Yifan Communications, Inc. was an Internet communications, e-commerce and software development company organized to provide a variety of software products and Internet services tailored to the specific needs of the Chinese-speaking population in North America. Over the years, the Company developed and acquired several websites, four of which are currently being maintained but none of which conduct any transactions.
As of December 31, 2003, the Company discontinued all of its operations and became a development stage company. Since that time, Yifan has devoted all of its efforts to develop or acquire a new line of business through business combination transactions. There has been no significant revenue since December 31, 2003 except for a nominal amount of sub-lease income.
Since December 2003, when the Company ceased all revenue producing operating activities, the principal activity of the Company has been to seek other economic opportunities, including but not limited to the possibility of a business combination. During this period, the Board of Directors decided to retain the services of certain personnel and external professionals. Myint J. Kyaw (aka Jeffrey Wu), our current Chief Executive Officer and Chairman of the Board of Directors, has advanced working capital funds to the Company in order to facilitate this plan (the “Kyaw Loan”).
In 2004 and 2005, the Company was a development stage company and operations were principally maintaining a lease and sub-lease income and incurring expenses in connection with the efforts to acquire a new line of business through business combination transactions.
On December 21, 2005, Yifan (BVI), Inc. was formed and incorporated under the laws of the British Virgin Islands. Yifan (BVI), Inc. is an inactive wholly owned subsidiary of Yifan Communications, Inc. The Company intends to use Yifan (BVI), Inc. as a vehicle to consummate any future business combinations.
Results of Operations
For Year Ended December 31, 2005 Compared to Year Ended December 31, 2004.
Commencing January 2004, the Company had no income other than sub-lease income. In January 2004, the Company entered into a sub-lease agreement for a portion of its leased office space, with the permission of the landlord, for $24,000 per annum, on a month-to-month basis. In the third quarter of 2005, the office space was vacant for a month. The current sub-lease agreement commenced October 1, 2005 and continues of on a month-to-month basis. Sub-lease income was $21,000 and $24,000 for the years ended December 31, 2005 and 2004, respectively, and is accounted for income offset against operating expenses for each year.
Operating expenses before offset of sub-lease income amounted to $615,935 for the year ended December 31, 2005 compared to $462,645 for the year ended December 31, 2004. The increase $153,290 in operating expenses was primarily the result of increase in professional fees in 2005, as part of the Company’s efforts in filing their reports with the SEC and pursuing a business combination transaction. Operating expenses for year ended December 31, 2005 primarily consist of office rent of $171,609, professional fees of $246,988, consulting expense of $57,733 and salaries of $70,908. Operating expenses for year ended December 31, 2004 primarily consist of office rent of $220,945, professional fees of $50,368, consulting expense of $30,744 and salaries of $57,693.
In 2004, Myint J. Kyaw advanced working capital to fund the operations of the Company. The loan balances were $895,388 and $336,055 plus accrued interest thereon amounting to $54,773 and $13,506 as of December 31, 2005 and 2004, respectively. The Kyaw Loan is due December 31, 2006 with interest at prime plus 2% (9.25% and 7.25% at December 31, 2005 and 2004, respectively). Under the terms of the promissory notes with Mr. Kyaw, repayment of principal and interest was not required in 2005 and 2004. On December 6, 2005, the Board of Directors resolved that the loan payable may be converted to common and preferred stock at $.008 per share. Mr. Kyaw has expressed the intent to convert the loan plus accrued interest.
In December 2005, the Company authorized the issuance of 3,875,000 shares of common stock at a value of $.008 per share which were granted to two current employees, two consultants and one former employee. The Company granted 1,050,000 shares of common stock to two employees under the Employee’s incentive Stock Plan. The Company recorded $8,400 as salaries which were included in the consolidated statements of operations for the year ended December 31, 2005. The Company granted 2,800,000 shares of common stock to two consultants pursuant to consulting agreements totaled $22,400 which was recorded as consulting expense and included in the consolidated statements of operations for the year ended December 31, 2005. 25,000 shares of common stock were issued to a former employee pursuant to a settlement agreement valued at $200 which was recorded as salaries and included in the consolidated statements of operations for the year ended December 31, 2005.
Net loss for the year ended December 31, 2005 was $594,935 compared to $438,645 for the year 2004. At December 31, 2005 and 2004, total outstanding shares (including shares to be issued) of the Company’s common stock was 17,601,951 and 13,726,951 shares, respectively. For the years ended December 31, 2005 and 2004, weighted average shares outstanding were 13,823,826 and 13,726,951, respectively. Net loss per common share, both basic and diluted, amounted to $0.04 per share for the year ended December 31, 2005 compared to $0.03 per share for the year ended December 31, 2004.
Liquidity, Capital Resources and Going Concern
As of December 31, 2005 and 2004, the Company had 10 million authorized but unissued preferred shares and 100 million authorized common shares, with 13,726,951 shares issued and outstanding as of each such date. As of December 31, 2005, there were 3,875,000 shares to be issued. The Company’s Board of Directors has the authority to issue all or any part of our authorized and unissued capital stock to raise additional capital or finance acquisitions as well as the authority to fix the rights, privileges and preferences of the preferred stock.
Up until November 2003, the Company’s operations were entirely funded by the original capital contributed to the Company and to a much lesser extent, cash flows provided by operating activities. These funding sources became inadequate for the Company to support its daily operations. As a result, the Kyaw Loan began in November 2003. This loan is due December 31, 2006 with interest at prime plus 2%. For the period from November 2003 to December 31, 2005, the Kyaw Loan totaled $895,388 representing the only source of funds for the Company and remained outstanding as of December 31, 2005
The Company intends to continue relying on loans from Kyaw to finance its operations until it can successfully complete a business combination transaction. The Company may also issue additional common or preferred shares to raise additional funds to finance new business acquisitions or to pay for professional fees or other costs associated with such acquisitions. There is no assurance, however, that additional financing from these sources can be obtained on acceptable terms or that a business combination transaction can be completed.
On January 26, 2006, the Board of Directors designated a class of Series A Convertible Preferred Stock authorizing 100,000 shares. The Company was permitted by the Board to convert up to the maximum amount of the loan payable to Kyaw into shares of common stock and shares of Series A Preferred stock at $.008 per share.
The Company’s consolidated financial statements have been presented assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has incurred cumulative losses of $3,569,004 through December 31, 2005, and the Company had a working capital deficiency of $132,018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern and as a result, the Company’s independent registered public accounting firm included an explanatory paragraph in its report on the Company’s consolidated financial statements for the year ended December 31, 2005 with respect to this uncertainty. Its ability to do so is dependent on finding economic opportunities that will achieve profitable operations, and to obtain any necessary financing. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty
Reverse Stock Split
The Board of Directors resolved it to be in the best interest of the Company and to present to the stockholders for their ratification and approval a reverse stock split. Each issued and outstanding share of common stock will be converted on a one-for-seven basis into .1428571428 of a share of common stock. The stockholders’ meeting to ratify and approve this matter is still pending.
Proforma net loss per share amounts on a post-split basis for the years ended December 31, 2005 and 2004 would as follows:
|
2005
|
2004
|
||||||
|
Basic
and diluted:
|
|||||||
|
As
reported
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
|
|
Proforma
(Unaudited)
|
$
|
(0.28
|
)
|
$
|
(0.22
|
)
|
|
|
Weighted
average shares outstanding:
|
|||||||
|
As
reported
|
13,823,826
|
13,726,951
|
|||||
|
Proforma
(Unaudited)
|
1,974,832
|
1,960,993
|
Critical Accounting Policies and Estimates
Management’s discussion and analysis of the Company’s consolidated financial condition and results of operations are based on its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the revenues and expenses during the reporting periods. The Company evaluates its estimates and judgments on an ongoing basis. The Company bases its estimates on historical experience and on various other factors it believes are 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.
Sub-lease Income Recognition
The Company maintains its financial records on the accrual basis of accounting. Sub-lease income is recognized as rentals become due. Sub-lease rent payments received in advance are deferred until earned. The sub-lease between the Company and the tenant is considered to be an operating lease. The sub-lease agreement is on a month to month basis.
Income Taxes
Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and probability of realization of deferred income taxes and the timing of income tax payments. This process requires the Company to estimate its actual current tax exposure together with an assessment of temporary differences resulting from differing treatment of items, such as depreciation on property, plant and equipment, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. Since the Company has net operating losses carryforward at December 31, 2005 and 2004, a valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not the asset will not be realized, because the ultimate realization of any deferred tax assets will be dependent on future taxable income.
Item 7. Financial Statements.
TABLE OF CONTENTS
|
Page(s)
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
|
|
December
31, 2005 and 2004
|
F-2
|
|
Consolidated
Statements of Operations
|
|
|
For
the Years Ended December 31, 2005 and 2004
|
|
|
Cumulative
Period from January 1, 2004 to December 31, 2005
|
F-3
|
|
Consolidated
Statements of Cash Flows
|
|
|
For
the Years Ended December 31, 2005 and 2004
|
|
|
Cumulative
Period from January 1, 2004 to December 31, 2005
|
F-4
|
|
Consolidated
Statements of Stockholders’ Deficiency
|
|
|
For
the Years Ended December 31, 2005 and 2004
|
|
|
Cumulative
Period from January 1, 2004 to December 31, 2005
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
- F-15
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
YIFAN COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of Yifan Communications, Inc. (A Development Stage Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the two years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Yifan Communications, Inc. (A Development Stage Company) at December 31, 2005 and 2004 the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles accepted in the United States of America.
The accompanying consolidated financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring net losses from operations and working capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
February 4, 2006
F-1
YIFAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
|
$
|
8,527
|
$
|
8,182
|
|||
|
Sublease
rent receivable
|
6,000
|
—
|
|||||
|
Prepaid
expense
|
4,000
|
—
|
|||||
|
Total
Current Assets
|
18,527
|
8,182
|
|||||
|
Property
and equipment, at cost
|
|||||||
|
(net
of accumulated depreciation and amortization
|
|||||||
|
of
$5,143 in 2005 and $2,150 in 2004)
|
9,824
|
12,817
|
|||||
|
Total
Assets
|
$
|
28,351
|
$
|
20,999
|
|||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
147,545
|
$
|
157,491
|
|||
|
Franchise
taxes payable
|
3,000
|
—
|
|||||
|
Tenant
deposit
|
—
|
2,000
|
|||||
|
Total
Current Liabilities
|
150,545
|
159,491
|
|||||
|
Long-term
liabilities:
|
|||||||
|
Deferred
rent
|
164,216
|
143,316
|
|||||
|
Loans
from stockholder
|
895,388
|
336,055
|
|||||
|
1,059,604
|
479,371
|
||||||
|
Total
Liabilities
|
1,210,149
|
638,862
|
|||||
|
Stockholders'
Deficiency:
|
|||||||
|
Preferred
stock $.008 par value,
|
|||||||
|
Authorized
- 10,000,000 shares
|
|||||||
|
Issued
and outstanding - none
|
—
|
—
|
|||||
|
Common
stock $.008 par value,
|
|||||||
|
Authorized
- 100,000,000 shares;
|
109,816
|
109,816
|
|||||
|
Issued
and outstanding - 13,726,951 shares
|
|||||||
|
Common
stock to be issued - 3,875,000 shares
|
31,000
|
—
|
|||||
|
Additional
paid-in capital
|
2,246,390
|
2,246,390
|
|||||
|
Deficit
accumulated during development stage
|
(3,569,004
|
)
|
(2,974,069
|
)
|
|||
|
Total
Stockholders' Deficiency
|
(1,181,798
|
)
|
(617,863
|
)
|
|||
|
Total
Liabilities and Stockholders' Deficiency
|
$
|
28,351
|
$
|
20,999
|
The accompanying notes are an integral part of the consolidated financial statements.
F-2
YIFAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Cumulative
|
||||||||||
|
Period
from
|
||||||||||
|
Year
Ended
|
Year
Ended
|
January
1, 2004 to
|
||||||||
|
December
31, 2005
|
December
31, 2004 (A)
|
December
31, 2005 (A)
|
||||||||
|
Revenue
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Expenses:
|
||||||||||
|
Operating
expenses
|
594,935
|
438,645
|
1,033,580
|
|||||||
|
594,935
|
438,645
|
1,033,580
|
||||||||
|
Net
loss
|
$
|
(594,935
|
)
|
$
|
(438,645
|
)
|
$
|
(1,033,580
|
)
|
|
|
Net
loss per share,
|
||||||||||
|
basic
and diluted
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
||||
|
Weighted
average
|
||||||||||
|
shares
outstanding
|
13,823,826
|
13,726,951
|
(A)
On December 31, 2003, the Company discontinued its operations. Effectively January 1, 2004, the Company became a development stage company.
The accompanying notes are an integral part of the consolidated financial statements.
F-3
YIFAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Cumulative
|
|||||||||
|
Period
from
|
||||||||||
|
Year
Ended
|
Year
Ended
|
January
1, 2004 to
|
||||||||
|
December
31, 2005
|
December
31, 2004
|
December
31, 2005
|
||||||||
|
Cash
flows from operating activities
|
||||||||||
|
Net
loss
|
$
|
(594,935
|
)
|
$
|
(438,645
|
)
|
$
|
(1,033,580
|
)
|
|
|
Adjustments
to reconcile net loss to
|
||||||||||
|
net
cash used in operating activities
|
||||||||||
|
Depreciation
and amortization
|
2,993
|
2,150
|
5,143
|
|||||||
|
Non-cash
stock-based compensation
|
31,000
|
—
|
31,000
|
|||||||
|
Deferred
rent
|
20,900
|
19,407
|
40,307
|
|||||||
|
(Increase)/decrease
in accounts receivable
|
(6,000
|
)
|
253
|
(5,747
|
)
|
|||||
|
Increase
in prepaid expenses
|
(4,000
|
)
|
—
|
(4,000
|
)
|
|||||
|
Increase/(decrease)
in accounts payable and
|
||||||||||
|
accrued
expenses
|
(9,946
|
)
|
156,234
|
146,288
|
||||||
|
Increase
in franchise taxes payable
|
3,000
|
3,000
|
||||||||
|
(Decrease)/increase
in tenant deposit
|
(2,000
|
)
|
2,000
|
—
|
||||||
|
Total
adjustments
|
35,947
|
180,044
|
215,991
|
|||||||
|
Net
cash used in operating activities
|
(558,988
|
)
|
(258,601
|
)
|
(817,589
|
)
|
||||
|
Cash
flows used in investing activities
|
||||||||||
|
Capital
expenditures
|
—
|
(14,967
|
)
|
(14,967
|
)
|
|||||
|
Net
cash used in investing activities
|
—
|
(14,967
|
)
|
(14,967
|
)
|
|||||
|
Cash
flows provided by financing activities
|
||||||||||
|
Proceeds
from stockholder loans
|
559,333
|
275,909
|
835,242
|
|||||||
|
Net
cash provided by financing activities
|
559,333
|
275,909
|
835,242
|
|||||||
|
Net
increase in cash
|
345
|
2,341
|
2,686
|
|||||||
|
Cash,
beginning of year
|
8,182
|
5,841
|
5,841
|
|||||||
|
Cash,
end of year
|
$
|
8,527
|
$
|
8,182
|
$
|
8,527
|
||||
|
Supplemental
disclosures:
|
||||||||||
|
Interest
paid
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Taxes
paid
|
$
|
1,967
|
$
|
21,256
|
$
|
23,223
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
YIFAN COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
EACH OF THE YEARS IN THE TWO YEAR PERIOD ENDED DECEMBER 31, 2005
|
Common
Stock
|
Common
Stock to be Issued
|
Additional
|
|
|||||||||||||||||||
|
Paid
in
|
Accumulated
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
(A)
|
Total
|
||||||||||||||||
|
Balance
- January 1, 2004 (A)
|
13,726,951
|
$
|
109,816
|
—
|
$
|
—
|
$
|
2,246,390
|
$
|
(2,535,424
|
)
|
$
|
(179,218
|
)
|
||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(438,645
|
)
|
(438,645
|
)
|
|||||||||||||
|
Balance
- December 31, 2004
|
13,726,951
|
109,816
|
—
|
—
|
2,246,390
|
(2,974,069
|
)
|
(617,863
|
)
|
|||||||||||||
|
Common
stock to be issued for
|
||||||||||||||||||||||
|
salaries
and consulting fees
|
—
|
—
|
3,875,000
|
31,000
|
—
|
—
|
31,000
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(594,935
|
)
|
(594,935
|
)
|
|||||||||||||
|
Balance
- December 31, 2005
|
13,726,951
|
$
|
109,816
|
3,875,000
|
$
|
31,000
|
$
|
2,246,390
|
$
|
(3,569,004
|
)
|
$
|
(1,181,798
|
)
|
(A)
On December 31, 2003, the Company discontinued its operations. Effectively January 1, 2004, the Company became a development stage company.
The accompanying notes are an integral part of the consolidated financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and a Development Stage Company
In July 2000, Yifan Communications, Inc. (“Yifan” or “the Company”) (incorporated in Ohio in 1991 and became a Delaware corporation since 1996) and Yifan.Com Inc, a New York Corporation, completed a business combination accounted for as a reverse acquisition, in which Yifan was the legal acquirer and Yifan.Com Inc. was the accounting acquirer under the generally accepted accounting principles in the United States of America.
Yifan was an internet communications, e-commerce and software development company organized to provide a variety of software products and internet services tailored to the specific needs of the Chinese-speaking population in North America. The Company’s first website “yifan.com” was originally created in 1997. The Company still maintains four inactive websites and they are “yifan.com”, “yifan.net”, “yifannet.com” and “yifanmall.com”. These websites are still being maintained but no longer accept any customer transactions. These websites were developed by the Company before December 31, 2003. In October 2000, the Company acquired the grocer2grocer website from a brother of the Company’s major stockholder which specialized in business to business internet transactions for the grocery industry. This site is no longer being maintained by the Company.
At December 31, 2003, the Company discontinued all of its operations and became a development stage company. Yifan has devoted all of its efforts to develop or to acquire a new line of business. There has been no significant revenue since December 31, 2003 except for a nominal amount of sub-lease income.
Since December 2003, when the Company ceased all revenue producing operating activities, the principal activity of the Company, has been to seek other economic opportunities including but not limited to the possibility of a business combination. The Board of Directors during this exploration or search period has decided to retain the services of certain personnel and external professionals. A major stockholder has advanced working capital funds to the Company in order to facilitate this plan.
On December 21, 2005, Yifan (BVI), Inc. was formed and incorporated under the laws of the British Virgin Islands. Yifan (BVI), Inc. is an inactive wholly owned subsidiary of Yifan Communications, Inc. The Company intends to use Yifan (BVI), Inc. as a vehicle to consummate any future business combinations.
Note 2 - Going Concern
The Company’s consolidated financial statements have been presented assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has incurred cumulative losses of $3,569,004 through December 31, 2005, and the Company had a working capital deficiency of $132,018. These conditions indicate that the Company may be unable to continue as a going concern. Its ability to do so is dependent on finding economic opportunities that will achieve profitable operations, and to obtain any necessary financing.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Going Concern (continued)
The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our independent registered public accounting firm has referred to the substantial doubt about our ability to continue as a going concern in their audit report on our consolidated financial statements included with this Annual Report on Form 10-KSB with respect to this uncertainty.
Note 3 - Summary of Significant Accounting Polices
(a) Basis of Presentation and Use of Estimates
These consolidated financial statements include the accounts of the Company and its wholly owned inactive subsidiaries (Yifan.Com, Inc. and Yifan (BVI), Inc.). The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(b) Concentration of credit risk
The Company maintains cash balances in bank deposit accounts at high quality financial institutions that may at times exceed federally insured limits. The individual balances are insured by the Federal Deposit Insurance Corporation up to $100,000 per institution. The Company has not experienced any losses in such accounts. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at December 31, 2005 and 2004.
Financial instruments that potentially subject the Company to concentration of credit risk consist of rent receivable. The Company performs ongoing credit evaluations and maintains reserve for potential credit losses.
(c) Fair value of financial instruments
The carrying values of financial instruments including cash, rent receivable and accounts payable approximate fair value due to the relatively short maturities of these instruments.
(d) Property and equipment
Property and equipment consist of furniture and fixture and computer equipment, are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets over five years. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. The cost of maintenance and repairs are charged to expense as incurred while additions and improvements that extend the life of the assets are capitalized.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant Accounting Polices (continued)
(e) Sub-lease Income Recognition
The Company maintains its financial records on the accrual basis of accounting. Sub-lease income is recognized as rentals become due. Sub-lease rent payments received in advance are deferred until earned. The sub-lease between the Company and the tenant is considered to be an operating lease. The Company offsets its sub-lease income against the rent expense (See Note 9).
(f) Valuation of long-lived assets
The Company’s method under current accounting rules for measuring impairment of long-lived assets is on an undiscounted cash flow basis. Long-lived assets held and used by the Company are reviewed for impairment when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which can trigger a review include, among other conditions, cash flow deficits, historic or anticipated decline in revenue or operating profit and a material decrease in fair value of some or all of the assets. If such impairment exists, the carrying value of the assets is reduced to its estimated fair value based on discounted cash slows. Such a review has been performed by management and does not indicate an impairment of such assets.
(g) Income Taxes
Income taxes are accounted for under the liability method whereby deferred tax asset and liability account balances are calculated at the balance sheet date using current tax laws and rates for the year in which the differences are expected to affect taxable income. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized. In addition, if the Company’s Board of Directors pursue a future corporate reorganization or other change in corporate ownership that will cause the ownership change by 50% or more, then the use of certain net operating loss carryforwards may be limited.
(h) Net loss per share
Net loss per common share is computed in accordance with the provisions of SFAS No. 128, “Earnings per Share”. SFAS No. 128 establishes standards for the computation, presentation, and disclosure of earnings (loss) per share. Basic per share amounts are computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted per share amounts incorporate the incremental shares issuable upon the assumed exercise of the Company’s stock options and warrants and assumed conversion of the convertible securities. To date, there have been no stock options or warrants granted.
(i) Reclassifications
Certain prior year amounts have been reclassified to conform to current year classifications.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Accounts payable and accrued expenses
Accounts payable and accrued expenses consists of:
|
2005
|
2004
|
||||||
|
Rent
|
$
|
—
|
$
|
98,529
|
|||
|
Professional
fees
|
90,262
|
44,293
|
|||||
|
Interest
|
54,773
|
13,506
|
|||||
|
Other
|
2,510
|
1,163
|
|||||
|
$
|
147,545
|
$
|
157,491
|
Note 5 - Stock Based Compensation
The Company has an Employee’s Incentive Stock Plan under which stock options, performance shares, restricted stock and other awards in common stock are granted, and a Director’s Stock Option Plan, which are described more fully below. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”. To date, no stock options relating to the Employee’s Incentive Stock Plan or Director Stock Option Plan, as described below, have been granted. As of December 31, 2005, 1,050,000 shares of common stock were granted relating to the Employee’s Incentive Stock Plan.
(a) Employee’s Incentive Stock Plan
Full-time employees of the Company and its subsidiary, including officers and employee directors, are eligible to participate in the Company’s Incentive Stock Plan (the “Plan”), which provides for the grant of incentive equity awards covering up to 1,500,000 shares of common stock. The Plan provides for the grant of (i) non-qualified stock options, (ii) incentive stock options, (iii) shares of restricted stock, (iv) shares of phantom stock and (v) stock bonuses (collectively, “Incentive Awards”). In addition, the Plan permits the grant of cash bonuses payable when a participant is required to recognize income for federal income tax purposes in connection with the vesting of shares of restricted stock or the grant of a stock bonus. A committee of the Board of Directors administers the Plan and has the power to determine, in its discretion, the number of shares subject to each incentive grant and the terms of the incentive grant.
(b) Director’s Stock Option Plan
The Non-Employee Directors’ Stock Option Plan provides options to purchase 25,000 shares of common stock to be granted to non-employee directors each year. However, these opti