IDEANOMICS, INC. - Quarter Report: 2008 March (Form 10-Q)

 

·	our ability to satisfy our obligations under our agreements with respect to our acquisition of the cable broadband business of Jian Guangdian Jiahe Digital Television Co., Ltd. located in mainland People’s Republic of China (the “PRC” or “China”),

·	our ability to complete our payments relating to the recent acquisition of Shandong Radio & Broadcasting Newspaper Group in the PRC if its performance goals are met,

·

a complex and changing regulatory environment in the PRC that limits our ability to pay dividends, currently permits only partial foreign ownership of certain PRC based businesses and that requires us to negotiate, acquire and maintain separate government licenses to operate each internet business that we would like to acquire (or any other business we would like to acquire in the PRC),

·	our ability to obtain government consent to introduce certain new services to existing or new customers,

·

our ability to implement complex operating and revenue sharing arrangements that will enable us to consolidate our financial statements with our partially owned PRC based business or joint ventures, and to modify and adapt these business arrangements from time to time to satisfy United States accounting rules,

·	our ability to enter into agreements with and to consummate acquisitions of businesses in the PRC in the Shandong region and elsewhere,

·	socio-economic changes in the regions in the PRC that affect consumer internet subscriptions,

·	the ability of the PRC government to terminate or elect to not renew any of our licenses for various reasons or to nationalize our industry, and

·	our anticipated needs for working capital.

·

Clive Ng agreed to transfer (and has since transferred), 390,000 shares of common stock of Cablecom Holdings (the “Cablecom Holdings Shares”) upon completion of the redomestication merger of Jaguar with Cablecom Holdings, the resulting surviving parent entity after the merger. The issuance of the 390,000 Cablecom Holdings Shares were conditioned upon, among other things, the consummation of the foregoing described merger and were to be transferred by Mr. Ng on an “as is basis”, except that such shares would have the same lock-up restrictions, registration or other rights, privileges or benefits as Mr. Ng has for all other shares to be issued to him by Cablecom Holdings. The 390,000 Cablecom Holdings Shares were transferred by Mr. Ng to the Company in April 2008 upon satisfaction of certain conditions in the Settlement Agreement, including, receipt of releases from certain parties listed therein and the shares have been registered for re-sale by Cablecom Holdings, subject to a lock up agreement.

·

The Company and each of Messrs. Ng and Pu, have agreed to modifications to the employment agreements of such persons (the “Employment Agreement Amendments”), reducing their time commitments to the Company and its subsidiary and providing that once replacement executive officers have been hired (and in the case of Mr. Ng, assuming Mr. Pu continues in his role as chief financial officer, eliminating his executive duties and he will only continue as the Chairman and a director of China Broadband and the Company), requiring in the case of Mr. Ng that he be subject to an ongoing obligation to offer acquisition candidates in the stand-alone, independent broadband business to China Broadband in the future (and recognizing that acquisition candidates involving acting as a joint venture provider of integrated cable television services in the People’s Republic of China and related activities, but which does not include the provision of Stand-Alone Broadband Services are the business of China Cablecom) and allowing them to continue to be involved with certain other activities and to continue in their executive capacities with Cablecom Holdings or its successor. In addition, Mr. Ng has waived his right to receive all accrued salary previously owed to him through January 11, 2008.

·

Mr. Ng assigned 7,017,814 shares of Common Stock owned beneficially by him to the investors (other than Chardan Capital which did not receive shares from Mr. Ng) in the private January 2008 Financing as described below, thereby facilitating the January 2008 Financing while avoiding additional dilution to the Company’s current stock and warrant holders.

·	Mr. Ng has transferred to certain private investors who acquired shares directly from him in July of 2007, an aggregate of 566,790 shares of Common Stock owned beneficially by him, in exchange for releases from such persons.

·	Chardan Capital, our placement agent for the January 2008 Financing and a party to the Settlement Agreement, completed the January 2008 Financing concurrently upon execution by all related parties of the Settlement Agreement.

·	Mr. David Zale, Mr. Jonas Grossman and Mr. James Cassano were appointed as directors joining Messrs. Yue Pu and Clive Ng on the board.

·

The Company agreed to extend the expiration dates of 4,000,000 warrants to purchase Common Stock at an exercise price of $2.00 per share, issued to certain private placement investors (“Investor Warrants”) in the Company’s private placement of common stock and warrants in 2007, from March of 2009, through January 11, 2013, upon receipt of releases from holders of the Investor Warrants. All releases were obtained as of May 2, 2008, resulting in the modification of all of the Investor Warrants.

·

The Company has offered to BCGU, LLC, WestPark Capital, Inc., Maxim Financial Corporation, who were issued 500,000, 640,000 and 3,974,800 warrants exercisable at $.60 per share in January of 2007, respectively, the right, at their discretion, to extend the exercisability period of their respective warrants through January 11, 2013 or, in the alternative, the right to receive a scrip right to execute the unexercised portion of their warrants, at any time between the time of expiration date of their unexercised warrants and continuing through January 11, 2013.

·	equals or exceeds 16 million RMB, then we will be required to contribute an additional 20 million RMB (or, approximately $3,000,000 presuming current exchange rates are in effect at such time) to the Shandong Media joint venture;

·	equals or exceeds 4 million RMB but less than 16 million RMB, then we will be required to contribute 125% of such net profits to the Shandong Media joint venture, and

·	is less then 4 million RMB, then we will be required to contribute only an additional 5 million RMB (approximately US $757,575 presuming current exchange rates are in effect at such time).

·	Expected volatility - the Company estimates the volatility of common stock at the date of grant using historical volatility.

·	Expected term - the Company estimates the expected term of options granted based on a combination of vesting schedules, term of the option and historical experience.

·	Risk-free interest rate - the Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant.

·	Dividends - the Company uses an expected dividend yield of zero. The Company intends to retain any earnings to fund future operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future.

A summary of option activity under the Plan as of March 31, 2008, and changes during the period then ended, is presented below:

		Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term
Options outstanding at January 1, 2008			-		$	-			-
Options granted			100,000			1.00			4
Options exercised			-			-			-
Options terminated and expired			-			-			-
Options outstanding at March 31, 2008			100,000		$	1.00			4
Options exercisable at March 31, 2008			25,000		$	1.00			4

9.  Warrants

In connection with the Company’s Share Exchange and capital raising efforts in 2007 and the Company’s January 2008 Financing of Convertible Notes and Class A Warrants described in Note 1 above, the Company has issued warrants to investors and service providers to purchase shares of the Company at a fixed exercise price and for a specified period of time. The following table outlines the warrants outstanding as of March 31, 2008:

F-10

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		Number of
		Warrants	Exercise	Expiration
Name		Issued	Price	Date
Maxim Financial Corporation		3,974,800	$0.60	1/11/2013
WestPark Capital, Inc.		640,000	$0.60	1/11/2013
BCGU LLC		500,000	$0.60	1/11/2013
2007 Private Placement Investor Warrants		4,000,000	$2.00	1/11/2013
January 2008 Financing Class A Warrants		6,628,333	$0.60	6/11/2013
Chardan Capital Broker Warrants		1,131,667	$0.50	6/11/2013
Other Warrants		67,500	$0.60	3/13/2013
		16,942,300

On January 11, 2008, as part of the Settlement Agreement described above, the Company agreed to extend the expiration date of the Maxim Financial Corporation, WestPark Capital, BCGU and the 2007 Private Placement Investor warrants issued in 2007 until January 11, 2013. As of March 31, 2008, all obligations under the Settlement Agreement were not completed and therefore the Company did not recognize any gain or loss during the three months ended March 31, 2008 related to the warrant extensions granted as part of the Settlement Agreement.

On January 11, 2008 the Company issued warrants in connection with the January 2008 Financing of Notes and Class A Warrants to ten accredited investors and Chardan Capital as broker. The Company recorded the value of the Class A Warrants of $504,661 as a discount to the Notes issued therewith and is amortizing this discount over the five year life of the Notes.

On January 11, 2008 the Company issued Broker Warrants expiring June 11, 2013 (see Note 1 above) in connection with the January 2008 Financing of Notes and Class A Warrants to Chardan Capital as broker. The Company is recognizing the value of the Broker Warrants of $226,835 as debt issuance costs and in expensing the value over the five year life of the Convertible Notes.

Pursuant to an agreement entered into in April 2007, the Company also issued warrants to a consultant for services provided on March 13, 2008, exercisable at $.60 per share. The Company incurred an expense of $14,198 during the three months ended March 31, 2008 related to the issuance of these warrants and had total unrecognized compensation expense related to these warrants of $7,099, which will be recognized in April 2009.

10.   Intangible Asset

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

In accordance with SFAS No. 142, goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. We have determined that our reporting unit for purposes of applying the provisions of SFAS No. 142 is our operating subsidiary Jinan Broadband.

On an annual basis, we test goodwill and other indefinite life intangible assets for impairment. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. In making these assumptions and estimates, we will use set criteria that are reviewed and approved by various levels of management, and we will estimate the fair value of our reporting units by using discounted cash flow analyses.

 

F-11

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As of March 31, 2008 we had no goodwill and our only intangible asset relates to the excess purchase price associated with the service agreement resulting from our Jinan Broadband subsidiary acquisition. In accordance with SFAS No. 142, the Company is amortizing this service agreement over the 20 year term of this agreement, resulting in a recorded amortization expense of $8,708 during the three months ended March 31, 2008.

11.  Income Taxes

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

The adoption of FIN 48 during the year ended December 31, 2007 did not have a material effect on the Company’s financial position

The Company is subject to a 5% business tax on the business income of our Jinan Broadband subsidiary.

Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

 

12.  Going Concern

The accompanying financial statements are presented on a going concern basis. The Company generated a net loss of approximately $597,625 and $1,977,000 during the three months ended March 31, 2008 and year ended December 31, 2007, respectively. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management plans to raise additional funds through debt or equity offerings or to seek merger opportunities with other companies. Management has yet to decide what type of offering the Company will use, how much capital the Company will raise or which companies it may seek merger opportunities with. There is no guarantee that the Company will be able to raise any capital through any type of offerings or merge with any other company.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.

 

The following discussion and analysis should be read in conjunction with our unaudited financial statements and related notes included in this report and the “Forward Looking Statements” in the beginning of this report and the “Risk Factors” set forth in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and our Current Reports on Form 8-K filed with the SEC, each as amended. The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions. These statements are based on current information available to management.

 

Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from expectations include, but are not limited to, those set forth under the sections “Forward Looking Statements” in the forepart of this report and “Risk Factors” set forth in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and our Current Reports on Form 8-K, all of which should be read together.

 

Background

 

We own and operate, through our indirect subsidiary in the People’s Republic of China (“PRC”), a cable broadband business based in the Jinan region of China and, effective May 1, 2008, acquired a television programming guide publication business joint venture in the Shandong Province of China (see below and Note 1 to Financial Statements above). Our principal activity is to provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance. We operate in a single segment.

Settlement Agreement and Convertible Note and Warrant Financing

On January 11, 2008, the Company entered into a Settlement Agreement (the “Settlement Agreement”) by and among the Company and its subsidiaries, Stephen P. Cherner, Maxim Financial Corporation, Mark L. Baum, BCGU, LLC, Mark I Lev, Wellfleet Partners, Inc., Yue Pu, Clive Ng, Chardan Capital Markets, LLC (“Chardan Capital”), Jaguar Acquisition Corporation (“Jaguar”), and China Cablecom Holdings, Ltd (“Cablecom Holdings”). As of March 31, 2008, all obligations under the Settlement Agreement were not completed and therefore the Company did not recognize any gain or loss during the three months ended March 31, 2008 related to this Settlement Agreement. All obligations under the Settlement Agreement were completed in May 2008 and the Company expects to recognize a gain during the second quarter of 2008.

Simultaneously, the Company consummated a private convertible note and warrant financing with gross proceeds of $4,971,250 (the “January 2008 Financing”), through Chardan Capital acting as Placement Agent and appointed three additional directors to the Company. The following is a summary only of the material terms of the Settlement Agreement, Employment Agreement Amendments and the January 2008 Financing related agreements (including the note purchase agreement, the form of Notes and form of warrants) which were filed as exhibits to our Current Report on Form 8-K dated January 11, 2008.

Settlement Agreement

 

The Settlement Agreement was negotiated by the Company, its advisors and management and certain shareholders, for purposes of facilitating the Company’s business plan and expediting and facilitating the Company’s financing activities and resolving all disputes with management and certain investors and consultants concerning possible claims that such investors suggested might be brought against Mr. Ng, our Chairman, for his activities in forming China Cablecom and its entry into a merger with a subsidiary of Jaguar as violative of his employment agreement with the Company. The Settlement Agreement provides, subject to the terms thereof, for general mutual releases of all executives and management and their affiliated entities and also provides for the modification of employment agreements of both Mr. Clive Ng and Mr. Yue Pu. The Settlement Agreement also calls for the transfer of certain securities by Mr. Ng to the Company and to certain of the Company’s shareholders and consultants, as elaborated further herein in exchange for releases in favor of the Company and management and their affiliates.

 

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Among other provisions, pursuant to the Settlement Agreement:

 

·

Clive Ng has agreed to transfer (and has since transferred), after the closing of the merger of a subsidiary of Cablecom Holdings, as successor to Jaguar in its redomestication merger, with and into China Cablecom, Ltd., a private limited liability British Virgin Islands company (“China Cablecom”), 390,000 shares of common stock of Cablecom Holdings (the “Cablecom Holdings Shares”), the resulting surviving parent entity after the merger. The 390,000 Cablecom Holdings Shares were to only be issued in the event of consummation of the merger (which has since occurred in April 2008) and were to be transferred by Mr. Ng on an “as is basis”, except that such shares have the same lock-up restrictions, registration or other rights, privileges or benefits as Mr. Ng has for all other shares to be issued to him by Cablecom Holdings under the merger terms. The 390,000 Cablecom Holdings Shares were issued to the Company in April 2008 after completion of the merger and upon receipt of releases from certain parties listed in the Settlement Agreement and the Company has entered into a lock-up agreement described below;

 

·

The Company and each of Messrs. Ng and Pu, have agreed to modifications to the employment agreements of such persons (the “Employment Agreement Amendments”), reducing their time commitments to the Company and its subsidiary and providing that once replacement executive officers have been hired (and in the case of Mr. Ng, assuming Mr. Pu continues in his role as chief financial officer, eliminating his executive duties and he will only continue as the Chairman and a director of China Broadband and the Company), requiring in the case of Mr. Ng that he be subject to an ongoing obligation to offer acquisition candidates in the stand-alone, independent broadband business to China Broadband in the future (and recognizing that acquisition candidates involving acting as a joint venture provider of integrated cable television services in the People’s Republic of China and related activities, but which does not include the provision of Stand-Alone Broadband Services are the business of China Cablecom) and allowing them to continue to be involved with certain other activities and to continue in their executive capacities with Cablecom Holdings or its successor after the Proposed Merger. In addition, Mr. Ng has waived his right to receive all accrued salary previously owed to him;

 

·

Mr. Ng assigned 7,017,814 shares of Common Stock owned beneficially by him to the investors (other then Chardan Capital which did not receive shares from Mr. Ng) in the private January 2008 Financing as described below, thereby facilitating the January 2008 Financing while avoiding additional dilution to the Company’s current stock and warrant holders;

 

·	Mr. Ng has agreed to transfer and did transfer to certain private investors who acquired shares directly from him in July of 2007, an aggregate of 566,790 shares of Common Stock owned beneficially by him, in exchange for releases;

 

·	Chardan Capital, our placement agent in the private January 2008 Financing and a party to the Settlement Agreement, completed the January 2008 Financing concurrently upon execution by all related parties of the Settlement Agreement;

 

·	Mr. David Zale and Mr. Jonas Grossman were appointed as directors joining Messrs. Yue Pu and Clive Ng on the board. Additionally, as a condition to Closing of the January 2008 Financing, Mr. James Cassano was appointed to the Board;

 

·

The Company agreed to extend the expiration dates of 4,000,000 warrants to purchase Common Stock at an exercise price of $2.00 per share, issued to certain private placement investors (“Investor Warrants”) in the Company’s private placement of common stock and warrants in 2007, from March of 2009, through January 11, 2013, upon receipt of releases from such Investor Warrant holders, all of which have been received and accepted by May 2, 2008; and

 

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·

The Company has offered to BCGU, LLC, WestPark Capital, Inc., Maxim Financial Corporation, who were issued 500,000, 640,000 and 3,974,800 warrants exercisable at $.60 per share in January of 2007, the right, at their discretion, to extend the exercisability period of their respective warrants through January 11, 2013 or, in the alternative, the right to receive a scrip right to execute the unexercised portion of their warrants, at any time between the time of expiration date of their unexercised warrants and continuing through January 11, 2013.

Simultaneous Closing of $4,971,250 Convertible Note and Warrant Financing, issuance of Shares and Warrants

On January 11, 2008, and simultaneously with the entry into the Settlement Agreement and in connection with completion of the January 2008 Financing, we entered into and consummated a subscription agreement (the “Subscription Agreement”) with ten accredited investors (inclusive of Chardan Capital) with respect to the issuance of an aggregate of $4,971,250 principal amount of Notes due January 11, 2013, and Class A Warrants to purchase an aggregate of 6,628,333 shares of common stock of the Company at $.60 per share expiring on June 11, 2013.

The gross proceeds of the offering were $4,850,000, and Chardan Capital which applied its 2.5% cash commission ($121,250) towards a subscription for Notes (“Notes”) and Class A Warrants resulting in the issuance of an aggregate of $4,971,250 principal amount of Notes to ten investors including Chardan Capital. Interest on the Notes compound monthly at the annual rate of five percent (5%) with the maturity date on January 11, 2013, if not paid earlier. Each holder of a Note can convert all or any portion of the then aggregate outstanding principal amount of the Note, together with interest, into shares of Common Stock at a conversion price of $0.75 per share, for or a total of 6,628,333 shares as of the date of issuance. The Notes have “full ratchet” anti dilution protection for the first three years, pursuant to which the conversion price of the Notes will be adjusted downward in the event of the issuance by the Company of Common Stock or rights to acquire Common Stock at prices below $.75 per share (or below such other conversion price of the Notes as is then in effect) to such lower price. Thereafter and until repaid, the Notes provide only for weighted average anti-dilution price protection adjustment. In addition, the Notes are subject to certain customary anti dilution protections for stock splits, combinations or similar transactions of the Company.

During the three months ended March 31, 2008 the Company incurred $56,000 in interest expense related to these Notes which is included in accrued expenses in the consolidated balance sheet. With the consent of the Note holders, in May 2008 the Company issued, an aggregate of 75,614 shares to the Note holders in lieu of interest through March 31, 2008, plus late penalty fees.

An aggregate of 6,628,333 Class A Warrants, exercisable at $0.60 per share and expiring on June 11, 2013 were issued pursuant to the January 2008 Financing. The Class A Warrants shall be exercisable (with cash or via cashless exercise) commencing one hundred and eighty-one (181) days after the closing date of the January 2008 Financing until 65 months thereafter, June 11, 2013. The Class A Warrants are subject to “full ratchet” anti-dilution protection for the first three years, pursuant to which the exercise price of the Class A Warrants will be adjusted downward in the event of the issuance by the Company of Common Stock or rights to acquire Common Stock at prices below $.60 per share (or below such other exercise price of the Class A Warrants as is then in effect) to such lower price. Thereafter and until all Class A Warrants are exercised or expire, the Class A Warrants provide only for weighted average anti-dilution price protection adjustment. In addition, the Class A Warrants are subject to certain customary anti-dilution protections for stock splits, combinations or similar transactions of the Company. The Company recorded the value of the Class A Warrants of $504,661 as a discount to the Notes issued therewith and is amortizing this discount over the five year life of the Notes.

 

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Placement Agent Fee to Chardan Capital Markets, LLC

In connection with their engagement as a placement agent, Chardan Capital has been compensated a $10,000 due diligence fee and reimbursement of legal and other expenses, and a cash placement agent fee of 2.5% based on the total amount sold to investors, or $121,250 based on $4,850,000 of principal amount of Notes issued to other investors, which fee has, pursuant to the terms of their engagement agreement, been applied their investment in a $121,250 Note and 161,667 Class A Warrants at the same terms as all other investors in the offering and whose value is included and discount applied in the same manner as the Class A Warrants. In addition, Chardan Capital was compensated warrants to acquire 1,131,667 shares of the Company’s Common Stock at an exercise price of $.50 per share exercisable commencing January 11, 2008 and expiring on June 11, 2013 (the “Broker Warrants”). The Broker Warrants are identical to the Class A Warrants in all other material respects. The Company is recognizing the value of the Broker Warrants of $226,835 as debt issuance costs and in expensing the value over the five year life of the Convertible Notes.

Assignment By Clive Ng of Shares to Investors

To incentivize the investors in January 2008 Financing and facilitate such financing, and as contemplated under the terms of the Settlement Agreement, Mr. Clive Ng assigned an aggregate of 7,017,814 shares of Common Stock beneficially owned by him to the January 2008 Financing investors, other than Chardan Capital, at a nominal purchase price of $.01 per share.

Release of Lock - Up Agreement

Prior to the assignment of the above shares to the January 2008 Financing investors, the Company, 88 Holdings, Inc., China Broadband Partners, Ltd., BCGU, LLC, MVR Investments, LLC, Stephen P. Cherner and WestPark Capital, Inc. were each shareholder parties to a Lock-Up Agreement dated as of January 23, 2007 (the “Lock-Up Agreement”). The Lock-Up Agreement provided, that each such shareholder shall only be permitted to sell 5% of the shares originally issued to them as scheduled in the Lock-Up Agreement, during any 30 day period and, that the Company’s management may review the lock up provisions and increase the number of shares that may be sold provided that, among other conditions, such modification is made pari pasu among all shareholders to this Lock-Up Agreement based on their share ownership. As a condition subsequent to the January 2008 Financing requested by Chardan Capital, and to remove any contractual restrictions relating to the 7,017,084 shares of Common Stock assigned by Mr. Ng to the Note investors to facilitate the financing, the Company and each of the shareholder parties to the Lock-Up Agreement agreed to the termination of this Lock-Up Agreement for all parties effective as of January 13, 2008.

Appointment of Additional Members to Board of Directors

Simultaneously with the closing of the January 2008 Financing, and entry into the Settlement Agreement, Messrs. David Zale, James Cassano and Jonas Grossman were appointed as directors of the Company, joining Messrs. Clive Ng and Yue Pu. Prior to the appointment of Messrs. Zale, Cassano and Grossman, such persons had no affiliations or business relationship with the Company, except that Mr. Grossman was and continues to be, a partner and officer of Chardan Capital.

Shandong Newspaper Cooperation Agreement

 

On March 7, 2008, through our indirect WFOE subsidiary in the PRC, we entered into a Cooperation Agreement (the "Shandong Newspaper Cooperation Agreement") by and among, Shandong Broadcast & TV Weekly Press and Modern Movie & TV Biweekly Press, each PRC companies (collectively "Shandong Newspaper"). This transaction was consummated on May 1, 2008. The Shandong Newspaper Cooperation Agreement provided for, among other terms, the creation of a joint venture entity in the PRC, Shandong Lushi Media Co., Ltd. ("Shandong Media") that would own and operate Shandong Newspaper's television program guide, newspaper and magazine publishing business in the Shandong region of the PRC (the "Shandong Newspaper Business") which businesses were previously owned and operated by the Shandong Newspaper entities pursuant to exclusive licenses.

 

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Under the terms of the Shandong Newspaper Cooperation Agreement and related transaction documents, the Shandong Newspaper entities mentioned above will contribute their entire Shandong Newspaper Business and transfer certain employees, to Shandong Media in exchange for a 50% stake in Shandong Media, with the other 50% of Shandong Media to be owned by our PRC based operating subsidiary. In exchange therefore, the Cooperation Agreement provides for total initial consideration from of approximately $1.3 million (based on existing exchange notes for 10 million RMB at the time) which was contributed to Shandong Media as working and acquisition capital, of which the Company paid approximately $300,000 (approximately 2 million RMB) in early March 2008 as a down payment which is included in “Other Assets” in the consolidated balance sheet.

 

In addition to the initial purchase price of $1.3 million (10 million RMB), the Shandong Newspaper Cooperation Agreement provides for additional consideration of approximately US $757,757 and US $3,000,000 (between 5 million RMB and 20 million RMB, respectively, based on current exchange rates at the time) to be paid as a capital contribution to Shandong Media in the event that certain performance thresholds are met during the first 12 months of operations after closing the transaction for a total maximum purchase price of approximately $4.5 (30 million RMB based on exchange rates at the time).

 

In the event that audited annual net profits during the first year after closing of the transaction relating to the Shandong Newspaper Cooperation Agreement:

 

·	equals or exceeds 16 million RMB, then we will be required to contribute an additional 20 million RMB (or, approximately $3,000,000 presuming current exchange rates exist at such time) to the Shandong Media joint venture;

 

·	equals or exceeds 4 million RMB but less than 16 million RMB, then we will be required to contribute 125% of such net profits to the Shandong Media joint venture, and

 

·	is less then 4 million RMB, then only an additional 5 million RMB (approximately US $757,575 presuming current exchange rates exist at such time).

 

Description of Shandong Newspaper Business Acquired

 

The Shandong Newspaper Business acquired from Shandong Newspaper by the Shandong Media joint venture on May 1, 2008, includes the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, the provision of audio value added communication services. The Shandong Newspaper Cooperation Agreement also provides that these businesses will be operated primarily by employees contracted to Shandong Media through secondment by the respective Shandong Newspaper entities.

 

In addition, the Shandong Newspaper entities, at closing, entered into an Exclusive Advertising Agency Agreement and an Exclusive Consulting Services Agreement with Shandong Media which required that the Shandong Newspaper entities appoint Shandong Media as its exclusive advertising agent and provider of technical and management support for a fee.

The Company closed this transaction during the second quarter of 2008.

 

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The following table presents the increases (decreases) in each major statement of operations category for the three months ended March 31, 2008 and 2007, respectively. The following discussion of “Results of Operations references these increases (decreases).

		Increase (Decrease) in Consolidated
		Statements of Operations Categories
		For the three months ended
		March 31, 2008 vs. 2007
		Amount ($)			%
Revenues		$	1,054,885			100	%
Cost of sales			352,198			100	%
Total gross margin			702,687			100	%
Selling, general and administrative			364,953			222	%
Professional fees			(2,747	)		-2	%
Depreciation			701,895			100	%
Operating loss			(361,414	)		119	%
Interest and other income			(70,850	)		1676	%
Pre-tax loss			(432,264	)		140	%
Minority interest			142,768			100	%
Pre-tax loss			(289,496	)		94	%
Taxes			(802	)		100	%
Net loss		$	(288,694	)		93	%

 

Results of Operations

 

The Company was a development stage company with no business operations during the first three months 2007. Effective January 23, 2007 we acquired China Broadband, Ltd. (“China Broadband Cayman”) and its operations which was already a party to a Cooperation Agreement to acquire PRC based Jinan Broadband. Effective April 1, 2007, China Broadband Cayman and our WFOE, completed the acquisition of the Jinan Broadband subsidiary. During the first three months of 2007 Jinan Broadband did not operate as its own separate entity and constituted assets within a business division that was separated out immediately prior to our acquisition. Accordingly, Jinan Broadband results for the three months ended March 31, 2007 were not included for comparative purposes as management believes that they are not meaningful.

 

Our revenues are based on the number of paying cable broadband internet customers in the Shandong province of China. As of March 31, 2008 Jinan Broadband had approximately 59,000 active paying subscribers for its services in this region as compared to 58,000 and 45,000 at December 31, 2007 and 2006, respectively. The increase is a result of increased efforts on internal growth by Jinan Broadband after our acquisition of them.

 

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Our gross revenues are dependent on several factors:

 

·	the amount that we are permitted to charge for cable broadband internet services in the regions we operate in,

·	the number of subscribers we have in each region,

·	advertising revenues, and

·	other revenues from other permitted value added services that we perform.

We intend to develop our business by growing internally to increase the subscribers for our services in the regions we operate, acquiring other complimentary media assets in the region and by acquiring licenses to operate the cable broadband business in other regions.

Our cost of revenue consists primarily of the costs of products or services sold to customers and personnel and other direct costs associated with providing technical services. In the future, we may expand or increase the discounts we offer to our customers and may otherwise alter our pricing structures and policies. These changes would negatively reduce our gross margins. We may also offer cross promotional discounts with other assets that we acquire in order to grow overall company revenue to draw attention to our other product offerings. In addition to pricing strategy, our gross margins will fluctuate based on other factors, including:

·	the cost of our products, including the extent of purchase volume discounts we are able to obtain from our suppliers;

·	promotions or special offers that we offer to attract new customers; and

·	the mix of products within each brand category that our customers purchase.

 

Our selling, general and administrative expenses consist of personnel costs including taxes and benefits, rent and utilities, contract labor, insurance, marketing, telecommunication and Internet costs, and other administrative expenses. We expect selling, general and administrative expenses to increase as we grow our business.

 

Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007

Revenues

Revenue for the three months ended March 31, 2008 was $1,055,000 as compared to $0 for the three months ended March 31, 2007. During the three months ended March 31, 2007 we had no operations. Revenue during the three months ended March 31, 2008 was attributed to our PRC subsidiary, Jinan Broadband and consisted of sales to our PRC based Internet consumers, cable modem consumers, business customers and other internet and cable services. We expect that our revenues will increase as we continue to grow our business and add new regions.

Gross Profit

Gross profit for the three months ended March 31, 2008 was $703,000 as compared to $0 for the three months ended March 31, 2007. During the 2007 period we had no operations. Gross profit as a percentage of revenue was 66.6% for the three months ended March 31, 2007.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2008 increased approximately $365,000 to $530,000 as compared to $165,000 for the three months ended March 31, 2007. During the 2007 period we had no operations and expenses during the period consisted of approximately $75,000 in travel expenses, $36,000 in payroll expense, $36,000 in rent expense and $13,000 in marketing and promotional expenses. Selling, general and administrative expenses during the 2008 period included salaries and personnel costs of approximately $294,000, network connection costs of $93,000 and insurance costs of $20,000. We expect that our selling, general and administrative expenses will increase as we continue to grow our business and add new regions.

 

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Professional Fees 

Professional fees for the three months ended March 31, 2008 decreased by $3,000 to $137,000 as compared to $140,000 for the three months ended March 31, 2007. During the 2007 period we had no operations and all expenses during the period included legal, accounting and consulting fees related to the acquisition of China Broadband Cayman via a share exchange. Professional Fees during the 2008 period included legal costs of approximately $37,000, accounting fees of approximately $53,000, consultant costs of approximately $48,000. We expect our costs for professional services to remain significant as we continue to acquire new entities and implement our growth strategy as set forth.

Depreciation 

Depreciation expense for the three months ended March 31, 2008 was $702,000 as compared to $0 for the three months ended March 31, 2007. During the period ended March 2007 we had no material operating assets. Depreciation expense during the 2008 period relates to the depreciation on the property, plant and equipment, net at our Jinan broadband subsidiary.

Interest and Other Income (Expense), net 

We incurred an expense of $75,000, in interest and other income (expense), net, during the three months ended March 31, 2008. This amount consisted primarily of interest expense related to the 5% Convertible Notes issued on January 11, 2008 in the amount of $56,000, the expense related to our requirement to issue new shares in the amount of $12,000, as a result of our not registering the 1,300,000 shares issued upon the conversion of our 7% Convertible Promissory Notes issued by China Broadband Cayman in 2006 and assumed by the Company upon the purchase of China Broadband Cayman in the time frame required and $22,000 of amortization expense related to the quarterly amortization of the Class A Warrant discount applied to the Convertible Notes. These amounts were partially offset by $16,000 of interest income earned on our cash balances.

During the three months ended March 31, 2007 we had no operations and incurred $4,227 in interest expense related to China Broadband Cayman’s $325,000 principal amount of 7% Convertible Promissory Notes. All of the 7% Convertible Promissory Notes were converted at the end of February 2007 with all interest paid thereon.

We expect to continue to incur interest expenses in connection with our issuance of our $4,971,250 principal amount of Notes issued in January 2008, which compounds monthly at the annual rate of five percent (5%) with the maturity date on January 11, 2013.

Minority Interest

49% of the operating loss of our Jinan Broadband subsidiary is allocated to Jinan Parent. During the three months ended March 31, 2008 $143,000 of our operating losses were allocated to Jinan Parent. During the three months ended March 31, 2007 we had no operations.

Income Tax Benefit

Our income tax benefit was $802 for the three months ended March 31, 2008. During the three months ended March 31, 2007 we had no operations.

Liquidity and Capital Resources

As of March 31, 2008 we had $4,717,000 of cash on hand and working capital of $551,473. As of March 31, 2008, we had total current liabilities of $5,008,000.

 

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On January 11, 2008 we entered into and consummated a subscription agreement with ten accredited investors with respect to the issuance of an aggregate of $4,971,250 principal amount of Notes due January 11, 2013, and Class A Warrants to purchase an aggregate of 6,628,333 shares of common stock of the Company at $.60 per share expiring on June 11, 2013. In March 2008 we used approximately $3.2 million of these proceeds to fund our second payment for our purchase of Jinan Broadband. In addition, in March 2008 we used $300,000 to fund our down payment under the Shandong Newspaper Cooperation Agreement to Shandong Media and in April 2008 utilized an additional $1.2 million to fund the remaining portion of our required working capital contribution. During the quarter ended March 31, 2008 the Company incurred $56,000 in interest expense related to these notes which is included in accrued expenses in the consolidated balance sheet. In addition, in April 2008 we received the 390,000 Cablecom Holdings Shares that were part of the Settlement Agreement described above.

 

Cash Flows

Operating activities for three months ended March 31, 2008 and 2007, after adding back non-cash items, provided (used) cash of approximately $145,000 and $(258,000), respectively. During such period other changes in working capital provided cash of approximately $53,000 and $17,000 respectively, resulting in cash being provided by (used in) operating activities of $199,000 and $(241,000), respectively.

 

Investing activities for three months ended March 31, 2008 and 2007 used cash of $1,040,000 and $2,550,000, respectively. The 2008 amounts consisted of additions to property and equipment in the amount of $740,000 and the down payment for the acquisition of Shandong Newspaper in the amount of $300,000. The 2007 amounts primarily consisted of our investment in Jinan Broadband.

 

Financing activities for three months ended March 31, 2008 and 2007 provided cash of $5,085,000 and $3,210,000, respectively. For 2008 this amount consisted of proceeds from the issuance of the convertible notes of $4,850,000 partially offset by $104,500 of payments related to issuance costs associated with the convertible notes and an increase in the payable to Jinan Parent in the amount of $340,000. For 2007, this amount proceeds from the private placement of $3,555,000 partially offset by $345,000 of payments related to issuance costs associated with the private placement offering.

Our WOFE and our Jinan Broadband subsidiary, which is our only operating subsidiary as of March 31, 2008, are located in China. All of their operations are conducted in the local currency the Chinese Yuan also known as Renminbi or RMB. The effect of exchange rates on cash between the Chinese Yuan and the United States dollar, provided cash of $0 and $5,341 during the three months ended March 31, 2008 and 2007.

Need for Additional Capital

We have raised $4.85 million (net of cost of capital and expenses) in our January 2008 Financing in order to fund our second payment for our purchase of Jinan Broadband, which payment was due in January of 2008 and to acquire Shandong Newspaper and cover the cost of interim operations. We made the second and last payment for Jinan Broadband in March of 2008 and incurred no penalty for making this payment in March. In addition, in March 2008 we used $300,000 to fund our down payment under the Shandong Newspaper Cooperation Agreement to Shandong Media and in April 2008 utilized an additional $1.1 million to fund the remaining portion of our required working capital contribution. In addition, in accordance with the Settlement Agreement, we received 390,000 shares of Cablecom Holdings Shares from Mr. Ng, in April 2008 of which 260,000 are subject to lock-up provisions for the next 12 months. Management does not believe that the Company has sufficient capital to continue its growth and acquisition strategy without raising additional capital and/or liquidating some of the Cablecom Holdings Shares.

We intend to grow primarily through marketing to increase our subscriber base and through acquisitions of China based broadband, internet and cable businesses. Our strategy also includes the purchasing of other complimentary media assets in the same regions. Our first purchase of this nature was the completion of our acquisition of Shandong Newspaper on April 24, 2008 in a Joint Venture. Shandong Newspaper’s business includes three main magazines: Shandong Broadcast & TV Weekly (Newspaper), TV Weekly Magazine and Modern Movie Times Magazine (Bi-Weekly). We intend to invest our acquisition cost in this Joint Venture to increase sales and advertising revenues of its periodicals in order to become profitable, and to cross market with our other asset, Jinan Broadband. No assurance can be made that we will be able to raise capital if and as needed to implement this business plan or, if implemented, that it will be successful.

 

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The amount and timing of our future capital requirements will depend upon many factors, including the number and size of opportunities available to us, the level of funding received by us, anticipated private placements of our common stock, the level of funding obtained through other financing sources, and the timing of such funding. In the event we are unable to raise additional capital we will not be able to sustain any growth or continue to operate.

Dividends

 

We intend to retain any future earnings to finance the expansion of our business and any necessary capital expenditures, and for general corporate purposes. Moreover, even if we are profitable as a result of our PRC based operations and subsidiaries, PRC regulations prevent the payment of dividends absent compliance with certain rules and obtaining appropriate government consents, which we believe will not happen in the near future, if ever.

Financial Commitments

 

The Company pays approximately $55,000 (400,000 RMB) annually for rent at its facilities in Jinan, China, renewable on an annual basis.

The Company utilizes approximately 1,000 square feet of space from Maxim Financial Corporation for its corporate headquarters for a monthly rental fee of $2,000. Maxim Financial Corporation provided consulting services to the Company during the years ended December 31, 2007 and 2006 and has agreed to discharge all rental costs under the terms of its consulting agreement with the Company through December 2007. In addition, Maxim Financial Corporation has agreed to defer all monthly rental payments beginning January 2008 until the Company’s next capital raise subsequent to January 2008.

Recent Events

In late April 2008, the Company received the 390,000 Cablecom Holdings Shares from Clive Ng, in connection with the Settlement Agreement. In accordance with the terms of the Settlement Agreement, the Company was to receive the Cablecom Holdings Shares from Mr. Ng subject to any lock up or similar restriction applicable to Clive Ng. Accordingly, the Company entered into a lock up agreement with China Cablecom Holdings with respect to the Cablecom Holdings Shares, containing substantially similar lock up restrictions as in effect with Mr. Ng’s shares of China Cablecom Holdings, dated as of April 24, 2008 (the “Cablecom Lock Up Agreement”).

Pursuant to the Cablecom Lock Up Agreement, the Company has agreed that without the consent of China Cablecom Holdings, except as otherwise provided in the Lock Up Agreement (i) until the earlier of the date (the "Trade Commencement Date"), that (x) is six months after April 9, 2008, and (y) a registration statement with respect to such shares, shall be declared effective by the Securities and Exchange Commission (which was declared effective on May 2, 2008), the Company shall not directly or indirectly offer, sell, contract to sell, gift, exchange, assign, pledge or otherwise encumber or dispose of the Shares (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition, (whether by actual disposition or effective economic disposition due to cash settlement or otherwise), or any affiliate of the Company other than China Cablecom Holdings, or any person in privity with the Company or any affiliate of the Company, other than China Cablecom Holdings), directly or indirectly, including the establishment or increase in a put equivalent position or liquidation or decrease in a call equivalent position within the meaning of Section 16 of the Exchange Act and the rules and regulations of the SEC promulgated thereunder (each of the foregoing referred to as a "Disposition"); (ii) for a period of 6 months after the Trade Commencement Date, not to effect a Disposition of more than 33⅓% of the shares and (iii) for a period of 12 months after the Trade Commencement Date not to effect a disposition of more than 66⅔% of the shares.

 

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The foregoing is a summary only of the Cablecom Lock Up Agreement. A registration statement with respect to the 390,000 Cablecom Holdings Shares has been declared effective on May 2, 2008, however, no assurance can be made that the registration statement will remain effective for any period of time, or that the shares will be liquid at favorable prices at times that the Company desires and is able to sell such shares.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires our management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements included in our Annual Report on Form 10-KSB describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of China Broadband, Inc. and its subsidiaries, China Broadband Cayman, its WOFE and Jinan Broadband. All material intercompany transactions and balances are eliminated in consolidation.

Accounting Method

The Company's policy is to use the accrual method of accounting to prepare and present financial statements, which conform to generally accepted accounting principles (GAAP). The Company has elected a December 31, year-end.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount after deduction of trade discounts, business tax and allowance. The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.

Inventories

Inventories, consisting of cables, fiber, connecting material, power supplies and spare parts are stated at the lower of cost or market value. Cost is determined using the first-in, first-out (FIFO) method.

 

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Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Expenditures for major renewals and betterments, which extend the original estimated economic useful lives or applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The costs and related accumulated depreciation of assets sold or retired are removed from the accounts, any gain or loss thereon is reflected in operations.

Depreciation is provided for on the straight line basis over the estimated useful lives of the respective assets over a period of five years.

Intangible Assets

We will perform indefinite life intangible asset impairment tests on an annual basis and between annual tests in certain circumstances. To determine the fair value of these intangible assets, there are many assumptions and estimates used that directly impact the results of the testing. In making these assumptions and estimates, the Company must make various assumptions regarding estimated future cash flows and other factors in determining the fair values of the respective assets. We will use set criteria that are reviewed and approved by various levels of management, and we will estimate the fair value of our reporting units by using discounted cash flow analyses. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets in future periods. Any such resulting impairment charges could be material to the Company’s results of operations.

Revenue Recognition

Sales are recorded as services are provided to customers. Provision for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period when related sales are recorded.

Income taxes

Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Foreign Currency Translation

The Company’s Jinan Broadband subsidiary located in China uses its local currency (RMB) as its functional currency. Translation adjustments are reported as other comprehensive income or expenses and accumulated as other comprehensive income in the equity section of the balance sheet. The financial information is translated into U.S. Dollars at prevailing or current rates respectively, except for revenue and expenses which are translated at average current rates during the reporting period.

Recent Accounting Pronouncements

 

In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial liabilities, which include assets and liabilities acquired in connection with a business combination, goodwill, intangible assets and asset retirement obligations recognized in connection with final capping, closure and post-closure landfill obligations, until January 1, 2009. The Company is currently evaluating the impact of SFAS 157 for nonfinancial assets and liabilities on the Company's financial position and results of operations.

 

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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company has not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No. 160.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51 ("SFAS 160"), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 also provides guidance when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"), which amends and expands the disclosure requirements of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments. This statement applies to all entities and all derivative instruments. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 161.

 

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial statements.

 

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Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

All of our foreign operations are conducted in China and the Renminbi is the national currency in which its operations are conducted. We have not utilized any derivative financial instruments or any other financial instruments, nor do we utilize any derivative commodity instruments in its operations, nor any similar market sensitive instruments.

 

The exchange rate between the Renminbi and the U.S. dollar is subject to the PRC foreign currency conversion policies which may change at any time. The exchange rate at May 13, 2008 was approximately 6.99 Renminbi to 1 U.S. dollar, and the exchange rate is currently permitted to float within a very limited range.

 

We believe that the weakening US dollar currently exposes us to significant market risk. We currently raise capital in the US to fund our acquisitions and growth in China. If the US dollar continues to weaken against the Renminbi we may be required to raise additional capital not anticipated or we may not be able to continue to operate, make required payments for agreements entered into or fund new acquisitions.

The Company primarily invests its cash in checking, bank money market and savings accounts. As of May 13, 2008, the Company had not entered into any type of hedging or interest rate swap transaction. 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

 

Management has reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report and have concluded that the disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

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(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of Management; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or the degree of compliance may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that assessment, Management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2008. Nonetheless, because of previous late filings during the 2007 year and because of our PRC operations, management has retained a PRC based consultant to assist with financial accounting processing and reporting.

This Form 10-Q does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this report.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

 

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company has not made any sales of unregistered Securities during the quarter ended March 31, 2008 or thereafter other than has been disclosed in Current Reports on Form 8-K.

In May 2008 the Company issued, an aggregate of 75,614 shares to the ten Note holders (all of whom are accredited investors) in lieu of interest through March 31, 2008, plus late penalty fees. The Company believes that this issuance was exempt from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(2) as this issuance of restricted shares was only made to certain accredited investors and not pursuant to an offering or other public distribution.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

None.