10QSB/A 1 v078668_10qsba.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

Amendment No. 3
to
Form 10-QSB
 
(Mark One)
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
 
COMMISSION FILE NUMBER : 333-100046
 
CINTEL CORP.
(Exact name of small business issuer in its charter)
 
NEVADA
(State or other jurisdiction of incorporation or organization)
52-2360156
(I.R.S. Employer Identification No.)
 
9900 Corporate Campus Drive, Suite 3000, Louisville, KY 40223
(Address of principal executive offices)
 
Issuer's telephone number: (502) 657-6077
 
WITH COPIES TO:
 
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of November 20, 2006, the issuer had 89,619,896 outstanding shares of Common Stock, $.001 par value.
 
Transitional Small Business Disclosure Format (check one): Yes o No x
 
 
 
This quarterly report on Form 10-QSB/A ("Form 10-QSB/A") is being filed to amend our quarterly report on Form 10-QSB for the fiscal quarter ended September 30, 2006 (the "Original Form 10-QSB"), which was originally filed with the Securities and Exchange Commission ("SEC") on November 20, 2006 and amended on November 22, 2006 and February 9, 2007. Accordingly, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Form 10-QSB/A contains current dated certifications from the Principal Executive Officer and the Principal Financial Officer.
 
The Original Form 10-QSB is being amended to amend the financial statements contained therein to write-off certain tax benefits recognized in the year ended December 31, 2005.
 
We have not updated the information contained herein for events occurring subsequent to November 20, 2006, the filing date of the Original Form 10-QSB.
 
 
TABLE OF CONTENTS
 
 
Page
PART I - FINANCIAL INFORMATION
   
Item 1. Financial Statements
1
Item 2. Management’s Discussion and Analysis or Plan of Operation
22
Item 3. Controls and Procedures
25
   
PART II - OTHER INFORMATION
   
Item 1. Legal Proceedings
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3. Defaults Upon Senior Securities
26
Item 4. Submission of Matters to a Vote of Security Holders
26
Item 5. Other Information
26
Item 6. Exhibits
26
   
SIGNATURES
29
 
 
Item 1. Financial Statements 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Cintel Corp. and the Subsidiary
 
We have reviewed the accompanying consolidated interim balance sheets of Cintel Corp. and the Subsidiary (the "Company") as of September 30, 2006 and 2005 and the related consolidated interim statements of operations and comprehensive loss, stockholders' equity, and cash flows for the nine-month periods ended September 30, 2006 and 2005. These consolidated interim financial statements are the responsibility of the Company's management.
 
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
 
  "SF PARTNERSHIP, LLP"
   
Toronto, Canada      CHARTERED ACCOUNTANTS
November 13, 2006 except as to note 15
which is as of February 2, 2007 and note 16
which is as of June 7, 2007
 
-1-
 
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Balance Sheets
September 30, 2006 and 2005
Unaudited
 
   
Restated (note 16)
  
Restated (note 15)
  
   
2006
 
2005
  
ASSETS
          
Current Assets
          
Cash and cash equivalents (note 3)
  
$
1,333,510
  
$
143,192
  
Accounts receivable (net of allowance for doubtful accounts of $1,117,530;
              
2005 - $1,013,918)
    
616,894
    
684,175
  
Inventories (note 4)
    
581,384
    
212,399
  
Prepaid and other assets
    
889,813
    
200,035
  
Loans receivable
    
-
    
9,635
  
               
Total Current Assets
    
3,421,601
    
1,249,436
  
Investments (note 6)
    
1,926,404
    
-
  
Investments in Available for Sale Securities (note 7)
    
17,025
    
48,204
  
Equipment, net (note 8)
    
449,066
    
411,860
  
               
Total Assets
  
$
5,814,096
  
$
1,709,500
  
               
LIABILITIES
              
Current Liabilities
              
Accounts payable
  
$
447,093
  
$
1,217,947
  
Shareholder loan
    
-
    
179,902
  
Customer deposits
    
-
    
191,800
  
Deferred revenue (note 16)
    
143,009
  
$
26,867
  
Loans payable - current (note 9)
    
53,509
    
1,430,542
  
               
Total Current Liabilities
    
643,611
    
3,047,058
  
Accrued Severance (note 10)
    
87,503
    
63,985
  
Loans Payable (note 9)
    
32,067
    
509,484
  
Convertible Debentures (note 11)
    
-
    
30,000
  
               
Total Liabilities
    
763,181
    
3,650,527
  
               
Commitments and Contingencies (note 13)
    
-
    
-
  
               
STOCKHOLDERS' EQUITY
              
Capital Stock (note 12)
    
87,619
    
41,833
  
Authorized
              
300,000,000 common shares, par value $0.001 per share
              
Issued
              
87,619,896 common shares (41,834,102 in 2005)
              
Additional Paid-in Capital
    
14,319,408
    
5,277,110
  
Treasury Stock
    
(5,630
)
  
(105,185
)
Cumulative Other Comprehensive Loss
    
(311,077
)
  
(24,779
)
Accumulated Deficit
    
(9,039,405
)
  
(7,130,006
)
               
Total Stockholders' Equity (Deficit)
    
5,050,915
    
(1,941,027
)
               
Total Liabilities and Stockholders' Equity
  
$
5,814,096
  
$
1,709,500
  

(The accompanying notes are an integral part of these consolidated financial statements.)
 
-2-
 
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Operations and Comprehensive Loss
Nine Months Ended September 30, 2006 and 2005
Unaudited
 
   
Restated (note 16)
  
Restated (note 15)
  
 
2006
  
2005
  
Revenue
          
Merchandise (note 16)
  
$
4,207,788
  
$
936,538
  
Finished goods (note 16)
    
85,372
    
177,215
  
Services
    
66,018
    
29,396
  
               
     
4,359,178
    
1,143,149
  
               
Cost of Sales
              
Merchandise (note 16)
    
4,015,586
    
813,856
  
Finished goods (note 16)
    
65,359
    
109,496
  
               
     
4,080,945
    
923,352
  
               
Gross Profit
    
278,233
    
219,797
  
               
Expenses
              
Salaries and employee benefits
    
516,422
    
378,411
  
Professional fees
    
454,436
    
222,087
  
Office and general
    
291,196
    
413,590
  
Travel
    
185,190
    
165,099
  
Amortization of deferred financing fees
    
90,000
    
120,000
  
Research and development
    
18,940
    
-
  
Taxes and dues
    
595
    
52,426
  
Depreciation
    
170,908
    
163,521
  
               
     
1,727,687
    
1,515,134
  
               
Loss from Operations
    
(1,449,454
)
  
(1,295,337
)
               
Other Income (Expense)
              
Interest income
    
46,714
    
7,594
  
Other income
    
106,261
    
-
  
Foreign exchange
    
(7,577
)
  
-
  
Interest expense
    
(27,636
)
  
(209,541
)
Share of income from equity investment (note 6)
    
16,303
    
-
  
               
Total Other Income (Expense)
    
134,065
    
(201,947
)
               
Loss Before Income Taxes
    
(1,315,389
)
  
(1,497,284
)
               
Current
    
52,373
    
-
  
               
Net Loss
    
(1,367,762
)
  
(1,497,284
)
Foreign currency translation adjustment
    
400,507
    
42,561
  
Unrealized loss on investment (note 6)
    
(720,536
)
  
-
  
               
Total Comprehensive Loss
  
$
(1,687,791
)
$
(1,454,723
)
               
Basic and Diluted Loss per Share
  
$
(0.03
)
$
(0.05
)
               
Basic and Diluted Weighted Average Number of Shares Outstanding
              
during the period
    
62,512,395
    
32,323,055
  
 
(The accompanying notes are an integral part of these consolidated financial statements.)
 
-3-
 
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Operations and Comprehensive Income
Three Months Ended September 30, 2006 and 2005
Unaudited
 
   
Restated (note 16)
  
Restated (note 15)
  
 
2006
  
2005
  
Revenue
          
Merchandise (note 16)
  
$
525,834
  
$
609,912
  
Finished goods (note 16)
    
(2,677
)
  
75,513
  
Services
    
16,868
    
7,752
  
               
     
540,025
    
693,177
  
               
Cost of Sales
              
Merchandise (note 16)
    
483,961
    
536,457
  
Finished goods (note 16)
    
3,374
    
70,295
  
               
     
487,335
    
606,752
  
               
Gross Profit
    
52,690
    
86,425
  
               
Expenses
              
Salaries and employee benefits
    
173,760
    
93,051
  
Professional fees
    
141,409
    
26,711
  
Office and general
    
103,617
    
205,440
  
Travel
    
84,908
    
12,829
  
Taxes and dues
    
322
    
2,831
  
Research and development
    
49
     -  
Amortization of deferred financing fees
    
30,000
    
30,000
  
Depreciation
    
61,992
    
50,884
  
               
     
596,057
    
421,746
  
               
Loss from Operations
    
(543,367
)
  
(335,321
)
               
Other Income (Expense)
              
Interest income
    
9,760
    
1,336
  
Foreign exchange
    
2,955
     -  
Interest expense
    
(5,149
)
  
(42,758
)
Share of income from equity investment (note 6)
    
43
     -  
 
              
Total Other Income (Expense)
    
7,609
    
41,422
  
               
Loss Before Income Taxes
    
(535,758
)
  
(376,743
)
               
Current
    
8,316
     -  
               
Net Loss
    
(544,074
)
  
(376,743
)
Foreign currency translation adjustment
    
11,268
    
22,375
  
               
Total Comprehensive loss
  
$
(532,806
)
$
(354,368
)
               
Basic and Diluted Loss per Share
  
$
(0.01
)
$
(0.01
)
               
Basic and Diluted Weighted Average Number of Shares Outstanding
              
during the period
    
87,594,963
    
41,240,272
  
 
(The accompanying notes are an integral part of these consolidated financial statements.)
 
-4-
 
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Stockholders' Equity (Deficit)
Nine Months Ended September 30, 2006 and 2005
Unaudited
 
     
Number of
Shares
 
 
Capital
Stock
 
 
Additional
Paid-in
Capital
 
 
Treasury
Stock
 
 
Cumulative
Other
Comprehensive
Income (Loss)
 
 
Accumulated
Deficit
 
 
Total
Stockholders'
Equity (Deficit) 
  
                                             
Balance, January 1, 2005
    
23,409,800
  
$
23,409
  
$
4,573,535
  
$
-
  
$
23,826
  
$
(4,789,132
)
$
(168,362
)
Adjustment due to restatement
(note 15)
    
-
    
-
    
-
    
-
    
(91,166
)
  
(843,591
)
  
(934,757
)
                                             
     
23,409,800
    
23,409
    
4,573,535
    
-
    
(67,340
)
  
(5,632,723
)
  
(1,103,119
)
Common stock issued for consulting
                                            
services - March 31, 2005
    
640,000
    
640
    
63,860
    
-
    
-
    
-
    
64,500
  
Common stock issued for consulting
                                            
services - June 30, 2005
    
1,350,000
    
1,350
    
51,151
    
-
    
-
    
-
    
52,501
  
Common stock issued for consulting
                                            
services - September 30, 2005
    
500,000
    
500
    
14,500
    
-
    
-
    
-
    
15,000
  
Common stock issued as repayment of
                                            
promissory note
    
11,987,320
    
11,987
    
368,011
    
-
    
-
    
-
    
379,998
  
Conversion of convertible debenture into
                                            
common stock
    
3,946,982
    
3,947
    
206,053
    
-
    
-
    
-
    
210,000
  
Repurchase of employees' stock
    
-
    
-
    
-
    
(105,185
)
  
-
    
-
    
(105,185
)
Foreign currency translation adjustment
    
-
    
-
    
-
    
-
    
42,561
    
-
    
42,561
  
Net loss for the period
    
-
    
-
    
-
    
-
    
-
    
(1,234,636
)
  
(1,234,636
)
Adjustment due to restatement (note 15)
    
-
    
-
    
-
    
-
    
-
    
(235,181
)
  
(235,181
)
Adjustment due to restatement (note 16)
    
-
    
-
    
-
    
-
    
-
    
(27,466
)
  
(27,466
)
                                             
Balance, September 30, 2005 - restated
                                            
(note 15)
    
41,834,102
  
$
41,833
  
$
5,277,110
  
$
(105,185
)
$
(24,779
)
$
(7,130,006
)
$
(1,941,027
)
                                             
                                             
Balance, January 1, 2006
  
$
42,379,354
  
$
42,379
  
$
5,351,058
  
$
(5,630
)
$
121,739
  
$
(7,269,855
)
$
(1,760,309
)
Adjustment due to restatement (note15)
    
-
    
-
    
-
    
-
    
(110,755
)
  
(267,801
)
  
(378,556
)
Adjustment due to restatement (note 16)
    
-
    
-
    
-
    
-
    
(2,032
)
  
(134,026
)
  
(136,058
)
                                             
Restated balance, January 1, 2006
    
42,379,354
    
42,379
    
5,351,058
    
(5,630
)
  
8,952
    
(7,671,683
)
  
(2,274,924
)
Unrealized loss on investment (note 6)
    
-
    
-
    
-
    
-
    
(720,536
)
  
-
    
(720,536
)
Common stock issued for consulting
                                            
services - April, 2006
    
500,000
    
500
    
89,500
    
-
    
-
    
-
    
90,000
  
Conversion of convertible debenture into
                                            
common stock (note 12)
    
44,300,542
    
44,300
    
8,808,890
    
-
    
-
    
-
    
8,853,190
  
Common stock issued for consulting
                                            
services - July, 2006
    
440,000
    
440
    
69,960
    
-
    
-
    
-
    
70,400
  
Foreign currency translation adjustment
    
-
    
-
    
-
    
-
    
400,507
    
-
    
400,507
  
Net loss for the period
    
-
    
-
    
-
    
-
    
-
    
(1,369,798
)
  
(1,369,798
)
Adjustment due to restatement (note 16)
    
-
    
-
    
-
    
-
    
-
    
2,076
    
2,076
  
Balance, September 30, 2006
    
87,619,896
  
$
87,619
  
$
14,319,408
  
$
(5,630
)
$
(311,077
)
$
(9,039,405
)
$
5,050,915
  
 
(The accompanying notes to the financial statements are an integral part of these statements.)
 
-5-
 
CINTEL CORP. AND THE SUBSIDIARY
Consolidated Interim Statement of Cash Flows
Nine Months Ended September 30, 2006 and 2005
Unaudited
 
 
 
Restated (note 16)
2006
 
Restated (note 15)
2005
 
Cash Flows from Operating Activities
          
Net loss
          
Items not affecting cash:
  
$
(1,367,762
)
$
(1,497,284
)
Depreciation
    
170,908
    
163,521
  
Adjustments to reconcile net loss to net cash used in operating activities:
              
Amortization of financing fees
    
90,000
    
120,000
  
Common stock issued for consulting services
    
131,600
    
131,999
  
Common shares issued for repayment of convertible debenture
    
8,853,191
    
-
  
Share of income from equity investment
    
16,303
    
-
  
Changes in non-cash working capital
              
Accounts receivable
    
467,535
    
(99,091
)
Inventories
    
(101,588
)
  
81,325
  
Prepaid and other assets
    
(339,408
)
  
85,190
  
Accounts payable
    
(782,554
)
  
412,935
  
Deferred revenue
    
(6,952
)
  
26,867
  
Accrued severance
    
13,354
    
(58,026
)
               
Net Cash Flows Provided by (Used in) Operating Activities
    
7,144,627
    
(632,564
)
               
Cash Flows from Investing Activities
              
Investments in available for sale securities
    
106,156
    
-
  
Loans receivable
    
-
    
(9,849
)
Acquisition of equipment, net
    
(2,400
)
  
(14,006
)
               
Net Cash Flows Provided by (Used in) Investing Activities
    
103,756
    
(23,855
)
               
Cash Flows from Financing Activities
              
Payments of deferred financing fees
    
-
    
(240,000
)
Proceeds from issuance of capital stock issued for repayment of convertible debenture
    
-
    
210,000
  
Proceeds from convertible debenture
    
-
    
240,000
  
Repayment of convertible debenture by issuance of capital stock
    
-
    
(210,000
)
Proceeds from promissory note
    
-
    
200,000
  
Repayment of promissory note by issuance of capital stock
    
-
    
(380,000
)
Repayment of convertible debentures
    
(8,853,191
)
  
-
  
Repayment of promissory note
    
-
    
(160,000
)
Repurchase of employees' stocks
    
-
    
(105,185
)
Customer deposits
    
-
    
196,064
  
Loans payable
    
(638,883
)
  
237,691
  
Proceeds from capital stock issued for repayment of promissory note
    
-
    
380,000
  
Shareholder loan
    
-
    
150,570
  
               
Net Cash Flows (Used in) Provided by Financing Activities
    
(9,492,074
)
  
519,140
  
               
Foreign Exchange on Cash and Cash Equivalents
    
87,753
    
(917
)
               
Net Decrease in Cash and Cash Equivalents
    
(2,155,938
)
  
(138,196
)
               
Cash and Cash Equivalents - Beginning of Period
    
3,489,449
    
281,387
  
               
Cash and Cash Equivalents - End of Period
  
$
1,333,511
  
$
143,191
  
               
Supplementary Information for Consolidated Interim Statement of Cash Flows
Interest and income taxes paid
              
             
Interest paid
  
$
27,636
  
$
209,541
  
               
Income taxes paid
  
$
52,373
  
$
-
  
 
In April 2006, 500,000 common shares were issued for consulting services at the value of $90,000.
 
In May 2006, the Company issued 44,300,542 common shares for the repayment of $8,853,190 of the convertible debenture including interest.
 
In July 2006, 440,000 common shares were issued for consulting services at the value of $70,340.
 
(The accompanying notes are an integral part of these consolidated financial statements.)
 
-6-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
1.
Operations and Business
 
Cintel Corp. and the Subsidiary, ("the Company"), was incorporated in the state of Nevada on August 16, 1996 and on April 24, 2001 changed its name from Great Energy Corporation International to Link2 Technologies, Inc. On September 30, 2003 the Company changed its name to Cintel Corp.
 
On September 30, 2003, the Company entered into a definitive Share Exchange Agreement (the "Agreement") with Cintel Co., Ltd., ("Cintel Korea") a Korean corporation and its shareholders. The Agreement provided for the acquisition by the Company from the shareholders of 100% of the issued and outstanding capital stock of Cintel Korea. In exchange, the shareholders of Cintel Korea received 16,683,300 shares of the Company. As a result, the shareholders of Cintel Korea controlled 82% of the Company. While the Company is the legal parent, as a result of the reverse-takeover, Cintel Korea became the parent company for accounting purposes.
 
Upon completion of the share exchange, the business operations of Cintel Korea constituted virtually all of the business operations of the Company. Cintel Korea develops network solutions to address technical limitations to the Internet. Cintel Korea has developed what it believes is the first Korean server load balancing technology. Cintel Korea is now focused on the development of advanced solutions for Internet traffic management. The business operations of Cintel Korea are located in Seoul, Korea.
 
2.
Summary of Significant Accounting Policies
 
The accounting policies of the Company are in accordance with generally accepted accounting principles of the United States of America, and their basis of application is consistent. Outlined below are those policies considered particularly significant:
 
 
a)
Basis of Financial Statement Presentation
 
These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the requirement of item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission ("SEC").

-7-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
2.
Summary of Significant Accounting Policies (cont'd)
 
 
b)
Basis of Consolidation
 
The consolidated financial statements of the Company included the financial results of Cintel Corp. and Cintel Korea. The merger of the Company and Cintel Korea has been recorded as the recapitalization of the Company, with the net assets of the Company brought forward at their historical basis. The intention of the management of Cintel Korea was to acquire the Company as a shell company listed on NASDAQ. Management does not intend to pursue the business of the Company, as such, accounting for the merger as the recapitalization of the Company is deemed appropriate.
 
 
c)
Unit of Measurement
 
The U.S. dollar has been used as the unit of measurement in these financial statements.
 
 
d)
Use of Estimates
 
Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates, although management does not believe such changes will materially affect the financial statements in any individual year.
 
 
e)
Revenue Recognition
 
   
For sale of finished goods, the Company recognizes revenue when there is a definitive sales agreement, and upon shipment of products when title is passed and the amount collectible can reasonably be determined.
 
   
For merchandise sales, the Company recognizes revenue upon shipment of products when title is passed and the amount collectible can reasonably be determined.
 
   
For the service sales, the Company recognizes revenue when services are rendered.
 
 
f)
Cash and Cash Equivalents
 
Cash includes currency, cheques issued by others, other currency equivalents, current deposits and passbook deposits. Cash equivalents include securities and short-term money market instruments that can be easily converted into cash. The investments that mature within three months from the investment date, are also included as cash equivalents.
 
 
g)
Investments in Available for Sale Securities
 
Investments in available for sale securities are recorded in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Investments in available for sale securities that are not held principally for the purpose of selling in the near term are reported at fair market value when it is readily determinable. Unrealized holding gains and losses from investments in available for sale securities are excluded from earnings and reported as a separate component of stockholders' equity.
 
-8-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
2.
Summary of Significant Accounting Policies (cont'd)
 
 
h)
Investments
 
Investments subject to significant influence have been recorded using the equity method.
 
 
i)
Inventories
 
Raw material is stated at the lower of cost or market value, using the first in first out weighted average cost method.
 
Merchandise inventory is stated at the lower of cost or net realizable value. Net realizable value is determined by deducting selling expenses from selling price.
 
 
j)
Equipment, net
 
Equipment is stated at cost. Major renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over a period of 5 years.
 
 
k)
Foreign Currency Translation
 
   
The Company's functional currency is the Korean won. Adjustments to translate those statements into U.S. dollars at the balance sheet date are recorded in cumulative other comprehensive (loss) income.
 
   
Foreign currency transactions of the Korean operation have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses have been charged to income in the year.
 
 
l)
Financial Instruments
 
Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments.
 
Fair values of cash equivalents, short-term and long-term investments and short-term debt approximate cost. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined using market information and valuation methodologies, primarily discounted cash flow analysis. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods could significantly affect the fair value estimates.
 
-9-

CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
2.
Summary of Significant Accounting Policies (cont'd)
 
 
m)
Comprehensive Income (Loss)
 
The Company adopted SFAS No. 130, “Reporting Comprehensive Income (“SFAS No. 130”).” SFAS No. 130 establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of financial statements. Comprehensive income (loss) is presented in the statements of stockholders' (deficit) equity, and consists of net earnings (loss) and foreign currency translation adjustments. SFAS No. 130 requires only additional disclosures in the financial statements and does not affect the Company's financial position or results of operations.
 
 
n)
Income Tax
 
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". Deferred income taxes are provided on a liability method whereby deferred income tax assets are recognized for deductible temporary differences, and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
 
o)
Earnings (Loss) per Share
 
The Company adopted FAS No.128, "Earnings per Share" which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year.
 
 
p)
Concentration of Credit Risk
 
SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance- Sheet Risk and Financial Instruments with Concentration of Credit Risk", requires disclosure of any significant off-balance-sheet risk and credit risk concentration. The Company does not have significant off-balance-sheet risk or credit concentration. The Company maintains cash and cash equivalents with major Korean financial institutions.
 
The Company provides credit to its clients in the normal course of its operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent credit losses which, once they materialize, are consistent with management's forecasts.
 
Concentration of credit risk arises when a group of clients having a similar characteristic such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions. The Company does not have any significant risk with respect to a single client.

-10-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
2.
Summary of Significant Accounting Policies (cont'd)
 
 
q)
Long-lived Asset Impairment
 
The company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is assessed based on the carrying amount of a long-lived asset compared to the sum of the future undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds the total undiscounted cash flows expected from its use and disposition.
 
 
r)
Recent Accounting Pronouncements
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). This Statement permits fair value of remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amended SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its consolidated financial statements.
 
In March 2006, FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets which amends FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 156"). In a significant change to current guidance, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: (1) Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial position.
 
In June 2006 FASB issued Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” ("SFAS No. 109"). FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently reviewing the effect, if any, FIN 48 will have on its financial position.

-11-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
2.
Summary of Significant Accounting Policies (cont'd)
 
 
r)
Recent Accounting Pronouncements (cont'd)
 
In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 was issued to provide consistency in how registrants quantify financial statement misstatements. The Company is required to and will initially apply SAB No. 108 in connection with the preparation of its annual financial statements for the year ending December 31, 2006. The Company does not expect the application of SAB No. 108 to have a material effect on its financial position and results of operations.
 
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for calendar year companies on January 1, 2008. The statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The statement codifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company is currently assessing the potential impacts of implementing this standard.
 
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("SFAS No. 158"). SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is defined as the difference between the fair value of the plan assets and the plans benefit obligation. For a pension plan the benefit obligation is the projected benefit obligation and for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. SFAS No. 158 requires an employer to recognize as a component of other comprehensive income, net of tax, the gains and losses and prior service costs or credits that arise during the period but that are not recognized as components of net periodic benefit costs pursuant to SFAS No. 87. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end. Additional footnote disclosure is also required about certain effects on net periodic benefit cost for the next year that arise from the delayed recognition of gains or losses, prior service costs or credits, and transition asset or obligation. Except for the year-end measurement requirement, SFAS No. 158 is effective for the year ending December 31, 2006. The Company does not anticipate that the adoption of this statement will have a material effect on its financial condition or operations.

-12-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
3.
Cash and Cash Equivalents
 
In 2005, the Company provided $134,260 as security for one of the bank loans as described in note 9. As at September 30, 2005, the amount of loan outstanding was $393,190. In 2006, the bank loan was repaid.
 
4.
Inventories
 
Inventory includes $421,549 (2005 - $5,427) of merchandise and $159,835 (2005 - $206,972) of raw materials.
 
5.
Income Taxes
 
Corporate income tax rates applicable to the Korean subsidiary in 2006 and 2005 are 16.5 percent on the first 100 million Korean won ($105,700) of taxable income and 29.7 percent on the excess. For the United States operation, the corporate tax rate is approximately 34%. The Company provided a valuation allowance equal to the deferred tax amounts resulting from the net operating losses available for tax purposes in the United States, as it is not more likely than not that they will be realized. Net operating losses available for tax purposes from the Korean subsidiary can be carried forward for five years to offset future taxable income. The U.S. tax losses can be carried forward for fifteen years to offset future taxable income. The Company has accumulated approximately $7,762,733 of taxable losses, which can be used to offset future taxable income. The utilization of the losses expires in years 2008 to 2010.
 
Under SFAS No. 109, income taxes are recognized for the following: a) amount of tax payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. The Company has deferred income tax assets arising from research and development expenses. For accounting purposes, these amounts are expensed when incurred. Under Korean tax laws, these amounts are deferred and amortized on a straight-line basis over 5 years.
 
The Company has deferred income tax assets as follows:
 
   
Restated (note 15)
  
   
2006
  
2005
  
Deferred Income Tax Assets
          
Research and development expenses amortized over 5
          
years for tax purposes
  
$
265,671
   $ 
197,242
  
Other timing differences
    
(55,272
)
  
152,713
  
Net operating loss carryforwards
    
2,194,563
    
799,434
  
               
     
2,404,962
    
1,149,389
  
Valuation Allowance (note 15)
    
(2,404,962
)
  
(1,149,389
)
               
   
$
-
  
$
-
  
 
-13-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
6.
Investments
 
Investments represent 500,000 shares, which is a 20% ownership in a private Korean company.
 
7.
Investments in Available for Sale Securities
 

   
2006
  
2005
  
Stock #1
  
$
16,745
   $
48,495
  
Other miscellaneous
    
280
    
257
  
               
   
$
17,025
   $
48,752
  
 
Stock #1 represents a minority interest in a private Korean company which is carried at cost.
 
8.
Equipment, net
 
Equipment is comprised as follows:
 
   
Cost
  
  2006
Accumulated
Depreciation
 
Cost
  
2005
Accumulated
Depreciation
  
Furniture and fixtures
  
$
71,619
  
$
39,418
   $
45,799
  
$
28,074
  
Equipment
    
910,110
    
709,702
    
631,257
    
547,983
  
Vehicle
    
17,750
    
2,663
    
14,843
    
14,841
  
Software
    
733,304
    
531,934
    
696,737
    
385,878
  
                           
                           
   
$
1,732,783
  
$
1,283,717
   $
1,388,636
  
$
976,776
  
                           
                           
Net carrying amount
        
$
449,066
        
$
411,860
  
 
-14-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
9.
Loans Payable
 
   
Current
    
Long-term
    
2006 Total
    
2005
Total
  
Bank loan
  
$
-
  
$
-
  
$
-
  
$
968,590
  
Promissory note
    
39,000
    
-
    
39,000
    
39,000
  
Government loans
    
10,422
    
31,269
    
41,691
    
99,062
  
Discount of interest-free government
                          
loans
    
-
    
(4,294
)
  
(4,294
)
  
(7,842
)
Vehicle loan
    
4,087
    
5,092
    
9,179
    
-
  
Note payable #1
    
-
    
-
    
-
    
479,500
  
Note payable (#2, 3 & 4)
    
-
    
-
    
-
    
361,716
  
   
$
53,509
  
$
32,067
  
$
85,576
  
$
1,940,026
  
 
Promissory Note
 
The promissory note is non-interest bearing, unsecured, and due on demand.
 
Government Loans
 
The loans are non-interest bearing, unsecured, repayable in annual payments of $10,422 and mature in October 2009.
 
Vehicle Loan
 
The vehicle loan is non-interest bearing, secured by the vehicle as disclosed in note 8, and is repayable in 27 blended monthly installments of $340. The loan matures in December 2008.
 
Future minimum annual payments are as follow;
 
2006
    
53,509
  
2007
    
14,502
  
2008
    
11,434
  
2009
    
6,131
  
         
Balance - September 30, 2006
  
$
85,576
  

-15-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
10. Accrued Severance
 
The Company's liability for severance pay is calculated pursuant to applicable labor laws in Korea. Severance payment will be the monthly average of the three most recent months' salary of the employees multiplied by the number of years of employment as of the balance sheet date for all employees.
 
11.
Convertible Debentures
 
Pursuant to SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", the Company accounts for the convertible debentures as a liability at face value and no formal accounting recognition is assigned to the value inherent in the conversion feature.
 
The convertible debentures outstanding during the year were unsecured and non-interest bearing. The debenture holders had sixteen months from the date of their agreements (the conversion date) to convert their debentures into common stock of the Company. Any balances outstanding after the conversion date are repayable twenty months after the conversion date (or thirty six months after the date of the agreements).
 
   
 
Conversion
Price
 
 
Conversion
Date
 
 
Maturity date
 
 
Amount
  
Convertible debenture #1
  
$
0.35
    
6/15/2007
    
12/15/2008
  
$
492,800
  
Convertible debenture #2
  
$
0.04
    
4/17/2007
    
10/17/2008
    
440,000
  
Convertible debenture #3
  
$
0.14
    
4/17/2007
    
10/17/2008
    
2,161,334
  
Convertible debenture #4
  
$
0.35
    
5/17/2007
    
11/17/2008
    
5,759,057
  
                           
                       
8,853,191
  
Less: conversions as at September 30, 2006
                      
8,853,191
  
                           
Total outstanding at September 30, 2006
                    
$
-
  
 
The convertible debenture outstanding at September 30, 2005 had an annual coupon rate of 5%. The convertible debenture was repaid in 2005.

-16-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
12.
Capital Stock
 
In January 2005, the Company issued 240,000 common shares for consulting service at the value of $20,500.
 
In January 2005, the Company issued 2,262,424 common shares from escrow upon the repayment of $40,000 of the convertible debenture.
 
In February 2005, the Company issued 622,200 common shares from escrow upon the repayment of $50,000 of the convertible debentures.
 
In February 2005, 400,000 common shares were issued for consulting services at the value of $44,000.
 
In March 2005, the Company issued 1,485,120 common shares from escrow upon the repayment of $80,000 of the convertible debenture.
 
In March 2005, the Company repurchased 93,830 common shares for $105,259. The excess of repurchase price over fair market value was recorded as an employee benefit.
 
In March 2005, 1,905,136 common shares were issued upon the conversion of $140,000 of convertible debenture.
 
In April 2005, the Company issued 1,311,769 common shares from escrow upon the repayment of $40,000 of the convertible debenture.
 
In April 2005, 1,200,000 common shares were issued for consulting services at the value of $48,000.
 
In April 2005, 712,500 common shares were issued upon the conversion of $20,000 of convertible debenture.
 
In May 2005, 1,329,346 common shares were issued upon the conversion of $50,000 of convertible debenture.
 
In May 2005, the Company issued 2,333,551 common shares from escrow upon the repayment of $70,000 of the convertible debenture.
 
In June 2005, 150,000 common shares were issued for consulting services at the value of $4,500.
 
In June 2005, the Company issued 3,268,031 common shares from escrow upon the repayment of $80,000 of the convertible debenture.
 
In July 2005, the Company issued 704,225 common shares from escrow upon the repayment of $20,000 of the convertible debenture.

-17-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
12.
Capital Stock (cont'd)
 
In September 2005, 500,000 common shares were issued for consulting services at the value of $15,000.
 
In October 2005, 400,000 common shares were issued for consulting services at the value of $36,000.
 
In December 2005, the Company issued 145,252 common shares for the repayment of $38,492 of the convertible debenture including interest.
 
The balance of shares held in escrow at March 30, 2006 of 10,837,180 common shares was returned to the Company.
 
In April 2006, 500,000 common shares were issued for consulting services at the value of $90,000.
 
In May 2006, the Company issued 44,300,542 common shares for the repayment of $8,853,190 of the convertible debenture including interest.
 
In July 2006, 440,000 common shares were issued for consulting services at the value of $70,340.
 
Stock Warrants and Options
 
The Company has accounted for its stock options and warrants in accordance with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148 "Accounting for Stock - Based Compensation - Transition and Disclosure." The value of options granted has been estimated using the Black Scholes option pricing model. The assumptions are evaluated annually and revised as necessary to reflect market conditions and additional experience. The following assumptions were used:

   
2006
  
2005
  
Interest rate
    
6.5
%
  
6.5
%
Expected volatility
    
70
%
  
70
%
Expected life in years
    
6
    
6
  
Expected dividend rate
    
-
    
-
  
 
In 1999, the Board of Directors of Cintel Korea adopted an option plan to allow employees to purchase common shares of Cintel Korea.

-18-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
12.
Capital Stock (cont'd)
 
Stock Warrants and Options (cont'd)
 
In August 1999, the share option plan granted 96,000 stock options for the common stock of Cintel Korea having a $0.425 nominal par value each and an exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In 2003, an additional 30,000 stock options were cancelled.
 
In March 2000, 225,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.68. In 2002, 135,000 and in 2003, an additional 47,000 of these stock options were cancelled.
 
In February 2001, 30,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.72. In 2003, all of these stock options were cancelled.
 
In March 2003, 65,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.71. In the same year, 15,000 of these stock options were cancelled.
 
The options vest gradually over a period of 3 years from the date of grant. The term of each option shall not be more than 8 years from the date of grant. No options have vested during the nine month periods ended September 30, 2006 and 2005.
 
The stock options have not been included in the calculation of the diluted earnings per share as their inclusion would be antidilutive.
 
The following table summarizes the stock option activity during the nine month periods in 2006 and 2005:

     
2006
    
2005
  
Outstanding, beginning of period
  
$
106,000
  
$
106,000
  
Exercised
    
-
    
-
  
Cancelled
    
-
    
-
  
Forfeited
    
-
    
-
  
               
Outstanding, end of period
  
$
106,000
  
$
106,000
  
               
Weighted average fair value of options granted during
              
the period
  
$
-
  
$
-
  
               
Weighted average exercise price of common stock
              
options, beginning of period
  
$
0.62
  
$
0.62
  
     
Weighted average exercise price of common stock
              
options granted in the period
  
$
-
  
$
-
  
               
Weighted average exercise price of common stock
              
options, end of period
  
$
0.67
  
$
0.67
  
               
Weighted average remaining contractual life of common
              
stock options
    
1 year
    
2 years
  
 
-19-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
13.
Commitments and Contingencies
 
The Company entered into a contract with iMimic Networking, Inc. for the use of the iMimic solution within Korea starting November 17, 2000. For the use of this solution, the Company paid $70,000 as an upfront payment and pays a $640 royalty for each product sold that uses the iMimic solution. The Company is also required to pay an annual royalty fee of $10,000. The contract has no fixed termination date.
 
The Company is committed to office spaces' lease obligations which expire in December 2006 and February 2007. Future minimum annual payments (exclusive of taxes and insurance) under the leases are as follows:
 
2006
  
$
24,683
  
2007
    
2,000
  
   
$
26,683
  
 
14.
Subsequent Events
 
On October 24, 2006, the Company completed financing in an aggregate of $15,284,295 principal amount in convertible bonds. The convertible bonds do not bear interest if converted into shares of the Company's common stock. If convertible bonds are not converted, then the Company shall pay interest at the rate of 8% per annum provided that PSTS generates total revenues of $65,800,000 and ordinary profit of $6,800,000 in 2007 and total revenue of $95,400,000 and ordinary profit of $10,600,000 in 2008. If the foregoing milestones are not achieved, interest shall be calculated at 10% per annum. Interest shall be due and payable in cash on the maturity date of October 30, 2011. The convertible bonds are convertible into the Company's common stock at any time after issuance through the date that is one month prior to the maturity date, at a conversion price $0.50 per share.
 
On October 24, 2006, the Company entered into a Stock Purchase Agreement with STS Semiconductor & Telecommunications Co., Ltd. (“STS”), a Korean corporation, for the acquisition of 51% of the total equity interest of Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. (“PSTS”) for a purchase price of $16,500,000 which was paid from the proceeds of the convertible bond financing.
 
PSTS is a limited liability company organized in the People’s Republic of China with its principal offices in Wujiang, Jiangsu. PSTS was founded by STS in China in 2004 by acquiring certain parts of the packaging production lines from Samsung Electronics Corporation’s China plant. PSTS began mass production in 2005 and its main customers are Samsung Electronics and Hynix, two of the largest semiconductor manufacturers in the world. PSTS’s main products are semiconductor packaging, NAND flash memory and LCD assembly.

-20-
 
CINTEL CORP. AND THE SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
Unaudited
 
15.
Restatement of Comparative Figures
 
Restatement dated February 2, 2007
 
On further consideration, the Company determined that at September 30, 2005 it was not more likely than not that deferred tax benefits would be realized, therefore, the Company provided a 100% valuation allowance against the deferred tax assets.
 
The effects of this restatement for September 30, 2006 are to increase the valuation allowance from the consolidated financial statements dated November 13, 2006 to $1,149,389 from nil (note 5); to decrease the deferred tax assets on the 2005 comparative consolidated balance sheets to nil from $1,149,389 (comprised of $202,024 current and $947,365 long term); and to decrease the deferred income taxes recoverable from $235,181 to an expense of nil on the 2005 comparative consolidated statements of operations and comprehensive loss.
 
16.
Restatement of Previously Issued Consolidated Financial Statements
 
Restatement dated June7, 2007
 
On further consideration, the Company decided to defer recognition of revenue for all sale arrangements that include the credit terms "condition of clearing from original buyer", when distributors who used the Company's products in network installation projects were allowed to pay when their final end-users paid them, until such time as the underlying payment condition has been met.
 
The affects of this restatement for September 30, 2006 are to increase the deferred revenue from the consolidated financial statements dated February 2, 2007 to $143,009 from $Nil on the consolidated balance sheet; and to increase revenue from merchandise from $3,980,325 to $4,207,788, increase revenue from finished goods from $76,680 to $85,372, increase cost of sales for merchandise from $3,795,287 to $4,015,586 and to increase cost of sales for finished goods from $51,538 to $65,359 on the consolidated statements of operations and comprehensive loss.
 
-21-
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
 
FORWARD-LOOKING STATEMENTS
 
The information in this quarterly report on Form 10-QSB contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
 
The following discussion and analysis should be read in conjunction with the consolidated financial statements of Cintel Corp. (referred to herein as the "Company," "we," "us," and "our") included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
 
OVERVIEW
 
Management anticipates CinTel Corp will gain access into other related businesses in addition to its current focus on the ITM (Internet Traffic management) market with its long term goal of expansion into new advanced technology sectors related to manufacturing of semiconductor components and wireless processes. CinTel Corp is now shifting from its core business of ITM, an increasingly competitive market due to changes in technologies and solution, to one of the fastest growing markets in the technology realm. CinTel will continue to expand its business into a high growth and profitable market with the long term growth strategy of consolidation of various companies in the semiconductor manufacturing sector. Management believes acquisition of several profitable semiconductor companies will ensure that CinTel's stream of profits will grow exponentially in the near future.
 
 
RESULTS OF OPERATIONS
 
Nine months period ended Sep 30, 2006 compared to the nine months ended Sep 30, 2005.

2005 (Unit: USD)
          
           
   
9/30/2006
  
9/30/2005
  
           
Revenue
    
4,359,178
    
1,143,149
  
               
Cost of sales
    
4,080,945
    
923,352
  
               
Gross Profit
    
278,233
    
219,797
  
               
Expenses
    
1,727,687
    
1,515,134
  
               
Operating (Loss)
    
(1,449,454
)
  
(1,295,337
)
               
Loss Before Income Taxes
    
(1,315,389
)
  
(1,497,284
)
 
-22-
 
The first nine months of 2006 and 2005 revenues totaled approximately $4.35 million and approximately $1.14 million, respectively, which reflects an increase of approximately of $3.21 million. The main reason for the increase in revenue for the first nine months of 2006, as compared to the nine months of 2005, was primarily attributed to the work with the Republic of Korea Air Force for the supply of network equipment. The company generated revenue of approximately $1.95 million from such work with the Republic of Korea Air Force during the first nine months of 2006. In addition approximately $0.45 million of the revenue generated during the first nine months of 2006 is derived from the global system integration project in Hyundai Heavy Industries plants located in Kuwait, in consortium with KT Corp. Approximately $ 0.70 million of revenue generated during the first nine months of 2006 is derived from Shinhan Bank for the supply of a Proxy Server solution. In the future, the company expects significant new revenues by opening up new markets with a strong strategic alliance with Hyundai HDS and KT Corp.
 
The increase in cost of sales and gross margins for the first nine months of 2006 compared to the same period in 2005 was primarily attributable to the relative increase in revenue.
 
Total expenses for the first nine months of 2006 and 2005 totaled approximately $1.72 million and approximately $1.51 million, respectively, resulting in an increase of 14.0%. In the 3rd quarter the company maintained extensive research into new business ventures. Expenses related to future business opportunity research continued to play a factor on profits but will give a good return on the expense in the near future with the expansion opportunities and revenues generated from our research. The company has also seen increases in accounting and legal consulting services related to acquisition preparation and execution in multiple countries.
 
The operating loss for the first nine months of 2006 and 2005 totaled $1.45 million and $1.29 million respectively. Total loss before income taxes the first nine months of 2006 and 2005 totaled $1.31 million and $1.49 million respectively.
 


   
9/30/2006
   
9/30/2005
  
               
Revenue
    
540,025
    
693,177
  
               
Cost of sales
    
487,335
    
606,752
  
               
Gross Profit
    
52,690
    
86,425
  
               
Expenses
    
596,057
    
421,746
  
               
Operating (Loss)
    
(543,367
)
  
(335,321
)
               
Loss Before Income Taxes
    
(535,758
)
  
(376,743
)
 
For the three month period ending September 30, 2006 and 2005 revenues totaled approximately $0.54 million and approximately $0.69 million, respectively, which reflect a decrease of approximately $0.15 million. The main reason for the decrease in revenue was primarily attributed to investment into our new business model and the company's new direction.
 
The decrease in cost of sales for the three month period ending Sep. 30, 2006 compared to the same period in 2005 was primarily attributable to the relative decrease in revenue.
 
-23-
 
Total expenses for the three months period ending Sep 30, 2006 and 2005 totaled approximately $0.59 million and approximately $0.42 million, respectively, resulting in an increase of 41.3%. Despite our decrease in revenues, the increase in expenses was primarily due to the increasing costs of consulting service in order to establish the company's new vision and strategies and establish a new business model.
 
The operating loss for the three month period ending Sep 30, 2006 and 2005 totaled $0.54 million and $0.33 million respectively. Total loss before income taxes for the three month period ending Sep 30, 2006 and 2005 totaled $0.53 million and $0.37 million respectively.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of Sep 30, 2006, CinTel had cash and cash-equivalents including short term investment totaling $1.33 million. Management believes it has the resources necessary to maintain its current business operations for at least twelve months from the date this report was filed.
 
BUSINESS TRENDS
 
Component material, semiconductors, semiconductor packaging and wireless processes are the planned new direction for CinTel Corp. Semiconductors are the basic blocks used to create an increasing variety of electronic products and system Improvements in semiconductor process and design technologies continue to result in ever smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and costs have decreased, semiconductors have become common components in products used in everyday life, including personal computers, telecommunications systems, wireless handheld devices, automotive products, industrial automation and control systems and security applications. The fragile nature of semiconductors also requires considerable efforts in packaging and transport of the products and components.
 
According to IC Insights, the percentage of semiconductor content in electronic equipment increased from approximately 11 percent in 1989 to approximately 21 percent in 2004. Nevertheless, the market for semiconductors has historically been volatile. Supply and demand have fluctuated cyclically and have caused pronounced fluctuations in prices and margins. Following a severe downturn in 2001, the industry experienced a further period of low demand and ongoing worldwide overcapacity during 2002. In 2003 and in particular in 2004, the semiconductor market showed stronger performance. During our 2005 financial year, global semiconductor market growth slowed significantly. However market trends indicate improved forecast and contracts secured at this point indicate a strong demand in the near future.
 
The ITM market has stabilized but is still seeing some significant transformation from a pure caching appliance environment to a convergence of more enterprise network traffic and application management features such as SSL VPN, Application Acceleration (Web-enabled), WAN optimization, firewall and content security. CinTel must incorporate these functions into its current product line to better compete in the marketplace. With current and future partners CinTel may continue to expand its offerings and move from being a niche player to a total solution provider in the near future.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off balance sheet arrangements that are likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
 
SIGNIFICANT ACCOUNTING POLICIES
 
Currency Translation - The Company's functional currency is Korean Won. Adjustments to translate those statements into U.S. dollars at the balance sheet date are recorded in other comprehensive income. Foreign currency transactions of the Korean operation have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses have been charged to income in the year.
 
-24-
 
Concentration of Credit Risk - SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk", requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration. The Company maintains cash and cash equivalents with major Korean financial institutions. The Company's provides credit to its clients in the normal course of its operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent credit losses which, once they materialize, are consistent with management's forecasts. For other debts, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value. Concentration of credit risk arises when a group of clients having a similar characteristic such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions. The Company does not have any significant risk with respect to a single client.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based Payment" (Statement 123). This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which the employee is required to provide service in exchange for the award requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met; those conditions are much the same as the related conditions in Statement 123. This Statement is effective for public entities that do not file as a small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. This Statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date and is not expected to have a material impact on the Company's consolidated financial statements.
 
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (Statement No. 154). Statement No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Statement No. 154 requires retrospective application of any change in accounting principle to prior periods' financial statements. Statement No. 154 is effective for the first fiscal period beginning after December 15, 2005. We do not expect the implementation of Statement No. 154 to have a significant impact on our consolidated financial statements.
 
ITEM 3. CONTROLS AND PROCEDURES.
 
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
 
 
-25-
 
 
Item 1. Legal Proceedings.
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
 
Item 3. Defaults Upon Senior Securities.
 
 
Item 4. Submission of Matters to a Vote of Security Holders.
 
 
Item 5. Other Information.
 

Item 6.
Exhibits.

Exhibit Number
  
Description
     
4.1
  
Standby Equity Distribution Agreement, dated August 4, 2004, between Cornell Capital Partners, L.P. and the Company (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-119002), filed with the Securities and Exchange Commission on September 15, 2004)
     
4.2
  
$240,000 principal amount Compensation Debenture, due August 4, 2007, issued to Cornell Capital Partners, L.P., in connection with the Standby Equity Distribution Agreement (Incorporated by reference to the Company’s registration statement on Form SB-2 (File No. 333-119002), filed with the Securities and Exchange Commission on September 15, 2004)
     
4.3
  
Convertible Note in the principal amount of $40,000 issued to Sang Yong Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2005)
     
4.4
  
Convertible Note in the principal amount of $400,000 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 21, 2005)
     
4.5
  
Convertible Note in the principal amount of $9,640 issued to Meung Jun Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.6
  
Convertible Note in the principal amount of $28,930 issued to Jin Yong Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.7
  
Convertible Note in the principal amount of $48,300 issued to Su Jung Jun (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
 
-26-
 
4.8
  
Convertible Note in the principal amount of $48,300 issued to Se Jung Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.9
  
Convertible Note in the principal amount of $48,300 issued to Sun Kug Hwang (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.10
  
Convertible Note in the principal amount of $192,864 issued to Woo Young Moon (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.11
  
Convertible Note in the principal amount of $336,000 issued to Joo Chan Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.12
  
Convertible Note in the principal amount of $483,000 issued to Sang Ho Han (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.13
  
Convertible Note in the principal amount of $483,000 issued to Jun Ro Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.14
  
Convertible Note in the principal amount of $483,000 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 21, 2005)
     
4.15
  
Convertible Note in the principal amount of $2,082,500 issued to Tai Bok Kim (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.16
  
Convertible Note in the principal amount of $280,000 issued to Joo Chan Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.17
  
Convertible Note in the principal amount of $281,065 issued to Sang Yong Oh (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.18
  
Convertible Note in the principal amount of $246,400 issued to JungMi Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.19
  
Convertible Note in the principal amount of $59,172 issued to Sung Min Chang (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.20
  
Convertible Note in the principal amount of $246,400 issued to Eun Suk Shin (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.21
  
Convertible Note in the principal amount of $492,800 issued to Overnet Co., Ltd. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.22
  
Convertible Note in the principal amount of $98,620 issued to Yeun Jae Jo (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.23
  
Convertible Note in the principal amount of $985,950 issued to Equinox Partners Inc. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.24
  
Convertible Note in the principal amount of $788,950 issued to Kei Wook Lee (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 20, 2005)
     
4.25
  
Convertible Note in the principal amount of $492,800 issued to Seok Kyu Hong (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2005)
 
-27-
 
4.26
  
Convertible Note in the principal amount of $197,200 issued to Moon Soo Park (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 30, 2005)
     
10.1
  
Distribution Agreement dated March 15, 2006 among Cintel Corp. and InterSpace Computers, Inc. (Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2006)
     
10.2
  
Convertible Bonds Subscription Agreement between the Company and Axlon Corporation dated October 24, 2006 (Incorporated by reference to the Company’s Form 8-K/A filed with the Securities and Exchange Commission on October 31, 2006)
     
10.3
  
Convertible Bonds Subscription Agreement between the Company and Emerging Memory & Logic Solutions, Inc. dated October 24, 2006 (Incorporated by reference to the Company’s Form 8-K/A filed with the Securities and Exchange Commission on October 31, 2006)
     
10.4
  
Convertible Bonds Subscription Agreement between the Company and KTB China Optimum Fund dated October 24, 2006 (Incorporated by reference to the Company’s Form 8-K/A filed with the Securities and Exchange Commission on October 31, 2006)
     
10.5
  
Convertible Bonds Subscription Agreement between the Company and Emerging Memory & Logic Solutions, Inc. dated October 24, 2006 (Incorporated by reference to the Company’s Form 8-K/A filed with the Securities and Exchange Commission on October 31, 2006)
     
31.1
  
Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
     
31.2
  
Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
     
32.1
  
Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
     
32.2
  
Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
 
-28-
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:   June 18, 2007      
    
   
 
CINTEL CORP.
 
 		  
 		  
 
By:   /s/ Sang Don Kim
 
Name: Sang Don Kim
Title: Chief Executive Officer
 
     
By:   /s/ Kyo Jin Kang
 
Name: Kyo Jin Kang
Title: Principal Financial Officer
Principal Accounting Officer  
 
-29-