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| CHTL.OB > SEC Filings for CHTL.OB > Form 10-Q on 19-Aug-2009 | All Recent SEC Filings |
19-Aug-2009
Quarterly Report
This following information specifies certain forward-looking statements of the Company's senior management. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may", "shall", "could", "expect", "estimate", "anticipate", "predict", "probable", "possible", "should", "continue", or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by the Company's senior management on the basis of assumptions made by themt and considered by the Company's senior management to be reasonable. The Company's future operating results, however, are impossible to predict, and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
Forward-looking statements include, but are not limited to, the following:
? Statements relating to the Company's future business and financial performance;
? The Company's competitive position;
? Growth of the telecommunications industry in China and Latin America; and
? Other material future developments that you may take into consideration.
The Company believes it is important to communicate the Company's expectations to our shareholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations we described in our forward-looking statements, including among other things:
? Competition in the industry in which we do business;
? Legislation or regulatory environments;
? Requirements or changes adversely affecting the businesses in which we are engaged; and
? General economic conditions.
You are cautioned not to place undue reliance on these forward-looking statements. The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results; accordingly, no opinion is expressed on the achievability of those forward-looking statements. The Company cannot guaranty that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
The following discussion should be read in conjunction with the information contained in the financial statements and the notes thereto, which forms an integral part of the financial statements. The financial statements begin on Page 3.
Overview and Business Operations
Peoples Republic of China
The present operations of China Tel Group, Inc. ("Company") conducted in the Peoples Republic of China ("PRC"), all of which are conducted through the Company's wholly-owned subsidiary, Trussnet USA, Inc., a Nevada corporation ("Trussnet"), consist of providing engineering and deployment services related to the build-out of a broadband wireless telecommunications network in several cities in the PRC for CECT-Chinacomm Communications Co, Ltd., a PRC company (together with its subsidiaries and affiliates, "Chinacomm"). Through the Company's wholly owned subsidiaries, the Company hold a 49% equity interest in ChinaComm, Limited, a Cayman Island corporation ("ChinaComm Cayman"). The remaining 51% equity interest in ChinaComm Cayman is held by affiliates of Chinacomm.
Chinacomm holds licenses and permits from the PRC to build and operate a 3.5 GHz broadband wireless telecommunications network ("Chinacomm Network") in 29 cities in the PRC. These licenses currently run through February 2013. Chinacomm has commenced the build-out of the Chinacomm Network in Beijing, Shanghai, Shenzhen, Qindao, and Nanjing. Portions of the network are operational in Beijing and Shanghai.
Pursuant to an Exclusive Technical and Management Consulting Services Agreement dated May 23, 2008, Yunji Communications Technology (China) Co., Ltd. ("Yunji"), a PRC wholly-owned foreign enterprise of a subsidiary of ChinaComm Cayman, will operate and service the Chinacomm Network in exchange for a approximately ninety percent (90%) of the revenue generated by Chinacomm from the Chinacomm Network. Trussnet Gulfstream (Dalian) Co. Ltd. ("Trussnet Dalian"), a PRC wholly owned foreign enterprise of Trussnet, has entered into agreements with Yunji pursuant to which it will lease to Yunji equipment required in the deployment of the Chinacomm Network ("Equipment") and provide technical and management services to Yunji for the procurement, installation and optimization of the Equipment. These agreements will become material to the Company's operations only when we provide a sufficient amount of cash in repayment of the $191 million owing on the promissory note for our acquisition of 49% of ChinaComm Cayman. The funds in repayment of $191 million promissory note will be used to acquire Equipment and capitalize Yunji and Trussnet Dalian. Until we provide this capital, Chinacomm will continue to operating the Chinacomm Network and retain any revenue it generates from therefrom.
Substantially all of the Company's business is conducted in the PRC and relates to the build-out of the Chinacomm Network. The Commpany is dependent upon Chinacomm's ability to maintain the necessary licenses for the operation of the Chinacomm Network. As the Chinacomm Network becomes operable, the Company will be dependent upon Yunji's ability to attract and retain subscribers on behalf of Chinacomm.
The Company has contracted with Trussnet USA, Inc., a Delaware corporation ("Trussnet Delaware") (under separate control from our subsidiary of the same name) engineering and deployment services for the Chinacomm Network. These services, generally performed by Trussnet Delaware itself or through subcontracts with vendors holding requisite local licenses, include radio frequency engineering, site acquisition, preparation and approval of architectural and engineering drawings, installations of the Equipment and network architecture and engineering.
Peru
The present operations of the Company conducted in Peru are all conducted through Perusat, S.A., a Peruvian company ("Perusat"). On April 15, 2009, the Company acquired 95% of the stock of Perusat through a wholly owned subsidiary of Trussnet in exchange for 1,000,000 shares of China Tel Group, Inc. Series A common stock, valued at $2.50 per share, and cash in the amount of $275,000. The Company has delivered the share consideration and has received the Perusat shares. The $275,000 is payable as follows: (i) $50,000 at the closing of the transaction ("Closing"); (ii) $50,000 at June 30, 2009; (iii) $50,000 at the end of each of the three following quarters; and (iv) the balance of the purchase price due at the end of the next quarter. The Company has not yet paid the initial $50,000 due at the Closing or the $50,000 due at June 30, 2009.
Perusat provides local and international long distance telephone services, including fixed line service (voice over IP) to approximately 6,500 customers in nine cities in Peru (Lima, Arequipa, Chiclayo, Trujillo, Piura, Santa, Cusco, Ica and Huanuco). Based on its status as a licensed telephone operator, Perusat has recently been granted a license in the 2.5 GHz spectrum covering these cities other than Lima and its surrounding metropolitan area. The Company believes this license is suitable to deploy a broadband wireless telecommunications network in the licensed area.
Perusat currently represents less than 1% of the total assets of the Company.
Opportunities in Latin America and Elsewhere
The Company is actively exploring other opportunities to acquire radio frequency spectrum through public auction or through merger, acquisition or joint venture with companies who already hold spectrum rights in Latin American countries, including Peru, Argentina, Chile, Brazil and the Dominican Republic, as well as in Russia and other sovereign nations of the former Soviet Union, and in India. The status of the Company's investigation of these opportunities is in various phases, depending on the particular opportunity; however, it is most mature in Peru, where the Company believes there are the greatest potential synergies with the Company's existing operations through Perusat.
Financial Overview
Since our inception, the Company has incurred comprehensive accumulated deficit of $128,068,853. As of June 30, 2009, the Company had cash of $18,278 and had current liabilities of $293,954,046. (Reference in this report to "Since our inception" refers to April 4, 2008, the date Trussnet Nevada was formed and the date used for financial activities for accounting purposes in this report.). The Company has expressed substantial doubt about its ability to continue as a going concern. In order to continue to operate our business, the Company will need to raise substantial amounts of additional capital and/or debt.
The Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance that the Company will be successful in its effort to secure additional equity financing.
Agreement with Olotoa Investments, LLC
On July 13, 2009, the Company entered into an amended and restated agreement with to Olotoa Investments, LLC ("Olotoa"), a private investment group, to sell 49% of our Series A common stock, on a fully diluted basis calculated on January 11, 2010, for an amended purchase price of $314 million. Pursuant to the terms of the agreement, Olotoa has agreed to pay the purchase price between March 9, 2009 and September 9, 2010 in amounts and on dates as requested by our Board of Directors. On May 1, 2009 and July 1, 2009, the Company requested Olotoa to pay $50 million and $65 million, respectively, of the amended purchase price. Olotoa has not yet made the requested payments.
The Company filed a current report on Form 8-K on July 13, 2009 disclosing and attaching the amended and restated agreement with Olotoa.
Acquisition of Interest in ChinaComm Cayman
Trussnet was formed in April 2008 and had no operations prior to our acquisition of Trussnet in May 2008. Trussnet's principal asset was a Framework Agreement dated April 7, 2008 with Chinacomm pursuant to which Trussnet had the contractual right to acquire a forty-nine percent (49%) interest in ChinaComm Cayman and provide services for the build-out of the Chinacomm Network.
On March 9, 2009, the Company acquired 49% of the authorized shares of ChinaComm Cayman for a purchase price of $196 million from Trussnet Capital Partners (HK) Ltd. Trussnet Capital Partners (HK) Ltd., of which Tay Yong Lee is the sole shareholder, provided bridge financing for this transaction due to the Company's lack of funds. The Company paid $5 million of the purchase price in cash and paid the balance of $191 million by delivering a promissory note secured by the ChinaComm Cayman shares acquired in the transaction. The promissory note bears interest of 8% per annum, payable quarterly, has a due date of March 9, 2010 and is non-recourse, except for the pledged collateral. Upon our payment of this note, Trussnet Capital Partners (HK) Ltd. will deliver the funds to ChinaComm Cayman which will in turn capitalize Yunji and Trussnet Dalian.
Trussnet Capital Partners (HK) Ltd. has agreed to the delayed payment of the interest payment due on June 9, 2009 under the promissory note. The first two quarterly payments are now due on September 9, 2009. The accrued interest owed to Trussnet Capital Partners (HK) Ltd. as of June 30, 2009 is $4,711,333.
Pending Strategic Transactions
During the period ending June 30, 2009, the Company has entered into, but not closed, the following strategic transactions:
Agreement with Runcom Technologies, Inc.
On October 6, 2008, the Company entered into a Strategic Frame Agreement with Runcom Technologies, Inc.("Runcom"). The agreement sets forth the terms and conditions under which Runcom was to design, manufacture and sell product to the Company and was to be our preferred provider of such products. Runcom agreed to invest a total of $100 million into the Company, in exchange for approximately 28% of the Company's issued and outstanding Series A common stock on a fully diluted basis according to the terms to be mutually agreed upon under a stock purchase agreement. The investment amount was to be paid in two equal payments; the first fifty percent (50%) was to occur within ninety days of the signing of the Stock Purchase Agreement, and the remaining fifty percent (50%) within six months thereof.
The Company has not entered into the contemplated stock purchase agreement with Runcom, but Runcom has expressed a continued interest in making an investment in the Company in the future. Discussions in that regard are ongoing.
Critical Accounting Policies and Estimates
The Company's Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires senior management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, senior management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Senior management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included herein for the period ended June 30, 2009.
Development Stage Company. The Company is a development stage company, as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises".
Revenue Recognition. The Company recognizes revenue from product sales and services in accordance with Staff Accounting Bulletin No. 101 requiring four basic criteria to be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts.
Loss Per Share. In accordance with SFAS No. 128, "Earnings Per Share", basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2009, the Company had approximately 39.5 million shares of common stock related to the issuance of debt instruments that could be converted into shares of the Company's Series A common stock if all debt instruments were converted. Diluted loss per share is not presented, because the issuance of these additional common shares would be anti-dilutive.
Convertible Instruments. The Company's derivative financial instruments consisted of embedded derivatives related to the 10% amended and restated convertible notes issued November 17, 2008. The embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments required that the Company record the derivatives at their fair values as of the inception date of the amended and restated convertible notes (estimated at $14,083,386) and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income. At June 30, 2009, the conversion-related derivatives were valued using the Black Scholes Option Pricing Model, with the following assumptions: dividend yield of 0%; annual volatility of 167.38%; and risk free interest rate of 0.35% and recorded non-operating income of $10,023,441 representing the change in fair value from December 31, 2008. The derivatives were classified as short-term liabilities. The derivative liability at June 30, 2009 is $16,142,445.
Goodwill and Identifiable Intangible Assets. Goodwill consists of the excess of the purchase price over the fair value of net assets acquired in purchase business combinations. At June 30, 2009, all goodwill is related to the acquisition of Perusat. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill and intangible assets with indefinite lives are not amortized, but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that impairment exists. As required by SFAS 142, in the impairment tests for indefinite-lived intangible assets, the Company compares the estimated fair value of the indefinite-lived intangible assets, using a combination of discounted cash flow analysis and market value comparisons. If the carrying value exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value over the estimate of fair value and, accordingly, records the loss.
Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment, only when events or circumstances indicate the carrying value may be impaired in accordance with SFAS 144 discussed below.
Impairment of Long-Lived Assets. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), the Company estimates the future undiscounted cash flows to be derived from the asset to assess whether or not a potential impairment exists when events or circumstances indicate the carrying value of a long-lived asset may be impaired. If the carrying value exceeds the Company's estimate of future undiscounted cash flows, the Company then calculates the impairment as the excess of the carrying value of the asset over the Company's estimate of its fair value.
Results of operations:
Three months ended June 30, 2009 as compared to the period from April 4, 2008 through June 30, 2008.
Revenue:
The Company's revenue for the three months ended June 30, 2009 is based on the acquisition of Perusat acquired on April 15, 2009. The Company did not have revenue during the same period last year.
Cost of sales
June 30, 2009 June 30, 2008 $ 128,431 $ -
The Company's cost of sales for the three months ended June 30, 2009 was $128,431, or 64.5% of sales. The Company did not have sales or related cost of sales during the same period last year.
Operating expenses:
Selling, general and administrative expenses:
June 30, 2009 June 30, 2008 $ 1,792,143 $ 3,084,571
The Company's selling, general and administrative expenses for the three months ended June 30, 2009 decreased by $1,292,428, or 41.9% as compared to the same period last year. The decease is primarily associated with reduced costs for service providers and other consultants during the current period compared to the same period last year.
Research and development:
June 30, 2009 June 30, 2008 $ - $ 32,996,825
The Company's research and development costs deceased $32,996,825, or 100% as compared to the same period last year. The Company's investments in R&D are primarily complete as compared to R&D investments during the same period last year, when we were in the initial phases of deployment operations.
Other Income (expense):
Loss on change in fair value of debt derivative:
June 30, 2009 June 30, 2008 $ 4,663,364 $ -
During the three months ended June 30, 2008, the Company incurred a non cash charge in the change in the fair value of our debt derivatives relating to our amended and restated convertible notes issued on November 17, 2008. The Company did not have any derivatives as of June 30, 2008.
Interest expense:
June 30, 2009 June 30, 2008 $ 8,722,566 $ 26,026,195
For the three months ended June 30, 2009, the Company's interest expense decreased $17,303,629, or 66.5%, compared to the similar period last year. This decrease is primarily attributable to incurring a beneficial conversion feature of $25,584,145 last year relating to convertible notes issued during the first three months of 2008, compared to an amortization of debt discount of $3,133,467 during the current period relating to notes issued on November 17, 2008, plus increased accrued interest cost.
Net loss:
June 30, 2009 June 30, 2008 $ 15,122,409 $ 62,147,591
For the three months ended June 30, 2009, our net loss decreased by $47,025,182, or 75.7%, as compared to the same period last year, primarily for the reasons described above.
Six months ended June 30, 2009.
Note our comparative discussion with the period from April 4, 2008 (date of inception) through June 30, 2008 is discussed above.
Revenue:
Our revenue for the six months ended June 30, 2009 is based on the acquisition of Perusat acquired on April 15, 2009.
Cost of sales
Our cost of sales for the six months ended June 30, 2009 was $128,431, or 64.5% of sales.
Operating expenses:
Selling, general and administrative expenses:
Our selling, general and administrative expenses for the six months ended June 30, 2009 was $6,403,951. During the six months ended June 30, 2009, we paid approximately $3.3 million in stock based compensation to service providers and other consultants.
Research and development:
Our research and development costs of $9,727,038 are a reduction as compared to the short prior period. Our investments in R&D are primarily complete as compared to our the same period last year, when we were in initial phases ofdeployment operatons.
Other Income (expense):
Gain on change in fair value of debt derivative:
For the six months ended June 30, 2009, we incurred a non cash gain from the change in the fair value of our debt derivatives relating to our amended and restated convertible notes issued on November 17, 2008. We did not have any derivatives as of June 30, 2008.
Interest expense:
For the six months ended June 30, 2009, our interest expense of $12,697,006 includes approximately $6.2 million in amortized debt discount relating to our convertible notes issued on November 17, 2008.
Net loss:
Our net loss of $18,748,890 for the six months ended June 30, 2009 is the result of the factors described above.
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