ("Purchaser"), the Registrant, Wang Hanqing, and Wu Wenbin (the "Shareholders"), on the one hand; and Shenzhen Teltone Communication Co. Ltd. ("Seller") on the other hand, the Registrant, through Purchaser, a wholly owned subsidiary of Registrant, acquired from Seller intellectual property to manufacture certain models of Seller's personal handy phones (the "Intellectual Property"). The closing (the "Closing") occurred on June 8, 2005. The purchase price for the Intellectual Property consisted of restricted shares of Registrant's Common Stock of which 8,360,000 shares (the "Initial Shares") were issuable at Closing and 6,640,000 shares are to be delivered to the Seller if the net income (the operating income attributable to the Intellectual Property) for the twelve month period commencing on April 1, 2005 is at least $5,000,000. Notwithstanding the foregoing, the effective date of the Closing is deemed to be March 15, 2005 so that all sales on and after March 15, 2005 (together with income and expenses associated therewith) are for the account of Purchaser. In connection with the issuance of the Initial Shares, the Shareholders have agreed to return to the Registrant for cancellation 5,360,000 shares of Registrant's Common Stock, which they had owned, so that the net dilution from the issuance of the Initial Shares will be 3,000,000 shares.
The intellectual property intangible asset has been recorded at an amount equal to $6,528,000. This is based on a closing stock price of $2.72 on June 8, 2005. The intangible asset is not being amortized because it has been determined to have an indefinite life.
In accordance with FAS 128, the 6,640,000 of contingently issuable shares have not been included in the fully diluted earnings per share calculation.
SUBSEQUENT EVENT
The People's Bank of China, China's central bank, recently announced that with approval from the State Council, and beginning from July 21, 2005, China will implement a regulated, managed floating exchange rate system based on market supply and demand and in reference to a package of currencies. Current US Dollar exchange rate is 8.11 to Chinese RMB, a 2% drop compared with 8.28, the exchange rate prior to July 21, 2005. This change of exchange rate will have no material impact to the overall operation of the Company. However, since the export revenue has accounted for 30% of the total sales, the company will monitor closely the changes in cost and selling price in order to make strategic decisions in a proper way and timely manner.
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using the average
exchange rate prevailing during the reporting period. Adjustments resulting from
the translation, if any, are included in cumulative other comprehensive income
(loss) in stockholder's equity.
GLOBAL NATIONAL COMMUNICATIONS CORPORATION AND SUBSIDIARY
(FORMERLY ZEOLITE MINING CORPORATION)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
The RMB is not readily convertible into United States dollars or other foreign currencies. The foreign exchange rate between the United States dollar the RMB has been stable at approximately 1RMB to US$.1205 for the last few years. No representation is made that the RMB amounts could have been or could be, converted into United States dollars or any other currency at that rate or any other rate.
Item 2. Management's Discussion And Analysis or Plan of Operation.
MANAGEMENT DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of the Company's management. This report includes forward-looking statements. Generally, the words "believes", "anticipates", "may", "will", "should", "expect", "intend", "estimate", "continue", and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents that the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with the Company's financial statements and the related notes thereto and other financial information contained elsewhere in this document. All amounts are presented in United States dollars.
GENERAL OVERVIEW
On August 12, 2004, Zeolite Mining Corporation, a Nevada corporation ("Zeolite"), entered into a Stock Exchange Agreement and Plan of Reorganization (the Agreement"), as amended on September 30, 2004, by and among its principal shareholders, Alan Brandys ("Brandys") and Douglas Hopper ("Hopper") (collectively, the "Zeolite Shareholders"), Global National Communications Corporation, a British Virgin Island corporation ("Global BVI"), and all of the shareholders of Global (the "Global Shareholders"), wherein Zeolite agreed to issue to the Global Shareholders 49,000,000 shares of its common stock in exchange for all of the issued and outstanding shares of Global BVI (the "Global Acquisition"). The Global Acquisition closed on September 30, 2004, as a result of which Global BVI became a wholly-owned subsidiary of Zeolite. All share and per share amounts presented herein have been adjusted to reflect a five-for-one forward stock split effective October 25, 2004.
At the closing of the transaction, Brandys and Hopper resigned as officers and directors of Zeolite and Wang Hanqing, Wu Wenbin, Peng Xiaoyan and Charles Shao were appointed to the board of directors to replace Brandys and Hopper. In addition, Wang Hanqing, Wu Wenbin and Peng Xiaoyan were also appointed officers of Zeolite.
On October 1, 2004, the board of directors of Zeolite changed Zeolite's fiscal year end from June 30 to September 30 to conform to the fiscal year end of Global BVI. On October 15, 2004, shareholders holding a majority of the outstanding shares of Zeolite's common stock executed a written consent approving an amendment to Zeolite's articles of incorporation to change its name from Zeolite Mining Corporation to Global National Communications Corporation. The name change was effective November 18, 2004.
Global National Communications Corporation, including, when the context so requires, Global BVI and its two subsidiaries, i.e., Guonuo Shenzhen Industrial Company Ltd. (as described below) and Shenzhen Century Teltone (as described below), is referred to herein as the "Company".
The acquisition of Global BVI by Zeolite was accounted for as a recapitalization of Global BVI, pursuant to which the accounting basis of Global BVI continued unchanged subsequent to the effective date of the transaction. Accordingly, the pre-transaction consolidated financial statements of Global BVI are the historical financial statements of Zeolite, with the shareholders' equity section of the balance sheet of Global BVI reconfigured to reflect the capital structure of Zeolite.
In conjunction with the Global Acquisition, Zeolite also agreed to issue an aggregate of 20,310,000 shares of common stock for financial consulting services, consisting of 7,250,000 shares of common stock to Yarek Bartosz, 6,500,000 shares of common stock to Lucky Ocean Group Ltd., 5,000,000 shares of common stock to Maple Leaf Enterprises, and 1,560,000 shares of common stock to Wilfred Yu (collectively, the "Investor Shareholders"). With respect to such shares, 2,500,000 shares issued to the Investor Shareholders were placed in escrow, to be released to the Investor Shareholders if Zeolite, through the efforts of the Investor Shareholders, obtained a commitment for a financing (a "Qualified Financing") within 60 days of the closing of the transaction. A Qualified Financing was defined as a cash investment of at least $2,000,000 to Zeolite in the form of Zeolite common stock or preferred stock with a minimum price per share of $0.20. In the event that the Investor Shareholders did not obtain a commitment for a Qualified Financing within 60 days of closing, then the Global Shareholders were entitled to acquire the 2,500,000 escrowed shares in consideration of $0.20 per share.
As of June 30, 2004, Zeolite had 30,690,000 shares of common stock issued and outstanding. In conjunction with the Global Acquisition, the Zeolite Shareholders returned 25,000,000 shares of Zeolite common stock owned by them to Zeolite, which were cancelled.
On November 12, 2004, the Global Shareholders and the Investor Shareholders returned a total of 55,000,000 shares of common stock to the Company, consisting of 36,140,000 shares owned by the Global Shareholders and 18,860,000 shares owned by the Investor Shareholders. The 55,000,000 shares that were returned to the Company were cancelled.
The previously described stock transactions were all deemed effective and recorded as of September 30, 2004. Accordingly, a net of 1,450,000 shares of common stock were issued to the Investor Shareholders, consisting of the 20,310,000 shares originally issued, less the 18,860,000 shares returned and cancelled. The Company recorded a charge to operations of $12,186,000 at September 30, 2004 to reflect the estimated fair market value of the shares of common stock (4,062,000 pre-split shares; 20,310,000 post-split shares) issued to the Investor Shareholders in conjunction with the Global Acquisition.
Effective November 15, 2004, the Company sold 2,000,000 shares of common stock at $1.00 per share for an aggregate purchase price of $2,000,000, consisting of 1,000,000 shares sold to Yarek Bartosz and 1,000,000 shares sold to Dong Chen, who are related parties, thus satisfying the requirement for a Qualified Financing as noted above. Accordingly, the 2,500,000 escrow shares were classified as issued and outstanding shares in the consolidated financial statements at September 30, 2004.
The Company conducts its operations through Global BVI's wholly-owned subsidiary, Guonuo Shenzhen Industrial Company Ltd. ("GSIC"). GSIC was organized in Guangdong Province of the People's Republic of China ("China" or the "PRC") on May 26, 1998, and has an approved operating period through July 9, 2014. GSIC designs and manufactures electrical power monitoring systems, computer components, telecommunications devices; including its branded Personal Handy System ("PHS") mobile phone product, digital television components, MP3 recorders and accessories. GSIC sells its products primarily in the PRC. GSIC's sales are to both original equipment manufacturers and under its own brand name. GSIC's facilities are located in the Shenzhen Hi-Tech Park.
GSIC faces a number of risks and challenges since its operations are located in the PRC. GSIC's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's consolidated results of operations and financial condition may be adversely affected by changes in, among other factors, the political and social conditions in the PRC, and by changes in the government policies with respect to laws and regulations, anti-inflationary measures, currency exchange rates, currency conversion and remittance abroad, and rates and methods of taxation.
Pursuant to an Asset Purchase Agreement dated as of June 6, 2005 (the "Purchase Agreement") among Shenzhen Century Teltone Technology Co. Ltd. ("Purchaser"), the Registrant, Wang Hanqing, and Wu Wenbin (the "Shareholders"), on the one hand; and Shenzhen Teltone Communication Co. Ltd. ("Seller") on the other hand, the Registrant, through Purchaser, a wholly owned subsidiary of Registrant, acquired from Seller Seller's intellectual property to manufacture certain models of Seller's personal handy phones (the "Intellectual Property"). The closing (the "Closing") occurred on June 8, 2005. The purchase price for the Intellectual Property consisted of restricted shares of Registrant's Common Stock of which 8,360,000 shares (the "Initial Shares") were issuable at Closing and 6,640,000 shares are to be delivered to the Seller if the net income (the operating income attributable to the Intellectual Property) for the twelve month period commencing on April 1, 2005 is at least US$5,000,000. Notwithstanding the foregoing, the effective date of the Closing is deemed to be March 15, 2005 so that all sales on and after March 15, 2005 (together with income and expenses associated therewith) are for the account of Purchaser. In connection with the issuance of the Initial Shares, the Shareholders have agreed to return to the Registrant for cancellation 5,000,000 shares of Registrant's Common Stock which they had owned so that the net dilution from the issuance of the Initial Shares will be 3,000,000 shares.
CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of 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 financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.
Revenues:
The Company recognizes product sales generally at the time the product is shipped and title passes to the customer and collectibility is reasonably assured. Revenues are presented net of any sales tax or value added tax. Shipping and handling costs are included either in general and administrative expenses or in selling and distribution expenses.
The Company typically extends credit to its customers. In order to determine the value of the Company's accounts receivable, the Company records a provision for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivables. The Company evaluates the credit risk of its customers by analyzing its accounts receivables aging, utilizing, among customer's financial condition, general economic conditions and estimates of future performance. The Company applies similar procedures to determine the value of the Company's other receivables.
The Company typically records a 10% allowance for accounts receivable that have been outstanding in excess of one year. For accounts receivable that have been outstanding for less than one year, the Company determines an appropriate allowance based on the age of the accounts receivable after consideration of any specific circumstances.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the weighted-average basis and includes all costs to acquire and other costs incurred in bring the inventories to their present location and condition. The Company valuates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.
Income Taxes:
The Company records a tax provision to reflect the expected tax payable on taxable income in the applicable jurisdiction for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Impairment of Long-Lived Assets:
The Company's long-lived assets consist of property, plant and equipment and certain intangible assets. In assessing the impairment of such assets, the Company periodically makes assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions indicate that the carrying amount may not be recoverable, the Company records impairment charges for these assets at such time.
RESULTS OF OPERATION
(1) Three Months Ended June 30, 2005 and 2004:
Net Sales. Net sales decreased by $137,362 or 2% to $7,840,494 for the three months ended June 30, 2005, as compared to $7,977,856 for the three months ended June 30, 2004. During the three months ended June 30, 2004 and 2005, there were no sales to related parties, and sales to individual unrelated parties did not account for 10% or more of sales.
Gross Profit. Gross profit was $1,951,214 or 25% of net sales for the three months ended June 30, 2005, as compared to gross profit of $1,350,369 or 17% of net sales for the three months ended June 30, 2004, an increase of $597,844 or 44%. The increase in both gross profit and gross margin was primarily a result of a change in the sales mix. The Company experienced a significant increase in the sales of computer parts and mobile phones in 2005 as compared to 2004, while MP3s were discontinued from the sales mix. The new products from Teltone even reached the highest gross margin of 31% in the Company.
Selling and Distribution Expenses. Selling and distribution expenses increased by $28,384 or 144% to $48,074 for the three months ended June 30, 2005, as compared to $19,691 for the three months ended June 30, 2004. The increase in selling and distribution expenses in 2005 as compared to 2004 was primarily as a result of increased personnel and personnel-related expenses related to the launch of the Company's PHS mobile phone product. The major components of selling and distribution expenses are salesmen's compensation, travel expenses, transportation expense and maintenance expense.
General and Administrative Expenses. General and administrative expenses increased by $137,681 or 70% to $334,477 for the three months ended June 30, 2005, as compared to $196,796 for the three months ended June 30, 2004, as a result of increased administrative personnel and personnel-related costs, in particular associated with the launch of the Company's PHS mobile phone product, and audit fees. The major components of general and administrative expenses are audit fees, management compensation, and personnel and personnel-related costs.
Bad Debt Expense. Bad debt expense, was $710,615 or 9% of net sales for the
three months ended June 30, 2005, as compared to a recovery of $(318,650) or
(4)% of net sales for the three months ended June 30, 2004. The recovery was an
adjustment of the previous provisions. Currently, aged receivables from 9-12
months are allowed for at 25%; 12-24 months are allowed for at 50%; and those
older than 24 months are allowed for at 100%. Previously, the following was
allowed for: 3-6 months 15%, 6-9 months 25%, 9-12 months 50%, and anything greater than 12 months was allowed for at 100%. The Company determined that the rates previously applied to the outstanding receivables did not reflect the current business condition of the Company and its customer base. The Company is implementing additional procedures to monitor and control accounts receivable and attempt to reduce bad debt expense in future periods.
Depreciation and Amortization Expense. Depreciation and amortization expense included in costs and expenses was $120,931 for the three months ended June 30, 2005, as compared to $100,594 for the three months ended June 30, 2004, as a result of the acquisition of fixed assets in 2004 to support increased business activities.
Financial Expenses. Financial expenses were $64,864 for the three months ended June 30, 2005, as compared to $107,194 for the three months ended June 30, 2004. The decrease was primarily a result of a decrease in interest expense.
Conversion Premium Expense. Conversion premium expense was $468,563 for the three months ended June 30, 2005, as compared to $-0- for the three months ended June 30, 2004. This represents a one time charge to the income statement. The amount represents a premium on $2,205,000 of debentures that were issued on April 7, 2005.
Compensation Expense Stock Warrants. Compensation expense on stock warrants was calculated at $2,631,116 for the three months ended June 30, 2005, as compared to $-0- for the three months ended June 30, 2004. This represents a one time charge to the income statement. The warrants are attached to the $2,205,000 of debentures that were issued on April 7, 2005.
Other Income. Other income was $7,709 for the three months ended June 30, 2005, as compared to $6,183 for the three months ended June 30, 2004.
Non-Operating Expenses. Non-operating incomes (expenses) were $(56,879) for the three months ended June 30, 2005, as compared to $(50,035) for the three months ended June 30, 2004. As of June 30, 2005 the company had accrued $14,333 for liquidating damages in conjunction with the company's failure to file its' Registration Statement. Per the agreement, the amount is calculated at .5% for each 30 day period
Provision for Income Taxes. The provision for income taxes were zero for the three months ended June 30, 2005, as compared to $97,837 for the three months ended June 30, 2004. The original lines of business of GSIC had a loss which will have not income tax in the current quarter; meanwhile the Teltone had a profit but will have an income tax exemption for two fiscal years since its inception till March 2007.
China has a preferential tax policy for high-tech enterprises that provides for income taxes to be cancelled for the first two profitable years and to be reduced by 50% for the subsequent three years.
Net Income. As a result of the aforementioned factors, net loss was $(2,355,665) for the three months ended June 30, 2005, as compared to net income of $1,206,653 for the three months ended June 30, 2004.
(2) Nine Months Ended June 30, 2005 and 2004:
Net Sales. Net sales increased by $2,580,006 or 17% to $17,734,090 for the nine months ended June 30, 2005, as compared to $15,154,084 for the nine months ended June 30, 2004. During the nine months ended June 30, 2004 and 2005, there were no sales to related parties, and sales to individual unrelated parties did not account for 10% or more of sales.
The nine months ended June 30, 2005 was a transition for the Company. During this quarter, the Company began to concentrate on the marketing of its branded Personal Handy System ("PHS") mobile phone product. The Company expects that sales of this product will increase substantially over the next year, and that gross margins for this product will be higher than for the Company's traditional OEM products, thus resulting in improved operating performance.
Gross Profit. Gross profit was $3,897,111 or 22% of net sales for the nine months ended June 30, 2005, as compared to gross profit of $2,685,798 or 18% of net sales for the nine months ended June 30, 2004, an increase of $1,211,313 or 45%. The Company experienced an increase in gross profit and increase in gross margin in 2005 as compared to 2004, it was primarily a result of a change in the sales mix. The introduction of Teltone's high margin products had improved the overall profitability.
Selling and Distribution Expenses. Selling and distribution expenses increased by $87,530 or 160% to $142,326 for the nine months ended June 30, 2005, as compared to $54,796 for the nine months ended June 30, 2004. The increase in selling and distribution expenses in 2005 as compared to 2004 was primarily as a result of increased personnel and personnel-related expenses related to the launch of the Company's PHS mobile phone product and Teltone products. The major components of selling and distribution expenses are salesmen's compensation, travel expenses, transportation expense and maintenance expense.
General and Administrative Expenses. General and administrative expenses increased by $426,609 or 99% to $859,230 for the nine months ended June 30, 2005, as compared to $432,621 for the nine months ended June 30, 2004, as a result of increased administrative personnel and personnel-related costs, in particular associated with the launch of the Company's PHS mobile phone product, Teltone product, and audit fees. The major components of general and administrative expenses are audit fees, management compensation, and personnel and personnel-related costs.
Bad Debt Expense. Bad debt expense was $408,891 or 3% of net sales for the nine months ended June 30, 2005, as compared to a recovery of $(684,966) or (5)% of net sales for the nine months ended June 30, 2004. The recovery was an adjustment of the previous provisions. Currently, aged receivables from 9-12 months are allowed for 25%, 12-24 months are allowed for at 50% and those older than 24 months are allowed for at 100%. Previously, the following was allowed for: 3-6 months 15%, 6-9 months 25%, 9-12 months 50%, and anything greater than 12 months was allowed for at 100%. The Company determined that the rates previously applied to the outstanding receivables did not reflect the current business condition of the Company and its customer base. The Company is implementing additional procedures to monitor and control accounts receivable and attempt to reduce bad debt expense in future periods.
Depreciation and Amortization Expense. Depreciation and amortization expense included in costs and expenses was $329,635 for the nine months ended June 30, 2005, as compared to $239,841 for the nine months ended June 30, 2004, as a result of the acquisition of fixed assets in 2004 to support increased business activities.
Financial Expenses. Financial expenses were $194,087 for the nine months ended June 30, 2005, as compared to $236,144 for the nine months ended June 30, 2004.
Other Income. Other income was $28,662 for the nine months ended June 30, 2005, as compared to $16,221 for the nine months ended June 30, 2004.
Conversion Premium Expense. Conversion premium expense was $468,563 for the nine months ended June 30, 2005, as compared to $-0- for the three months ended June 30, 2004. This represents a one time charge to the income statement. The amount represents a premium on $2,205,000 of debentures that were issued on April 7, 2005.
Compensation Expense Stock Warrants. Compensation expense on stock warrants was calculated at $2,631,116 for the nine months ended June 30, 2005, as compared to $-0- for the three months ended June 30, 2004. This represents a one time charge to the income statement. The warrants are attached to the $2,205,000 of debentures that were issued on April 7, 2005.
Non-Operating Expenses. Non-operating expenses were $76,949 for the nine months ended June 30, 2005, as compared to $58,700 for the nine months ended June 30, 2004. As of June 30, 2005 the company had accrued $14,333 for liquidating damages in conjunction with the company's failure to file its' Registration Statement. Per the agreement, the amount is calculated at .5% for each 30 day period
Provision for Income Taxes. The provision for income taxes, which is computed on a per country basis, was $95,087 for the nine months ended June 30, 2005, as compared to $203,578 for the nine months ended June 30, 2004.
China has a preferential tax policy for high-tech enterprises that provides for income taxes to be cancelled for the first two profitable years and to be reduced by 50% for the subsequent three years. Accordingly, for the nine months ended June 30, 2005 and 2004, the SGIC subsidiary was subject to a tax rate of 15%, reduced by a tax holiday of 7.5%, resulting in a net tax rate of 7.5%. This tax holiday will expire in 2005. However, the Teltone subsidiary will follow the policy and continue to enjoy the tax holiday from its inception in March 2005 to March 2007, and preferential 7.5% tax rate till March 2010.
Net Income. As a result of the aforementioned factors, net loss was $(951,137) for the nine months ended June 30, 2005, as compared to net income of $2,401,146 for the nine months ended June 30, 2004.
FINANCIAL CONDITION
Operating - The Company's operations utilized cash resources of $8,498,194 for the nine months ended June 30, 2005, as compared to generating cash resources of $3,611,013 for the nine months ended June 30, 2004, primarily as a result of cash generated in 2005 to support the increases of accounts receivable and inventories.
The Company had working capital of $6,495,434 at June 30, 2005, as compared to a working capital of $(402,534) at June 30, 2004, reflecting current ratios of 1.36 and .97, respectively. The improvement in working capital during the nine months ended June 30, 2005 was primarily a result of the sale of $2,000,000 of common stock in November 2004, as described herein, sales increasing thereby increasing accounts receivables which were then offset by the increases of payables.
Investing - During the nine months ended June 30, 2005, the Company used $5,333,648 for investing activities, the major components of which were the disposal of property and equipment of $1,152,778, offset by the fixed asset acquisition of $155,826. The decrease in loans receivable of $190,520 also improved the cash flow and the investment in intangible assets used $6,521,120 of capital. During the nine months ended June 30, 2004, the Company utilized $3,797,611 in investing activities, the major components of which were the acquisition of property and equipment of $2,241,954 and an increase in short-term investments of $60,386, a increase in loans receivable of $1,452,349 and an investment in intangible assets of $42,922.
Financing - During the nine months ended June 30, 2005, the Company generated $13,691,208 from financing activities, consisting of the repayment of borrowings of $38,544 offset by total net equity financing of $1,897,053 and paid in capital generated from a beneficial conversion premium $468,563, compensation on stock warrants $2,631,116 and capital issued for intellectual property $6,527,970. During the nine months ended June 30, 2004, the Company utilized $524,150 in financing activities, consisting of the total repayments of the borrowings of $663,293 and a paid in capital increase of $139,143.
At June 30, 2005, the Company does not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as commodity prices, equity prices, and other market changes that affect market risk sensitive investments.
With respect to foreign currency exchange rates, the Company does not believe that a devaluation or fluctuation of the RMB against the USD would have a detrimental effect on the Company's operations, since the Company conducts virtually all of its business in China, and the sale of its products and the purchase of raw materials and services are settled in RMB. The effect of a devaluation or fluctuation of the RMB against the USD would affect the Company's results of operations, financial position and cash flows, when presented in USD (based on a current exchange rate) as compared to RMB.
As the Company's debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any risk from an increase in market interest rates. However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rates would cause a commensurate increase in the interest expense related to such borrowings.
ENTRY INTO A MATERIAL AGREEMENT
On April 7, 2005, Global National Communications Corp. (the Registrant") entered into a Letter of Intent with the Purchasers listed in Schedule 1 thereto providing for the issuance by the Registrant to the Purchasers of up to $7,000,000 8% Fixed Price Convertible Debentures (the "Debentures"). Subject to certain provisions described below, the Debentures are convertible, at the option of the holder, at a conversion price of $4.00 (the "Conversion Price"). If at the close of trading on the tenth trading day following the effective date of the Registration Statement (defined below), the closing price of the Registrant's common stock is less than $5.00 or the volume weighted average
price for the previous ten trading days is less than $5.00, the Conversion Price will be reset to $3.50. The term of the Debentures is three years from the date of issuance. Commencing six months from the closing the Registrant is required to reduce the principal amount on the Debentures by 1/10th per quarter, payable in cash or shares if the shares are: (1) covered by the Registration Statement (defined below); and (2) the closing price for the Registrant's shares is at least 110% of the Conversion Price for each of the five trading days prior to the payment date. The Registrant may redeem the Debentures upon at least twenty days prior written notice, assuming the shares issuable upon conversion of the Debentures have been registered and the trading price of the Registrant's shares, subject to volume limitations, exceeds 200% of the Conversion Price for a period of ten days.
As a condition to the closing, certain of the Registrant's shareholders entered into a pledge agreement (the "Pledge Agreement") pursuant to which such shareholders agreed to pledge 100,000 shares as collateral for each $1,000,000 of the Debentures sold. In connection with the Debentures, the Registrant shall issue warrants (the "Warrants") to purchase up to 100% of the shares issuable upon conversion of the Debentures. The Warrants have an exercise price of $4.50 per shares.
On April 7, 2005, the Registrant also entered into a Registration Rights Agreement with the investors signatory thereto, which provides that on or prior to 45 days after a closing, of which one occurred on April 7, 2005, the Registrant shall prepare and file with the Commission a registration statement ("Registration Statement") covering the resale of all of the Registrable Securities (defined as the shares issuable upon conversion of the Debentures and the shares issuable upon exercise of the Warrants). If the registration statement is not filed within 45 days or is, for any reason, not declared effective within 120 days, the Registrant shall pay liquidated damages to the investors. Such damages shall be paid in cash in an amount equal to 0.5% of the aggregate amount of the Debentures purchased by the investor for the first 30 days (or part thereof) after either the filing date or effective date of the Registration Statement, and for any subsequent 30-day period (or part thereof), thereafter.
The investors have contractually agreed to restrict their ability to convert the Debentures and exercise the warrants and receive shares of the Registrant's common stock such that the number of shares of the Registrant held do not exceed 9.9% of the Registrant's issued and outstanding shares.
On April 7, 2005, pursuant to the Securities Purchase Agreement, the Company sold, pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 promulgated thereunder, $2,205,000 aggregate amount of the Debentures and issued Warrants to purchase up to 100% of the shares issuable upon conversion of the Debentures. Duncan Capital LLC received commissions for serving as placement agent in the amount of $176,400.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of SFAS No. 150 did not have a significant effect on the Company's financial statement presentation or disclosures.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment". SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS No. 123(R) in its quarter ending March 31, 2006. The Company is currently evaluating the provisions of SFAS No. 123(R) and has not yet determined the impact, if any, that SFAS No. 123(R) will have on its financial statement presentation or disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company implemented the disclosure provisions of FIN 45 in its September 30, 2003 consolidated financial statements, and the measurement and recording provisions of FIN No. 45 effective October 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", relating to consolidation of certain entities. In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN 46R requires identification of a company's participation in variable interest entities ("VIEs"), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit it to operate on a standalone basis. For entities identified as a VIE, FIN 46R sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE (if any) bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. FIN 46R also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. The Company is not currently participating in, or invested in any VIEs, as defined in FIN 46R. Accordingly, the implementation of the provisions of FIN 46R did not have a significant effect on the Company's consolidated financial statement presentation or disclosures.
SUBSEQUENT EVENT
The People's Bank of China, China's central bank, recently announced that with approval from the State Council, and beginning from July 21, 2005, China will implement a regulated, managed floating exchange rate system based on market supply and demand and in reference to a package of currencies. Current US Dollar exchange rate is 8.11 to Chinese RMB, a 2% drop compared with 8.28, the exchange rate prior to July 21, 2005. This change of exchange rate will have no material impact to the overall operation of the Company. However, since the export revenue has accounted for 30% of the total sales, the company will monitor closely the changes in cost and selling price in order to make strategic decisions in a proper way and timely manner.
Item 3. Controls And Procedures
During the period covered by the Quarterly Report on Form 10-QSB, there were no significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
On April 7, 2005, the Company issued $2,205,000 of Convertible Debentures and issued warrants to purchase up to 100% of the shares issuable upon conversion of the Debentures. Duncon Capital LLC received $176,400 in commissions for serving as placement agent. Pursuant to an Asset Purchase Agreement dated as of June 6, 2005, on June 8, 2005, the Company agreed to issue 8,360,000 shares of its Common Stock to the seller (and/or its designees) of the assets covered by such Agreement. In connection with the purchase, certain of the Company's shareholders agreed to return to the Company for cancellation 5,360,000 shares.
The securities were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 21, 2005 GLOBAL NATIONAL COMMUNICATIONS CORP.
/s/ Ybin Chen
-------------------------------------
Name: Ybin Chen
Title: President, Principal Executive
Officer
|
EXHIBIT 31.1
Certification of Chief Executive Officer
pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Ybin Chen, certify that:
(1) I have reviewed this Form 10-QSB of Global National Communications Corp.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
(4) The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent quarter (the small business issuer's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
(5) The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 20, 2005 /s/ Ybin Chen -------------------------------------- Ybin Chen President, Principal Executive Officer |
EXHIBIT 31.2
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Tiejian Peng, certify that:
(1) I have reviewed this Form 10-QSB of Global National Communications Corp.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
(4) The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent quarter (the small business issuer's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
(5) The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 21, 2005 /s/ Tiejian Peng -------------------------------------- Tiejian Peng Treasurer, Principal Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ybin Chen, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of GLOBAL NATIONAL COMMUNICATIONS CORP. on Form 10-QSB for the quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of GLOBAL NATIONAL COMMUNICATIONS CORP.
Date: August 21, 2005 /s/ Ybin Chen -------------------------------------- Ybin Chen President, Principal Executive Officer |
EXHIBIT 32.2
CERTIFICATION OF THE PRINCIPAL ACCOUNTING OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Tiejian Peng, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of GLOBAL NATIONAL COMMUNICATIONS CORP. on Form 10-QSB for the quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-QSB fairly presents in all material respects the financial condition and results of operations of GLOBAL NATIONAL COMMUNICATIONS CORP.
Date: August 21, 2005 /s/ Tiejian Peng -------------------------------------- Tiejian Peng Treasurer, Principal Financial Officer |