10QSB 1 p15561_10qsb.txt FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2002. [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______. Commission file number: GOSUN COMMUNICATIONS LTD., INC. ---------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) TEXAS 91-1939829 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 80 Zhong Shan Er Road Guangzhou, China 510080 (Address of principal executive offices) 011-86-208-387-9773 (Issuer's Telephone Number, Including Area Code) ---------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 [ ] No [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] 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 Nov. 30, 2002, there were 30,568,179 shares of common stock issued and outstanding. -------------------------------------------------------------------------------- FORM 10-QSB GOSUN COMMUNICATIONS LIMITED, INC. TABLE OF CONTENTS PART I ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES SIGNATURES -------------------------------------------------------------------------------- -2- PART I ITEM 1. FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited financial statements included in this Form 10-QSB reflect all adjustments (consisting only of normal recurring accruals and consolidations) necessary for a fair presentation of the results of operations for the periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. -3- GOSUN COMMUNICATIONS LTD., INC. CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS June 30, December 31, 2002 2001 ---------- ---------- (Unaudited) US$ US$ Current assets Cash and cash equivalents 8,508 488,238 Restricted cash 100,000 -- Accounts receivable -- 561,887 Advances to suppliers -- 2,302 Other receivables 55,098 450,621 Inventories -- 1,234,234 Amounts due from affiliates -- 1,500,954 ---------- ---------- Total current assets 163,606 4,238,236 Investment in equity investees 251,797 50,585 Amount due from affiliates 579,144 -- Deposits -- 300,649 Property, plant and equipment, net -- 539,409 ---------- ---------- Total assets 994,547 5,128,879 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable -- 700,922 Accrued employee compensation and benefits -- 24,440 Other payables and accrued expenses 129,611 998,567 Income taxes payable -- 153,116 Amounts due to affiliates -- 90,581 Short term bank loans -- 1,690,821 ---------- ---------- Total current liabilities 129,611 3,658,447 Amount due to stockholder 44,686 178,744 Convertible note, net of debt discount of (US$62,908, US$89,400) 221,283 210,600 ---------- ---------- Total liabilities 395,580 4,047,791 ---------- ---------- Commitments and contingencies Stockholders' equity Preferred stock series A, par value US$0.001 per share; 100,000 shares authorized; no shares issued and outstanding -- -- Preferred stock series B, par value US$0.001 per share; 5,000 shares authorized; no shares issued and outstanding -- -- Common stock, par value US$0.001 per share; 49,000,000 shares authorized; 45,733,614 (2001: 30,093,179) shares issued and outstanding less 15,165,435 shares held in treasury in 2002 30,568 30,093 Unissued common stock -- 39,375 Additional paid in capital 1,525,259 1,117,827 Accumulated losses (956,860) (113,182) ---------- ---------- 598,967 1,074,113 ---------- ---------- Minority interest -- 6,975 ---------- ---------- Total liabilities and stockholders' equity 994,547 5,128,879 ========== ==========
See accompanying notes to the condensed consolidated financial statements. -4- GOSUN COMMUNICATIONS LTD., INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Six months ended June 30, June 30, -------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenue US$ US$ US$ US$ Sales of cellular phones and pagers, net 4,725,535 5,645,148 11,166,759 11,863,281 Sales of smart cards 1,813,894 7,161,973 7,555,490 10,753,008 Agency service 283,777 525,817 683,876 887,955 ----------- ----------- ----------- ----------- 6,823,206 13,332,938 19,406,125 23,504,244 ----------- ----------- ----------- ----------- Cost of revenue Cost of cellular phones and pagers 4,613,653 5,556,498 10,773,782 11,560,105 Cost of smart cards 1,892,641 7,010,604 7,111,530 10,347,911 Agency service 9,693 138,289 23,475 174,744 ----------- ----------- ----------- ----------- 6,515,987 12,705,391 17,908,787 22,082,760 ----------- ----------- ----------- ----------- Gross profit 307,219 627,547 1,497,338 1,421,484 Other operating income, net 46,333 84,781 98,164 134,801 ----------- ----------- ----------- ----------- 353,552 712,328 1,595,502 1,556,285 Selling expenses 352,065 650,255 874,043 1,144,549 General and administrative expenses 440,230 270,006 1,097,340 513,774 ----------- ----------- ----------- ----------- Operating loss (438,743) (207,933) (375,881) (102,038) ----------- ----------- ----------- ----------- Other income (expenses) Interest income 681 518 694 1,204 Interest expenses (92,606) (14,200) (146,817) (34,224) Share of profit (loss) of equity investees (36,589) 8,076 (29,342) 6,093 ----------- ----------- ----------- ----------- Total other expenses, net (128,514) (5,606) (175,465) (26,927) ----------- ----------- ----------- ----------- Loss before income taxes nd inority interest (567,257) (213,539) (551,346) (128,965) Income taxes 116,586 4,167 299,307 38,289 ----------- ----------- ----------- ----------- Loss before minority interest (683,843) (217,706) (850,653) (167,254) Minority interests (6,277) 8,914 6,975 7,988 ----------- ----------- ----------- ----------- Net loss (690,120) (208,792) (843,678) (159,266) =========== =========== =========== =========== Earnings per share - basic and diluted (0.02) (0.01) (0.03) (0.01) =========== =========== =========== =========== Weighted average common shares Outstanding - basic and diluted 30,548,179 30,215,384 30,452,627 30,215,384 =========== =========== =========== ===========
See accompanying notes to the condensed consolidated financial statements. -5- GOSUN COMMUNICATIONS LTD., INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, ------------------------ 2002 2001 ---------- ---------- US$ US$ Cash flows from operating activities Net loss (843,678) (159,266) Adjustments to reconcile net income to net cash used in operating activities Depreciation 79,612 69,235 Write off of property, plant and equipment 30,564 -- Amortization of debt discount 26,492 -- Expenses compensated by common stock 352,400 -- Interest on convertible note compensated by common stock 323 -- Unparticipated profit (loss) of an equity investee 29,342 (6,093) Minority interests (6,975) (7,988) Increase (decrease) from changes in Accounts receivable 436,020 (124,563) Advances to suppliers (25,692) (237,775) Other receivables and deposits 83,305 (196,264) Inventories (359,828) (107,974) Amounts due from affiliates, net (592,919) (624,762) Accounts payable 499,086 462,771 Accrued employee compensation and benefits (2,192) (14,696) Other payables and accrued expenses 612,881 6,043 Income tax payable 286,307 36,475 ---------- ---------- Net cash provided by (used in) operating activities 605,048 (904,857) ---------- ---------- Cash flows from investing activities Acquisition of property, plant and equipment (52,280) (74,371) Cash of investment no longer consolidated (62,933) -- ---------- ---------- Net cash used in investing activities (115,213) (74,371) ---------- ---------- Cash flows from financing activities Advances from affiliates -- 149,536 Proceeds from issuing common stock -- 16,000 Repayment to stockholder -- (51,932) Restricted cash (100,000) Proceeds from short term bank loans 96,618 1,086,957 Repayment of short term bank loans (966,183) (241,547) ---------- ---------- Net cash provided by (used in) financing activities (969,565) 959,014 ---------- ---------- Net decrease in cash and cash equivalents (479,730) (20,214) Cash and cash equivalents, beginning of period 488,238 158,927 ---------- ---------- Cash and cash equivalents, end of period 8,508 138,713 ========== ========== Supplemental disclosure of cash flow information Interest paid 146,817 34,224 Income taxes paid 13,000 1,814 Supplemental disclosure of significant non-cash transactions Issuance of common stock in connection with consulting services 352,400 -- Conversion of notes and interest payable to common stock 16,132 -- Dilution of ownership of subsidiary 285,527 -- ========== ==========
See accompanying notes to the condensed consolidated financial statements. -6- Note 1 - Basis of Financial Statement Presentation Organisation Gosun Communications Ltd., Inc. ("GOSUN" or "the Company") was organized under the laws of the State of Texas on January 20, 1998, under the name of Blackwing Corporation. On April 4, 1989, Blackwing Corporation, a publicly held corporation, acquired all of the issued and outstanding shares of a company known as Surface Tech, Inc., which was originally known as Holmes Microsystems, Inc.. The transaction had been accounted for as a recapitalization of Holmes Microsystems, Inc. in a manner similar to a reverse acquisition. Accordingly, Holmes Microsystems, Inc. has been treated as the surviving entity. As part of this transaction, Blackwing Corporation changed its name to Holmes Microsystems, Inc. ("Holmes") and the original Holmes Microsystems, Inc., which was then a wholly owned subsidiary, was dissolved. On January 12, 2001, the shareholders of Holmes entered into an exchange agreement with the equity owners of Guangdong Gosun Communication Equipment Sales Co, Ltd. ("GD Gosun"). Pursuant to the exchange agreement, the GD Gosun equity owners transferred all of their equity interests in GD Gosun to Holmes in exchange for 89% of the issued and outstanding shares of Holmes after giving effect to the share exchange. The exchange agreement resulted in the equity owners of GD Gosun obtaining a majority voting interest in Holmes and GD Gosun was treated as the acquiring entity in the transaction for accounting purposes according to generally accepted accounting principles. The reverse acquisition process utilized the capital structure of Holmes and the assets and liabilities of GD Gosun were recorded at predecessor cost. Being the continuing operating entity, the historical financial statements of GD Gosun prior to December 31, 2000 are included for financial reporting purposes. The financial year end date of Holmes has also been changed from January 31 to December 31 effective from the financial year ended December 31, 2000. As part of this transaction, Holmes Microsystems, Inc. changed its name to Gosun Communications Ltd., Inc. In order to enforce the exchange agreement, GD Gosun needed to change its legal status from a PRC private company into a Foreign Investment Enterprise in the People's Republic of China (the "PRC"). The registration of GOSUN as the registered owner of GD Gosun has been approved by the PRC authorities on October 17, 2002. In March 2002, GD Gosun changed its name to Guangdong Gosun Communication Equipment Information Technology Co. Ltd. On June 19, 2002, the ownership of Guangdong Gosun Communications Chain Operation Co. Ltd. ("GGCCO"), the major subsidiary of GOSUN, which was owned by GOSUN has been diluted. On that day, Guangdong Gosun Telecommunication Co. Ltd. (GGT), a commonly controlled affiliate of GOSUN, invested RMB10, 000,000 (equivalent to US$1,210,654) in GGCCO. The investment by GGT is in the form of Internet equipment. After such capital injection, the ownership of GGCCO held by GOSUN was decreased from 100% to 27%. GGCCO is no longer included in the consolidated financial statements of GOSUN. On September 3, 2002, GGT further invested RMB10, 000,000 (equivalent to US$1,210,654) cash in GGCCO. The ownership of GGCCO held by GOSUN was further diluted to 16%. -7- Note 1 - Basis of Financial Statement Presentation - Continued Basis of Presentation The consolidated condensed interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual audited financial statements for the year ended December 31, 2001. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not necessarily indicative of annual results. Business Conducted As mentioned in Note 1, the ownership of GGCCO was diluted on June 19, 2002. Before that, the principal activities of the Company and its subsidiaries were the retail sale and distribution of telecommunication equipment including cellular phones, pagers, cellular phone smart cards and value-refill smart cards, and acting as an agent of cellular and paging services providers. The Company was also a primary agent of an affiliate, Guangdong Gosun Communication Development Company Limited ("GGCD"), a paging service provider in the PRC and a licensed primary agent of China Mobile Communications Corporation, one of two exclusive cellular communications providers in the PRC. After the dilution on June 19, 2002, the principal activities of the Company and its subsidiaries become investment holding. Note 2 - Inventories Inventories represent purchased finished goods and are stated at the lower of cost or market. Note 3 - Investment in Equity Investees As mentioned in Note 1, the company's equity interest in GGCCO has been diluted to 27% during the period. GGCCO is jointly owned by the Company and a commonly controlled affiliate, GGT. The financial information of GGCCO are listed as follows: -8- Note 3 - Investment in Equity Investees - Continued Balance Sheets
ASSETS June 19, December 31, 2002 2001 ---------- ---------- (Unaudited) US$ US$ Current assets Cash and cash equivalents 62,933 252,506 Accounts receivable 125,867 561,887 Advances to suppliers 27,995 2,302 Other receivables 325,250 380,361 Income tax recoverable -- -- Inventories 1,594,062 1,234,234 Amounts due from affiliates 1,770,330 1,303,795 ---------- ---------- Total current assets 3,906,437 3,735,085 Investment in equity investees 54,972 50,585 Deposits 287,617 300,649 Property, plant and equipment, net 481,513 539,409 ---------- ---------- Total assets 4,730,539 4,625,728 ========== ========== LIABILITIES AND OWNERS' EQUITY Current liabilities Accounts payable 1,200,008 700,923 Accrued employee compensation and benefits 22,247 24,478 Other payables and accrued expenses 1,481,838 933,868 Income taxes payable 439,423 153,116 Amounts due to affiliates 346,182 392,873 Short term bank loans 821,256 1,690,821 ---------- ---------- Total current liabilities 4,310,954 3,896,079 Amount due to owners 134,058 134,058 ---------- ---------- Total liabilities 4,445,012 4,030,137 ---------- ---------- Owners' equity Paid in capital 446,860 446,860 Accumulated losses (161,333) 141,756 ---------- ---------- 285,527 588,616 ---------- ---------- Minority interests -- 6,975 ---------- ---------- Total liabilities and owners' equity 4,730,539 4,625,728 ========== ==========
-9- Note 3 - Investment in Equity Investees - Continued Statements of Income (unaudited)
April 1, 2002 April 1, 2001 January 1, 2002 January 1, 2001 To To To To June 19, 2002 June 30, 2001 June 19, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Revenue US$ US$ US$ US$ Sales of cellular phones and pagers, net 4,725,535 5,645,148 11,166,759 11,863,281 Sales of smart cards 1,813,894 7,161,973 7,555,490 10,753,008 Agency service 283,777 525,817 683,876 887,955 ----------- ----------- ----------- ----------- 6,823,206 13,332,938 19,406,125 23,504,244 ----------- ----------- ----------- ----------- Cost of revenue Cost of cellular phones and pagers 4,613,653 5,556,498 10,773,782 11,560,105 Cost of smart cards 1,892,641 7,010,604 7,111,530 10,347,911 Agency service 9,693 138,289 23,475 174,744 ----------- ----------- ----------- ----------- 6,515,987 12,705,391 17,908,787 22,082,760 ----------- ----------- ----------- ----------- Gross profit 307,219 627,547 1,497,338 1,421,484 Other operating income, net 46,333 84,096 98,164 134,116 ----------- ----------- ----------- ----------- 353,552 711,643 1,595,502 1,555,600 Selling expenses 352,065 650,255 874,043 1,144,549 General and administrative expenses 278,112 269,430 628,650 512,909 ----------- ----------- ----------- ----------- Operating profit (loss) (276,625) (208,042) 92,809 (101,858) ----------- ----------- ----------- ----------- Other income (expenses) Interest income 669 497 669 1,164 Interest expenses (76,139) (14,201) (108,623) (34,224) Share of profit of equity investees (2,859) 8,077 4,387 6,093 ----------- ----------- ----------- ----------- Total other expenses, net (78,329) (5,627) (103,567) (26,967) =========== =========== =========== =========== Loss before income taxes and minority interest (354,954) (213,669) (10,758) (128,825) Income taxes 116,586 4,167 299,307 38,220 ----------- ----------- ----------- ----------- Loss before minority interest (471,540) (217,836) (310,065) (167,045) Minority interests (6,277) 8,914 6,975 7,988 ----------- ----------- ----------- ----------- Net loss (477,817) (208,922) (303,090) (159,057) =========== =========== =========== ===========
-10- Note 3 - Investment in Equity Investees - Continued Dongguan Gosun Network Science & Technology Co. Ltd. ("DGNST") is a company incorporated in Dongguan, PRC. It is jointly established by GGCCO and an affiliate, Guangdong Gosun Internet Information Industry Co., Ltd. on January 11, 2001 and is owned as to 49% by GGCCO. DGNST is engaged in the retailing of telecommunication equipment and operating ISP business. Note 4 - Due From and To Affiliates The majority owner of the Company and GGCCO owned minority equity interests in several other companies including Guangdong Gosun Communication Development Co. Ltd. ("GGCD"), Shanghai Gosun Network Science & Technology Co., Ltd. ("SGNST"), Guangdong Gosun Internet Information Industry Co. Ltd. ("GGIII"), Shenzhen Gosun Digital Chain Operation Co. Ltd. ("SGDCO") and Kwok Shun Communication (Hong Kong) Investment Ltd. ("KSCI"). GGCD operates a paging service in Guangzhou, PRC. GGCCO earned agency service income from GGCD for the provision of services to their subscribers by way of facilitating accounts opening and collection of subscriber fees. The agency service income charging rate is revised from 30% in 2001 to 40% in 2002. The agency service income earned was US$339,340 for the period from January 1, 2002 to June 19, 2002. SGNST is an ISP in Shanghai, PRC, established in late 2000. It shares office space and staff with Shanghai Chain Operation. For the period from January 1, 2002 to June 19, 2002, operating expenses in the amount of US$4,085 were charged to SGNST. GGIII operates an ISP business. GGCCO acquired Internet network cards from GGIII amounting to US$702,591 as merchandise for resale for the period from January 1, 2002 to June 19, 2002. The amount due from GGIII represents temporary cash advances. Agreement was signed between GGCCO and GGIII whereby interest at the Renminbi bank borrowing rate will be charged on the cash advances and entire advances became due in September 2002. SGDCO is engaged in trading of telecommunication products. For the period from January 1, 2002 to June 19, 2002, SGDCO acquired telecommunication products from GGCCO amounting to US$205,440. KSCI is a trading company in Hong Kong. The amount due from KSCI represents cash advances by the Company. The amount is interest-free, unsecured and without fixed terms of repayment. GGCCO becomes an equity investee of the Company after the dilution on June 19, 2002 as mentioned in Note 1. The amount due from GGCCO represents cash advances by the Company. The amount is interest-free, unsecured and without fixed terms of repayment. -11- Note 5 - Short Term Bank Loans The Company does not have any bank loans as of June 30, 2002. The bank loans shown in previous period were borrowed by GGCCO. Short-term loans are borrowed by GGCCO and obtained from creditworthy commercial banks in PRC to finance operations. The loans are guaranteed by an affiliate, Guangdong Gosun Network Science & Technology Inc.. Details of the bank loans are as follows:
Outstanding Prevailing Maturity Principal interest rate Date ------------------------------------ ------------------ -------------------- US$ RMB equivalent December 31, 2001 Loan 1 5,000,000 603,864 6.138% January 17, 2002 Loan 2 2,000,000 241,546 6.435% January 23, 2002 Loan 3 3,000,000 362,319 6.435% February 17, 2002 Loan 4 2,000,000 241,546 6.435% March 14, 2002 Loan 5 2,000,000 241,546 6.435% August 21, 2002 ------------ ------------- 14,000,000 1,690,821 ============ =============
Note 6 - Convertible Note On December 21, 2001, the Company entered into a Securities Purchase Agreement with a Purchaser. Pursuant to the Securities Purchase Agreement, the Company agreed to sell to the Purchaser 8% convertible note which amount should be equal to US$300,000. The 8% convertible note has a maturity date of two years from the date of issuance. Legal and professional fees incurred in connection with the issuance of the convertible note, amounting to $71,250, are included in deferred expenses to be amortized over a period of two years. During the six months ended June 30, 2002, $17,812 of the deferred expenses has been amortized. The convertible note holder has the right from and after the issuance of this convertible note and at any time until the convertible note is fully paid, to convert any outstanding and unpaid principal portion of this convertible note and, at the holder's discretion, interest accrued on the convertible note into fully paid and non-assessable shares of common stock of the Company at the conversion price. The conversion price per share should be the lower of (i) 80% of the average of the three lowest closing prices for the common stock for the 30 trading days prior to but not including the closing date in connection with which this convertible note is issued or (ii) 80% of the average of the three lowest closing prices for the common stock for the 30 trading days immediate before the conversion. Pursuant to the same agreement, 15,000 warrants were issued to the Purchaser in conjunction with the convertible note. The exercise period of the warrants is 5 years and entitles their holder to purchase up to 15,000 shares of common stock of the Company. -12- Note 6 - Convertible Note - Continued During the six months ended June 30, 2002, part of the convertible note and interest accrued were converted into 65,000 shares of common stock on various dates at per share prices of $0.5387, $0.4293 and $0.056. Note 7 - Income Taxes Income is subject to tax in the countries in which the Company and its subsidiaries operate. The Federal statutory tax rate is 34%. The standard enterprise income tax rate in the PRC is 33% of which 30% is attributable to the central government and 3% to the provincial government. The principal differences between taxes on income computed at the applicable statutory income tax rates and recorded income tax expenses are as follows: Six months ended June 30, ----------------------- 2002 2001 --------- --------- US$ US$ Applicable statutory tax rates applied to loss before income taxes (187,002) (42,558) Changes in valuation allowance 476,626 42,504 Non deductible expenses -- 24,072 Prior year's under accrual -- 16,282 Others 9,683 (2,011) -------- -------- 299,307 38,289 ======== ======== Note 8 - Stock Issued as Compensation for Services During the six months ended June 30, 2002, common stock were issued as compensation for services as follows:
Unissued Common stock common Additional Shares Amount stock paid in capital ---------- ---------- ---------- -------------- US$ US$ US$ Issuance of shares in connection with consulting services for 2001 43,750 44 (39,375) 39,331 Issuance of shares in connection with consulting services for 2002 366,250 366 -- 352,034 ------------ ---------- ----------- ---------------- Total 410,000 410 (39,375) 391,365 ============ ========== =========== ================
This resulted in the recognition of consulting expenses included in general and administrative expenses of $352,400 for the six months ended June 30, 2002. Note 9 - Commitments and Contingencies There are no material commitments and contingencies as of June 30, 2002. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion should be read in conjunction with Management's Discussion and Analysis of financial condition and result of operations, and the Consolidated Financial Statements and the Notes thereto, for the year ended December 31, 2001, included in the company's Form 10-KSB and SB-2 Registration Statement filed with the SEC. In addition to historical information, the following discussion and analysis of management contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. These risks and uncertainties included, but are not limited to those described under the caption "Factors That May Impact Future Results" in the above referenced SB-2 Registration Statement filed on February 11,2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. Gosun Communications Ltd., Inc. undertakes no obligation to revise or publicly release any revision to these forward-looking statements. We believe that period-to-period comparisons of our operating results, including our revenues, cost of sales, gross margins, expenses, and capital expenditures may not necessarily provide meaningful results and should not be relied upon as indications of future performance. We do not believe that our historical growth rates are indicative of future growth or trends. Background On June 19, 2002, the ownership of Guangdong Gosun Communications Chain Operation Co. Ltd.("GGCCO"), the major subsidiary of the Company, has been diluted. On that day, Guangdong Gosun Telecommunication Co. Ltd.("GGT"), a mainland Chinese company, invested RMB10,000,000 (equivalent to US$1,210,654) in GGCCO. The investment by GGT is in the form of Internet equipment. After such capital injection, the ownership of GGCCO held by the Company was decreased from 100% to 27%. After June 19, 2002, GGCCO is no longer a subsidiary of the Company; it has become an equity investee. On September 3, 2002, GGT further invested RMB10, 000,000 (equivalent to US$1,210,654) cash in GGCCO. The ownership of GGCCO held by the Company was further diluted to 16%. The board of directors of GGCCO decided to increase the paid in capital of GGCCO as it is required by banks for granting bank loans to GGCCO and also to resolve the problem of lack of operating cash. Prior to the ownership dilution of GGCCO on June 19, 2002, the principal activities of the Company and its subsidiaries were the selling of telecommunication equipment and related products and acting as an agent of cellular and paging services providers in the PRC. Through our subsidiaries in PRC, we operate a number of chain stores and sell a broad range of telecommunication products. GGCCO is a primary agent of a related company, Guangdong Gosun Communication Development Company Limited ("GGCD"), a paging service provider in the PRC and a licensed primary agent of China Mobile Communications Corporation ("China Mobile") and China Unicom Corporation, two exclusive cellular communications providers in the PRC, within the region of Guangzhou. After the dilution, the principal activities of the Company became an investment holding company and the financial statement presentation of GGCCO is under the equity method. GGCCO's operating income/loss are recorded in the Company's income statement under "Share of profit (loss) of equity investees". -14- Results of Operations The following table shows the selected consolidated income statement data of the Company and its subsidiaries for the three-month period and six-month period ended June 30, 2002 and 2001. The data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and the notes thereto included as part of the Quarterly Report:
Three-Month Three-Month Six-Month Six-Month (In US$1000's) Period Ended Period Ended Period Ended Period Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 Revenue Sales of Cellular Phones 4,725 5,645 11,167 11,863 and Pagers, net Sales of Smart Cards 1,814 7,162 7,555 10,753 Agency Service 284 526 684 888 ------- ------- ------- ------- 6,823 13,333 19,406 23,504 Cost of Revenue Cost of Cellular Phones and Pagers 4,614 5,556 10,774 11,560 Cost of Smart Cards 1,893 7,011 7,112 10,348 Agency Service 10 138 23 175 ------- ------- ------- ------- 6,517 12,705 17,909 22,083 Gross Profit 306 628 1,497 1,421 Gross Profit Margin 4.5% 4.7% 7.7% 6.0% Other Operating Income 46 84 98 135 Selling Expenses (352) (650) (874) (1,144) General and Administrative Expenses (440) (270) (1,097) (514) Financing/Interest Expenses (92) (14) (147) (33) Share of profit/(loss) of equity investees (36) 8 (29) 6 ------- ------- ------- ------- Loss before Income Taxes and Minority Interest (568) (214) (552) (129) Income Taxes 116 4 299 38 Minority Interest 6 (9) (7) (8) ------- ------- ------- ------- Net loss (690) (209) (844) (159) ======= ======= ======= =======
Three-Month Period Ended June 30, 2002 Compared To Three-Month Period Ended June 30,2001 -15- Revenue, Cost of Revenue, and Gross Profit Margin In comparing revenue for the three-month period ended June 30, 2002 verses 2001, total revenue of US$6.8 million compared to US$13.3 million, a decrease of US$6.5 million or 48.8%, consisted of: 69.3% verses 42.3% generated from the sales of cellular phones and pagers, 26.6% verses 53.7% from the sales of smart cards, and 4.1% verses 4.0% from agency service, respectively. The decrease in total revenue was primarily due to decrease of US$5.3 million in smart card sales. The reason for decrease in smart cards was due to cash flow problem of GGCCO. GGCCO has repaid bank loans amounting to US$869,600 from January to June 2002. As lack of further funding, GGCCO was unable to purchase smart card for sale. On June 30, 2002 and 2001, GGCCO has 13 stores and 15 stores in Guangdong Province and 1 store and 3 stores in Shanghai, respectively. The 0.2% increased in gross profit margin during the three-month period ended June 30, 2002 of 5.1% compared to 4.7% for the same period ended 2001 was the result of reversal of smart cards sales to two distributors The gross profit margin of the cell phone and pager increased to 3.3% for the three-month period ended June 30, 2002, compared to 1.6% for the same corresponding period in year 2001. The gross loss on the sale of smart cards was due to the reversal of sales incurred in 2nd quarter, amounting to US$239,000, for 1st quarter of 2002. Other Operating Income Other operating income for the three-month period ended June 30, 2002 decreased by US$38,000 or 45.2% to US$46,000 compared to US$84,000 for the three-month ended June 30, 2001. The decrease was mainly due to the reduction of the income from repairs and maintenances of cellular phone service. Selling Expenses Selling expenses for the three-month period ended June 30, 2002 decreased by US$298,000 or 45.8% to US$352,000, compared to US$650,000 for the three-month period ended June 30, 2001. The decrease was mainly due to the decrease of the number of stores of GGCCO from 18 on June 30, 2001 to 14 on June 30, 2002. General and Administration Expenses General and administration expenses for the three-month period ended June 30, 2002 increased by US$ 170,000 or 63.0% to US$ 440,000, compared to US$270,000 for the three-month period ended June 30, 2001. Most of the increase in general and administrative expenses was related to the increase in non cash expenditure of company shares to overseas financial advisors, promotion companies, PR companies and attorney fee. The following items contributed to most of the increase: a) Audit fee--. Audit fee for the three-month period ended June 30, 2002 increased to US$30,000, compared to US$8,000 for the three-month period ended June 30, 2001. The increase was due to special audit fees paid to PRC accountants by GGCCO for fund raising purpose and increase in audit fee paid to overseas accountants. b) Consultancy fee--. Consultancy fee for the three-month period ended June 30, 2002 increased to US$13,000, compared to US$400 for the three-month period ended June 30, 2001. The fee was -16- paid to the consultants for their services on the development strategy and domestic funding actions of GGCCO. c) Legal and professional fee--. Legal and professional fee for the three-month period ended June 30, 2002 increased to US$432,000, compared to US$0 for the three-month period ended June 30, 2001. Non-cash expenditure of US$134,000 of the expense represented the fair value of shares issued to overseas financial advisors, promotion companies and PR companies in compensation for their services provided to the Company. d) Staff insurance expense--. Staff insurance for the three-month period ended June 30, 2002 increased by US$27,000 or 1350.0% to US$29,000, compared to US$2,000 for the corresponding period ended June 30, 2001. The increase was due to insurance payment to enhance welfare coverage for employees. Financing Expenses Financing expenses was US$92,000 for the three-month period ended June 30, 2002, compared to US$14,000 for the three-month period ended June 30, 2001. The increase was mainly due to the amortization of the debt discount that relate to the convertible debt issued in December 2001 and increase in payment of short term loans interest by GGCCO. Share of Profit (Loss) of Equity Investees Share of profit (loss) of equity investees was US$(36,000) for the three-month period ended June 30,2002 consisted of: US$(34,000) was the sharing loss of GGCCO for the period from June 20 to June 30 of 2002; US$(2,000) was the sharing loss of Dongguan Gosun Network Science & Technology Co. Ltd. (DGNST), of which the ownership held by GGCCO was 49%. During the three-month period ended June 30, 2001, the profit of equity investee of US$8,076 was from DGNST. Income Taxes The standard enterprise income tax rate in the PRC is 33% of which 30% is attributable to the central government and 3% to the provincial government. Newly established commercial enterprises, on application and approval by the tax bureau, are exempted from enterprise income taxes in respect of income earned during their first year of operation. All subsidiaries in PRC have already expired their tax holidays. The provision for income taxes was due primarily to the impact of the earning subsidiaries as well as the setting up of valuation allowances against net tax benefit earned by other subsidiaries. Minority Interest Minority interest of US$(6,000) for the period April 1, through June 19, 2002 was the sharing profit allocated to the minority shareholder of Shanghai Gosun Communication Chain Operation Co., Ltd, of which the ownership held by GGCCO is 66.6%. Net Loss Net loss was US$690,000 for the three-month period ended June 30, 2002, an increase of US$481,000 or 230.1% as compared to US$209,000 for the three-month period ended June 30, 2001. The net loss was primarily due to U.S. operating expenditures, attorney fee, and service fees in form of stock compensation to -17- overseas financial advisors, promotion companies, and PR companies of US$194,000, and an adjustment in 2nd quarter for consignment sales of smart cards recorded in 1st quarter which resulted in a decrease of US$239,000 to the gross profit in 2nd quarter. The net loss for the first quarter of 2002, after adjustment for smart card sales, increased from US$154,000 to US$393,000. The net loss for the second quarter of 2002 after the adjustment of US$239,000 for smart card sales is US$451,000, which is an increase of US$242,000 from the same period in 2001, of which US$194,000 was from oversea expenditures referred to above. Six-Month Period Ended June 30, 2002 Compared To Six-Month Period Ended June 30, 2001 Revenue, Cost of Revenue, and Gross Profit Margin In comparing revenue for the six-month period ended June 30,2002 verses 2001, total revenue of US$19.4 million compared to US$23.5 million, a decrease of US$4.1 million or 17.5%, consisted of: 57.5% verses 50.5% generated from the sales of cellular phones and pagers, 39.0% verses 45.7% generated from the sales of smart cards, 3.5% verses 3.8% generated from agency service, respectively. The decrease in total revenue was primarily due to a decrease of US$3.2 in smart card sales. The reason for the decrease in smart cards sales was due to repayment of the bank's credit loan amounting to US$869,600 from January to June 2002 and due to the lack of further funding, GGCCO was unable to purchase smart cards for re-sale. On June 30, 2002 and 2001, GGCCO has 13 stores and 15 stores in Guangdong Province and 1 store and 3 stores in Shanghai in respectively. The 1.7% increased in gross profit margin during the six-month period ended June 30, 2002 of 7.7% compared to 6.0% for the same period ended 2001 was the result of increased retail sales compared to wholesale sales of cellular phones. The gross profit margin of the cell phone and pager increased to 3.5% for the six-month period ended June 30, 2002, compared to 2.6% for the same corresponding period in year 2001. The gross profit margin of the smart card increased to 5.9% for the six-month period ended June 30, 2002, compared to 3.8% for the same corresponding period in year 2001. The profitability of smart cards increased because China Mobile Communications Corporation adjusted the compensation policy to its principal agents. We now can share in the mobile communication service revenues for the first nine months of the users we developed at a rate of 3.8%. Following the stable and rapid development of national economy and the entry to the WTO in 2001 in China, the telecommunication product and service market are in a rapid increase stage. As a professional chain company acting on an agent of various telecommunication product and service, GGCCO has constructed a good sales network in some large cities and established its brand and reputation and built good cooperation relations with many suppliers, including China Mobile and China Unicom, two exclusive cellular communications providers in the PRC, in the region of Guangdong province. The management is very confident on the future of GGCCO. Other Operating Income Other operating income for the six-month period ended June 30, 2002 decreased by US$37,000 or 27.4% to US$98,000 compared to US$135,000 for the six-month ended June 30, 2001. The decrease was mainly due to the reduction of the income from repairs and maintenances of cellular phone service. -18- Selling Expenses Selling expenses for the six-month period ended June 30, 2002 decreased by US$270,000 or 23.6% to US$874,000, compared to US$1,144,000 for the six-month period ended June 31, 2001. The decrease was mainly due to the decrease of the number of stores of GGCCO from 18 on June 30, 2001 to 14 on June 30, 2002. General and Administration Expenses General and administration expenses for the six-month period ended June 30, 2002 increased by US$626,000 or 121.8% to US$1,140,000, compared to US$514,000 for the six-month period ended June 30, 2001. Most of the increase in general and administrative expenses was related to the increase in non cash expenditure of company shares to overseas financial advisors, promotion companies, PR companies and attorney fee. The following items contributed to most of the increase: a) Audit fee--. Audit fee for the six-month period ended June 30, 2002 increased by US$68,000 or 680% to US$78,000, compared to US$10,000 for the six-month period ended June 30, 2001. The increase was due to special audit fees paid to a PRC accountants for fund financing purpose and increase in audit fee paid to overseas accountants. b) Consultancy fee--. Consultancy fee for the six-month period ended June 30, 2002 increased by US$41,000 or 4100% to US$42,000, compared to US$1,000 for the six-month period ended June 30, 2001. The fee was paid to the consultants for their service on the development strategy and domestic funding actions of GGCCO. c) Legal and professional fee--. Legal and professional fee for the six-month period ended June 30, 2002 increased by US$432,000 compared to US$0 for the six-month period ended June 30, 2001. Non cash expenditure of US$352,000 of the expense represented the fair value of shares issued to overseas financial advisors, promotion companies and PR companies in compensation for their services provided to the Company. d) Staff insurance expense--. Staff insurance for the six-month period ended June 30, 2002 increased by US$27,000 or 675.0% to US$31,000, compared to US$4,000 for the corresponding period ended June 30, 2001. The increase was due to insurance payment to enhance welfare coverage for employees. Financing Expenses Financing expenses was US$116,000 for the three-month period ended June 30, 2002, compared to US$33,000 for the three-month period ended June 30,2001. The increase was mainly due to the amortization of the debt discount that relate to the convertible debt issued in December 2001 and increase in payment of short term loans interest by GGCCO. Income Taxes The standard enterprise income tax rate in the PRC is 33% of which 30% is attributable to the central government and 3% to the provincial government. Newly established commercial enterprises, on application and approval by the tax bureau, are exempted from enterprise income taxes in respect of income earned during their first year of operation. All subsidiaries in PRC have already expired their tax holidays. The provision for -19- incometaxes was due primarily to the impact of the earning subsidiaries as well as the setting up of valuation allowances against net tax benefit earned by other subsidiaries. Minority Interest Minority interest (loss) of US$(7,000) for the six-month period ended June 30, 2002 was the sharing loss allocated to the minority shareholder of Shanghai Gosun Communications.Chain Operation Co. Ltd., of which the ownership held by GGCCO is 66.6%. Net Loss Net loss was US$(844,000) for the six-month period ended June 30, 2002, an increase of US$685,000or 430.8% as compared to US$(159,000) for the six-month period ended June 30, 2001. The net loss was primarily due to U.S. operating expenditures, attorney fee, and service fees in form of stock compensation to overseas financial advisors, promotion companies, and PR companies of US$583,000, and the financial expense increase of US$ 114,000. Liquidity and Capital Resources Cash and cash equivalents were US$9,000 as of June 30, 2002. This represents a decrease of US$130,000 from December 31,2001. The decrease was primarily due to a negative cash flow from repayment of short-term bank loans. The Company's cash and cash equivalents, excluding consolidation presentation remained about the same during the quarter ended June 30, 2002. The financing of the Company's operations is dependent on its equity investees in China. The growth of the Company will be dependent on the future funding raised by the Company in the market place, and by the Company's equity investees. Summary of Critical Accounting Policies Our consolidated financial statements have prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to use estimates and assumptions and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We based our estimation on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Accounting for Income Taxes Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded. As of June 30, 2002, we have recorded a valuation allowance against our deferred tax assets balance due to uncertainties mainly related to our deferred tax assets as a result of our history of losses in the Company and its subsidiaries. The valuation is based on our estimates of taxable income in the Company and its subsidiaries and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in the future periods, we may need to change the valuation allowance, which could impact our financial position and -20- New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognized acquired intangible assets apart from goodwill if they meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. The adoption of SFAS No. 141 did not have a material effect on the Company's consolidated results of operations or financial position. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. This Statement changes the accounting for goodwill from an amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations will cease upon adoption of this Statement, which will begin with the Company's fiscal year beginning January 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 will be subject to immediate adoption of the Statement. The adoption of SFAS No. 142 did not have a material effect on the Company's consolidated results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", in that it removes goodwill from its impairment scope and allows for different approaches in cash flow estimation. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of. SFAS No. 144 also supersedes the business segment concept in APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in that it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS No.144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations. The Company is required to adopt the provision of SFAS No. 144 beginning with its fiscal year that starts January 1, 2002. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated results of operations or financial position. -21- Business Risks Certain characteristics and dynamics of the Company's business and of financial markets generally create risks to the Company's long-term success and to predictable quarterly results. These risks include: o No Assurance of Profitability. As of June 30, 2002, the Company became an investment holding company. There is no assurance that the Company will generate income from equity investees. o No Assurance of Business Expansion. Due to lack of funding and volatility of the Company's common stock market price, there is no assurance as to the expansion capability of the Company. o Liquidity: Need for Additional Capital. Without additional financing, the Company's normal operation might be affected. o Dependency on Equity Investees for Operation Support and Capital Resources. The Company does not have full time salary employees. The daily operations are supported by the Company's equity investees in China, and the repayments of the Company's loans and payables are also funded by the equity investees. There is no assurance that the equity investees will be able to continue with its' funding and support. o Volatility of Stock Price. The market price of the Company's common stock has fluctuated substantially since the reverse acquisition of the Company's common stock on January 12, 2001. Such volatility may, in part, have a negative effect on the Company's funding sources, thus changes the direction of the Company's expansion efforts. In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies, including the Company, for reasons sometimes unrelated to the operating performance of these companies. o Seasonality and Quarterly Results. The Company's equity investees' businesses are seasonal, reflecting the general pattern of peak sales and earnings for the retail industry during the holiday shopping season. After June 19, 2002, the Company became an investment holding company and will no longer have operating income or loss. The Company's net income/loss will be from equity investees. o Intense Competition in the Rapidly Changing Retail Markets. The Company's equity investees operate in a highly competitive environment. If they experience increased competition, then their business and operating results could be adversely affected. The China retail industry sector is dynamic in nature and have undergone significant changes over the past several years. Their ability to anticipate and successfully respond to continuing challenges is critical to their long-term growth and we cannot assure you that they will anticipate and successfully respond to changes in the retail industry. -22- Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risks, which include changes in interest rates and to foreign exchange rates. The Company does not engage in financial transactions for trading or speculative purposes. The Company does not hedge against foreign currency risks and believes that foreign currency exchange risk is immaterial. Item 4. Disclosure Controls and Procedure Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. -23- PART II. OTHER INFORMATION Item 1. Legal Proceedings There are no material pending legal proceedings, to which the Company is a party or to which any of its property is subject. Item 2. Changes in Securities 1. During the first quarter of 2002, the company issued 410,000 shares of its common stock in conjunction with consulting agreements. 2. During the first and second quarters of 2002, the Company issued 35,000 shares and 30,000 shares, respectively, of its common stock to a convertible note holder in lieu of cash payment for interest, and partial note conversion. The sales of the above securities were deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Act") in reliance on Section 4(2) of the Act, Regulation D and /or Rule 701 promulgated under the Act. In each such transaction, the recipients of securities represented that they were accredited investors and intended to acquire securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the securities issued in such transactions. 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 and Reports on Form 10-Q a) Exhibits: None. b) Reports on Form 10Q: None. -------------------------------------------------------------------------------- -24- 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. GOSUN COMMUNICATIONS LTD., INC. Date: November ___, 2002 by: /S/ Jin-Qiu Mai ------------------------- Jin-Qiu Mai Chief Executive Officer by: /S/ Jimmy Liu ------------------------- Jimmy Liu Chief Financial Officer -25-