ITEM 1. DESCRIPTION OF BUSINESS
History and Development of the Company
Intermost Corporation (as used in this Annual Report on Form 10-KSB, unless the context otherwise requires, the terms “we,” “us,” “the Company,” “IMOT,” and “Intermost” refer to Intermost Corporation and its subsidiaries) was incorporated as La Med Tech, Inc. under the laws of the State of Utah on March 6, 1985. The Company changed its name to Entertainment Concepts International in 1987, to Lord & Lazarus, Inc. in 1988, and to Utility Communication International, Inc. in 1996.
From the date of incorporation through October 1998, the Company’s operations were limited to efforts to identify and acquire, or merge with, one or more operating businesses. In October 1998, the Company acquired all of the issued shares of Intermost Limited, a British Virgin Islands Company (“IML”), by issuing to the then shareholders of IML a total of 4,970,000 shares of the Company’s common stock, par value $0.001 per share (the “Merger”). Following the Merger, (i) IML became a wholly-owned subsidiary of the Company, (ii) the shareholders of IML held 58.7% of all issued and outstanding shares of the Company, (iii) the Company changed its name to Intermost Corporation, (iv) the Company terminated all its prior business activities and adopted IML’s business plan, and (v) all officers and directors of the Company resigned and were replaced by officers and directors of IML.
In February 2003, the Company reincorporated from Utah to the State of Wyoming.
IML was incorporated in January 1998 to develop a Chinese-language Internet business portal and to render services in connection therewith in the People’s Republic of China (“China”). During the period following the Merger, the Company entered into agreements with, and completed acquisitions of, some businesses that provided or supported Internet services in an effort to implement this business plan. The Company also endeavored to develop its own Internet services businesses, including e-commerce business solutions. However, the global decline in the demand for Internet services after mid-2000, which resulted in a significant economic slowdown that affected many of the companies with whom we do business, materially undermined the effectiveness of our efforts. While we continued (and still continue) to offer web design and hosting services to customers in China through our subsidiary, ChinaE.com Information Technology Ltd. (“ChinaE”), we also began to look for ways to diversify or expand our business.
In November 2002 ChinaE purchased eight licenses for HanWEB Publishing Server 3.0, an online real time translation engine that translates traditional Chinese characters, used in most of the world, to simplified Chinese characters, which are used only in China, and vice versa, and six licenses for HanVoice Web to Phone Server 1.0, a real time Internet to telephone conversion server for Cantonese, Putonghua and English. These were purchased from KanHan Technologies Ltd. (“KanHan”) at a cost of $150K. The Company was one of two distributors of these licenses in China.
With the assistance of KanHan, the Company opened an office in Guangzhou in April 2003. The office was staffed with two persons who were responsible for introducing these products to businesses and government agencies in Guangdong Province. For a period of approximately one year, KanHan subsidized the costs related to maintaining this office and developing a market for these products. The amount of the subsidy was approximately $12,800 per month. The office was closed in March 2004 and the Company is no longer receiving the subsidy, although it continues to market the licenses.
In May, 2003, the Company’s wholly owned subsidiary, IMOT Information Technology (Shenzhen) Ltd. (“IMOT Technology”), received approval from the governments of Shenzhen and Shanghai for its proposed acquisition of 51% of the issued and outstanding shares of Shanghai Newray Photographic Equipment Co., Ltd. (“Shanghai Newray”) from Shanghai Newray Business Development Co., Ltd. (“Shanghai Newray Business”), the owner of 75.5% of the issued and outstanding capital stock of Shanghai Newray. Shanghai Newray is located in Shanghai and is engaged in the sale of digital photographic equipment. Approval of the governments of Shenzhen and Shanghai was required to complete the acquisition, which was memorialized by a Shareholding Transfer Agreement entered into on May 23, 2003 between IMOT Technology and Shanghai Newray Business.
Pursuant to the Shareholding Transfer Agreement, IMOT Technology paid Shanghai Newray Business Rmb200,000 (approximately $24,000) in cash to reimburse Shanghai Newray Business for certain expenses related to the acquisition and agreed to transfer to Shanghai Newray Business 4,000,000 shares of the Company’s restricted common stock. The cash used to reimburse Shanghai Newray Business for its expenses was paid with the Company’s funds.
On October 3, 2003 IMOT Technology entered into an agreement for the acquisition of 25% of the issued and outstanding shares of Shanghai Fortune Venture Limited (“Shanghai Fortune”) from certain shareholders of Shanghai Fortune. Shanghai Fortune has the right to operate equity exchange transactions in Shanghai, and through its investment in Xi’an Assets and Equity Exchange, operate an equity exchange in Xi’an. In China, equity, including intellectual property rights, may be listed on and transferred through such exchanges. The share transfer was approved by the government of Shanghai on April 12, 2004. The consideration for this acquisition was Rmb600,000, approximately $72,464, in cash plus 10 million shares of our restricted common stock. The value of the common stock was determined to be $0.24 per share, based upon the average of the closing prices for the 10-day period from September 22, 2003 to October 1, 2003. The shares were issued on April 14, 2004.
On May 23, 2006, IMOT signed an agreement to sell the 25% shareholding investment in Shanghai Fortune to Mr. Li Laohu. The net asset value of Shanghai Fortune as of December 31, 2005, the latest audited financial statements date, was Rmb21,957,791. The consideration received by IMOT for the sale of the 25% shareholding was agreed at redemption of 6,500,000 shares of restricted common stock of IMOT with a value of US$0.18 per share, which was the closing price of IMOT share of common stock as of May 23, 2006, held and transferred by Mr. Li Laohu, Mr. Li Xiaoqin and Ms. Huang Xiujuan.
Since December 6, 2002, Shanghai Fortune has been an official registered member of the Shanghai Technology Exchange (the “STE”) and was entitled to conduct exchange business with the STE. The STE was the major entity in the Shanghai Equity Exchange Market. Shanghai Fortune had the exclusive right to manage and operate the North Shanghai Branch (the “NSB”) of the STE. The NSB had the right to conduct the same exchange business as STE and share 80% of the profits with the STE.
Shanghai Fortune was also a founder and major participant in the Yangtze River Delta Equity Exchange Market Place (the “YRDE”). The YRDE included more than 14 major exchanges in Shanghai and the surrounding cities and was the largest equity exchange market place in China.
However, in December 2003, the STE and another exchange were merged into the Shanghai United Assets and Equity Exchange (the “SUAEE”). The SUAEE is a non-profit government-sponsored organization.
As a result of the merger of the STE, although Shanghai Fortune continues to maintain its membership, it is currently still unclear how the NSB and the YRDE will conduct business going forward, and how Shanghai Fortune will participate in the equity exchange markets following the issuance of final regulations by the local PRC government. Due to the uncertainty of the content and timing of governmental regulations, IMOT entered into the May 23, 2006 agreement for the sale of its interest in Shanghai Fortune
On August 10, 2004, we purchased 51% of the issued and outstanding shares of Golden Anke Technology Ltd. (“Golden Anke”) from two of its shareholders, Tu Guoshen and Li Zhiquan, to IMOT Technology for $3.24 million, payable by issuance of 12 million shares of our common stock. The value of our common stock was determined by applying a 20% discount to the average closing price during the period from January 20 to March 19, 2004. On or about February 15, 2007 we sold approximately two percent (2%) of the outstanding shares in Golden Anke to an unaffiliated minority stockholder so that this minority stockholder could seek an independent listing of Golden Anke on a UK exchange, thus reducing our ownership from approximately 51% to approximately 49%. We recently discovered that GATL is no longer seeking a public listing and negotiated an exit settlement under which they will buy back our 49% ownership interest at US$1 million. To date we have collected $200,000 of this amount.
In September 2, 2004, IML incorporated a 100% owned subsidiary, ChinaE.com Technology (Shenzhen) Ltd. (“ChinaE Tech”), to take over the business of ChinaE to provide and support Internet services including, but not limited to, web-hosting, web design, domain name registration and software development.
On December 8, 2004, IMOT Technology entered into an agreement for the acquisition of 15% of the issued and outstanding shares of Shenzhen International Hi-Tech Exchange (“Hi-Tech Exchange”) from Shenzhen Merchant Technology Investment Co., Ltd. Hi-Tech Exchange is an enterprise authorized by the PRC government to carry out business in the transfer of hi-tech property rights and corporate equity interests. The share transfer was approved by the government of Shenzhen on February 25, 2005. The consideration for this acquisition was 2,470,355 shares of our common stock. The value of the common stock was determined to be $0.22 per share based upon the average of the closing prices for the period from October 18, 2004 to November 18, 2004. The shares were issued on February 28, 2005. Subsequently, on December 8, 2006, we redeemed all of these 2,470,355 shares for an aggregate redemption price of US$805,214.75.
On January 6, 2005, all necessary government approvals were obtained to complete the transfer of 80% of the issued and outstanding shares of Hainan Concord Financial Products Development Co., Ltd. (“Hainan Concord”) from Guangzhou Ditai Communication Co., Ltd. and Zhai Xiya to IMOT Technology. Pursuant to the Share Transfer Agreement signed on December 11, 2004 the purchase price paid for the stock was $917,874. On January 12, 2005 we issued to the selling shareholders 5,000,000 shares of our restricted common stock, in full payment of the purchase price. The value of our common stock was determined by applying a 15% discount to the average closing price for the 10 day trading period from November 16, 2004 to November 30, 2004. Hainan Concord’s principal business is to issue and manage multi-functional membership cards for the people who participate in private equity exchange in Hainan. Hainan Concord also provides financial institutions with research and development services for their financial products and instruments.
On October 19, 2005, all necessary government approvals were obtained to complete the transfer of 21% of the issued and outstanding shares of Hainan Special Economic Zone Equity Exchange Center (the “Exchange Center”) from Hainan Concord Investment Holding Co., Ltd. and Guangzhou Keensheng Science and Technology Development Co., Ltd. Pursuant to the Stock Exchange Agreement, the Company issued to the Exchange Stockholders 5,000,000 shares of the Company’s common stock having a value of RMB8,799,350 (approximately US$1,085,000). The consideration for the transaction was agreed to after arm’s-length negotiations between the parties, which are unrelated to each other. On October 19, 2005, we issued to the selling shareholders 5,000,000 shares of our common stock, in full payment of the purchase price.
On July 13, 2006, IML incorporated a 100% owned subsidiary, Leader Palace International Ltd. (“LPI”), to explore businesses in Taiwan region. LPI started to negotiate an investment in touch panel manufacturing and such acquisition was still ongoing.
Management is continuing efforts to identify and explore acquisition, merger and development opportunities.
Products and Services
Internet Services
Through ChinaE Tech, our wholly-owned subsidiary, we offer web design, web hosting, domain name registration, software development and office automation software to our clients. We operate within what is commonly referred to as the “business-to-business” segment of the Internet market, where products and services are offered principally to businesses, as compared to the “business-to-consumer” segment of the Internet services market, where products and services are offered to consumers directly.
We locate web design and hosting customers and secure web design and hosting projects primarily through the efforts of our sales team. We currently employ 10 sales persons for our Internet solution services. All of our sales team members are based in Shenzhen, but occasionally travel throughout China, as necessary. Our sales persons are paid a base salary, and earn commissions on revenues we receive from the customers they secure.
Digital Imaging System
Shanghai Newray is a wholesaler of various brands of consumer digital photographic equipment, including traditional 35mm cameras, digital cameras and camera accessories. Last year, the shareholders in a special meeting passed a resolution (“the Resolution”) to take action to terminate the operation of Shanghai Newray. However the legal representative of Shanghai Newray was lost in contact. The business of Shanghai Newray was written off this year.
Equity Exchange
Equity exchanges are platforms that permit privately-owned and state-owned equity transactions. Subject to the parameters established by the government of China, equity exchanges provide services for the purchase and sale of equity rights, debts, intellectual property rights and technology property rights. Equity listed on the exchanges may be traded through negotiation, auction and bids.
Our subsidiary, Hainan Concord’s principal business is to issue and manage multi-functional membership cards for the people who participate in private equity exchange in Hainan, and has an exclusive agreement with Hainan Exchange Centre Non-Public Company Registration Co., Ltd. to issue multi-functional membership and credit cards to their members.
Through our 15% investment in Hi-Tech Exchange and 21% investment in Exchange Center, we have further expanded our investment in Shenzhen and Hainan, China. Hi-Tech Exchange and Exchange Center are authorized by the government of China to engage in the business of transferring equity and corporate equity interests in Shenzhen and Hainan.
At this time the various equity exchanges in China work, for the most part, independently of one another. We believe that this is inefficient. We are in the process of using our software technology to develop, and we hope to eventually implement, an electronic information and trading platform for equity exchanges that will enable the flow of information regarding rights transfers, as well as payments, among the different equity exchanges in China, including those owned and operated by Hi-Tech Exchange and Exchange Center.
Competition
Internet Services
The market for Internet services and software is intensely competitive and we expect it to become more competitive in the future. Increased competition could result in pricing pressures, low operating margins and the realization of little or no market value. Currently, our competitors are primarily other Chinese owned and operated Internet services and software development companies.
Most of our current and potential competitors may have longer operating histories, larger customer bases, greater brand recognition and greater financial, marketing and other resources than we do, and may enter into strategic or commercial relationships on more favorable terms than we can. In addition, new technologies and the expansion of existing technologies may increase competitive pressure on us. We are a significant presence in the Chinese market for Internet services.
Equity Exchange
There is no national equity exchange in China. It has been estimated that there are approximately 100 equity exchanges in China, most of them small in scale and serving only the local area. There are also a few large equity exchanges serving the largest cities in China, including the Beijing Equity Exchange Center, the Tianjin Equity Exchange Center and the Shanghai Equity Exchange Center. Even the operations of the large equity exchanges are localized.
Currently, because of the localized nature of equity exchanges, there is not significant competition among them. However, further development and expansion of other large equity exchanges, or the nationalization of equity exchanges, would be likely to result in an increase in competition. If that were to happen, it could have a material adverse effect on our ability to attract property owners to list their properties for sale on our exchange and to identify and secure investors or buyers for the properties we list.
Regulation
Since we operate principally through our subsidiaries in China, we are subject to and affected by laws, regulations, administrative determinations, court decisions and similar constraints that apply to business operations located in China.
China has enacted regulations governing Internet connection and the distribution of information via the Internet. Pursuant to Article 6 of the Revised Provisional Regulations Governing the Management of Chinese Computer Information Networks Connected to International Networks, individuals or entities operating computer networks within China, which are connected to the Internet and conduct international information exchange, must use the international access channels provided by the Ministry of Information Industry (“MII”) and obtain various licenses and approvals. Our relevant subsidiaries have secured the necessary licenses and approvals, and access the Internet through ChinaNet, an approved channel of MII.
The operation of our equity exchange will be largely dependent upon the development of China’s policies and laws relating to the transfer of private and state-owned equity. The transfer and management of state-owned equity are subject to the supervision of the Administrative Bureau of State-owned Assets, whereas the equity of privately-owned enterprises must be transferred in compliance with the Company Law and related regulations.
According to the Provisional Procedures on the Administration of the Transfer of State-owned Equity in Enterprises, all the transfers of state-owned equity must be carried out through duly authorized equity exchange centers. NSB and Xi’an Assets and Equity Exchange have secured the necessary licenses and approvals for their operations and qualify to transfer state-owned equity.
We work diligently to assure compliance with all applicable regulations which impact our business, including cooperating with the MII, the Ministry of Public Security and the Administrative Bureau of State-owned Assets. There can be no assurance, however, that additional regulations will not be enacted that might adversely affect our operations.
Employees
As of June 30, 2008, we employed 23 full-time employees consisting of 2 management executives and 21 administrative and clerical staff. None of our employees are members of any labor union, and we have never experienced any business interruption as a result of any labor disputes. We do not provide any special benefit or incentive programs for our employees. We believe that we enjoy good relations with all of our employees.
RISK FACTORS
In addition to other information in this Form 10-KSB, including many risks presented in our Management’s Discussion and Analysis, the following risk factors should be carefully considered in evaluating our business since it operates in a highly changing and complex business environment that involves numerous risks, some of which are beyond our control. The following discussion highlights a few of these risk factors, any one of which may have a significant adverse impact on our business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this 10-KSB, and the risks discussed in our other Securities and Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements.
We face significant risks, and the risks described below may not be the only risks we face. Additional risks that we do not know of or that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be harmed and the trading price of our common stock could decline.
We are restating several of our financial statements and may have other or future restatements.
On August 12, 2008, the Company’s current management team, following discussions with its Board of Directors and its auditors, concluded that the previously filed audited financial statements and other financial information as of and for the year ended June 30, 2007, issued with the Company’s Form 10-KSB filed with the Commission on October 26, 2007 should no longer be relied upon. In response to an inquiry from the Securities and Exchange Commission concerning the Company’s financial statements, the Company reexamined certain accounts which it has now determined should have been impaired. Impairment of these accounts is not temporary and expected to result in an increased loss for the fiscal year ended June 30, 2007 of $5,507,510 from the loss of $3,090,547 reported in the Annual Report, to a loss of $8,598,057.
Owing to the above mentioned impairment, the Company will restate the audited financial statements as of and for the year ended June 30, 2007 by filing amendments to the Form 10-KSB for the year ended June 30, 2007 and to the Form 10-QSB for the period ended December 31, 2007 and March 31, 2008 as soon as practicable.
Similarly, on October 14, 2008, the Company announced that its board of directors and its officers also concluded that, in the same context and for the same reasons, the Company must also file amendments to its quarterly reports for the periods ended September 30, 2007, December 31, 2007 and March 31, 2008.
In connection with these restatements, the Company is re-evaluating its procedures concerning long-life asset impairment, its disclosure and presentation criteria, and its internal controls over financial reporting. The Company intends to examine enhancements to its internal controls over financial reporting to provide reasonable assurance that errors of this type will not recur. In addition, the Company is examining the implementation of well-defined standards for long-life asset impairment. The Company expects to complete this reporting examination by December 31, 2008.
The above conclusions were reached in consultation with the Company’s Board of Directors and the Company’s independent registered public accounting firm, Albert Wong & Co. A copy of these disclosures was provided to Albert Wong & Co.
Our success depends on identifying and closing acquisitions of emerging and growing businesses in China.
Our success is largely dependent on our identifying good acquisition targets, negotiating and structuring transactions that are beneficial to us, closing those transactions, finding suitable management to operate those businesses and successfully operate and grow the businesses we acquire.
We must work cooperatively with governmental authorities.
We are engaged in business in a country with a planned economy heavily influenced by government activities and we must work cooperatively with a variety of national, federal, regional, state, provincial, and local government authorities and entities. The economy of China differs significantly from the economies of the “western” industrialized nations in such respects as structure, level of development, gross national product, growth rate, capital reinvestment, resource allocation, self-sufficiency, rate of inflation and balance of payments position, among others. Only recently has the Chinese government encouraged substantial private economic activities. The Chinese economy has experienced significant growth in the past several years, but such growth has been uneven among various sectors of the economy and geographic regions. Actions by the Chinese government to control inflation have significantly restrained economic expansion in the recent past. Similar actions by the Chinese government in the future could have a significant adverse effect on economic conditions in China and the results of operations of the Company.
If we deliver products with defects, our credibility will be harmed and the sales and market acceptance of our products will decrease.
Our product and services are complex and may at times contained errors, defects and bugs. If we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. We may agree to indemnify our customers in some circumstances against liability arising from defects in our products. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We carry product and information liability and errors and omissions insurance, but in the event that we are required to defend more than a few such actions, or in the event that we are found liable in connection with such an action, our business and operations may be severely and materially adversely affected.
We compete with large companies.
We operate in a highly competitive industry. Although we believe that some of our technology is unique, can be protected, and, if adopted, will confer benefits that will be otherwise unavailable for some time, we face very large competitors with greater resources who may adopt various strategies to block or slow our market penetration, thereby straining our more limited resources. We are aware of efforts by competitors to introduce doubt about our financial stability as we compete to make sales and win customers and business. Large competitors may also seek to hinder our operations through attempts to recruit key staff with exceptionally attractive terms of employment, including signing bonuses, or by offer of highly competitive terms to potential or newly acquired customers.
We will need to continue our product development efforts.
We believe that our market will be characterized by increasing technical sophistication. We also believe that our eventual success will depend on our ability to continue to provide increased and specialized technical expertise. There is no assurance that we will not fall technologically behind competitors with greater resources. Although we believe that we enjoy a lead in our product development, and are hopeful that our patents provide some protection, we will likely need significant additional capital in order to continue to enjoy such a technological lead over competitors with more resources.
If we are unable to protect our intellectual property, our competitive position would be adversely affected.
We may rely on patent protection, as well as trademark and copyright law, trade secret protection and confidentiality agreements with our employees and others to protect our intellectual property. Despite our precaution, unauthorized third parties may copy our products and services or reverse engineer or obtain and use information that we regard as proprietary. We have filed eleven patent applications with the United States Patent and Trademark Office and intend to file more. Six patents have been granted; however, we do not know if the remaining applications will be granted or whether we will be successful in prosecuting any future patents. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent, as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and third parties may infringe or misappropriate our patents, copyrights, trademarks and similar proprietary rights. If we fail to protect our intellectual property and proprietary rights, our business, financial condition and results of operations would suffer. We believe that we do not infringe upon the proprietary rights of any third party, and no third party has asserted an infringement claim against us. It is possible, however, that such a claim might be asserted successfully against us in the future. We may be forced to suspend our operations to pay significant amounts to defend our rights, and a substantial amount of the attention of our management may be diverted from our ongoing business, all of which would materially adversely affect our business.
We focus on the research and development of our proprietary technologies and the marketing of our first product.
We believe that these technologies are the basis for marketable commercial products. However, there can be no assurance of this, and it is possible that our proprietary technologies and products will have no commercial benefit or potential. In addition, from our inception to the present, we have not recognized any substantial operating revenues.
We depend on our key personnel and may have difficulty attracting and retaining the skilled staff we need to execute our growth plans.
Our success will be dependent largely upon the efforts of our management team. The loss of key staff could have a material adverse effect on our business and prospects. To execute our plans, we will have to retain current employees. Competition for highly skilled employees with technical, management, marketing, sales, product development and other specialized training is intense. We may not be successful in retaining such qualified personnel. Specifically, we may experience increased costs in order to retain skilled employees. If we are unable to retain experienced employees as needed, we would be unable to execute our business plan.
We may face rapid technological change.
The market for our products and services may be characterized by rapidly changing technologies, extensive research and the introduction of new products and services. We believe that our future success will depend in part upon our ability to continue to enhance our existing products and to develop, manufacture and market new products and services. As a result, we expect to continue to make a significant investment in engineering, research and development. There can be no assurance that we will be able to develop and introduce new products and services or enhance our initial products in a timely manner to satisfy customer needs, achieve market acceptance or address technological changes in our target markets. Failure to develop products and services and introduce them successfully and in a timely manner could adversely affect our competitive position, financial condition and results of operations.
If we experience rapid growth, we will need to manage such growth well.
We may experience substantial growth in the size of our staff and the scope of our operations, resulting in increased responsibilities for management. To manage this possible growth effectively, we will need to continue to improve our operational, financial and management information systems, will possibly need to create entire departments that do not now exist, and hire, train, motivate and manage a growing number of staff. Due to a competitive employment environment for qualified technical, marketing and sales personnel, we expect to experience difficulty in filling our needs for qualified personnel. There can be no assurance that we will be able to effectively achieve or manage any future growth, and our failure to do so could delay product development cycles and market penetration or otherwise have a material adverse effect on our financial condition and results of operations.
We could face information and product liability risks and may not have adequate insurance.
Our products may be used in connection with critical business applications. We may become the subject of litigation alleging that one or more of our products are ineffective or disruptive in our treatment of data, or with regard to critical business information. Thus, we may become the target of lawsuits from injured or disgruntled businesses or other users. In the event that we are required to defend more than a few such actions, or in the event that it is found liable in connection with such an action, our business and operations may be severely and materially adversely affected.
Future profitability is not guaranteed.
We have not recognized any substantial operating revenues to date. Assuming we can attract sufficient financing, and revenues increase, there is no assurance that our plans will be realized or that we will achieve break-even status or profitability in the future.
Changes to financial accounting standards may affect our results of operations and cause us to change business practices.
We prepare financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the SEC and various other bodies formed to interpret and create appropriate accounting principles. A change in those principles can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business. For example, accounting principles affecting many aspects of our business, including rules relating to equity-related compensation, have recently been revised. The Financial Accounting Standards Board and other agencies finalized changes to U.S. generally accepted accounting principles that required us, starting January 1, 2006, to record a charge to earnings for employee stock option grants and other equity incentives. We will have significant ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce net income or increase losses. In addition, since we historically used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive and therefore make it more difficult to attract and retain employees.
There is a limited market for our common stock.
Our common stock is not listed on any exchange and trades in the over-the-counter (the “OTC”) market. Additionally, one stockholder holds a majority of our stock. As such, the market for our common stock is limited and is not regulated by the rules and regulations of any exchange. Further, the price of our common stock and its volume in the OTC market may be subject to wide fluctuations. Our stock price could decline regardless of our actual operating performance, and stockholders could lose a substantial part of their investment as a result of industry or market-based fluctuations. Our stock trades relatively thinly. If a more active public market for our stock is not sustained, it may be difficult for stockholders to sell shares of our common stock. Because we do not anticipate paying cash dividends on our common stock for the foreseeable future, stockholders will not be able to receive a return on their shares unless they are able to sell them. The market price of our common stock will likely fluctuate in response to a number of factors, including but not limited to, the following:
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sales, sales cycle and market acceptance or rejection of our product;
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economic conditions within our industry;
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our failure to meet performance estimates or the performance estimates of securities analysts;
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the timing of announcements by us or our competitors of significant products, contracts or acquisitions or publicity regarding actual or potential results or performance thereof; and
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domestic and international economic, business and political conditions.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to and reporting on these assessments. If we fail to adequately maintain compliance with, or maintain the adequacy of, our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If we cannot favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment of the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive office consists of approximately 200 square feet of office space that is located at Suite 5204, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. The premises are leased from a related third party with free rental.
Our operating office in China consists of approximately 5,600 square feet of office space located at Suite 1506-09, Landmark, 4028 Jintian Road, Futian District, Shenzhen 518026, PRC. The premises are leased from an unrelated third party with rental payments and management fees of approximately $99,000 per year. This lease will expire in February 2011.
All of our office facilities are in good condition and we believe they are adequate to support our operations for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are a party to the following legal proceedings:
(1) Hainan Concord Financial Products Co., Ltd.
On December 11, 2004, the Company’s wholly-owned subsidiary, IMOT Information Technology (Shenzhen) Ltd. (“IMOT Technology”) entered into a stock exchange agreement and a profit guarantee agreement (respectively, the “Stock Swap Agreement” & “Profit Guarantee Agreement”) with Guangzhou Di Tai Communication Co. Ltd & Mr. Zai (collectively “Sellers”). The Stock Swap Agreement called for the Company to ultimately issue 5,000,000 shares of common stock in January 2005 in exchange for 80% of the issued and outstanding capital of Hainan Financial Products Development Co., Ltd (“Hainan Financial Products”). Under the Profit Guarantee Agreement, the Sellers guaranteed that the net profit after taxation of Hainan Financial Products for the year ended December 31, 2005 would not be less than Rmb5,000,000. On February 7, 2005, the Sellers received the share certificates of the 3,000,000 common stocks of the Company from IMOT Technology. In late 2006, IMOT Technology discovered that the profit requirement of Rmb5,000,000 of Hainan Financial Products had not met and Hainan Financial Products was a shelf company without any registered capital.
In accordance with the terms of Stock Swap Agreement, any dispute in a deadlock situation should be referred to an Arbitration tribunal in Shenzhen to be resolved. As such, IMOT Technology and the Company decided to refer the dispute (“the Dispute”) and apply to China International Economic and Trade Arbitration Commission, South China Sub-Commission in Shenzhen (“Arbitration Commission”). On December 20, 2006, Arbitration Commission approved the application. Under the application, IMOT Technology and the Company were named as joint applicants (“the Applicants”); and the Sellers together with Hainan Special Economic Zone Property Rights Exchange Centre and a securities-broker in Hainan province as respondents (“the Respondents”). The three orders sought under this arbitration include rescission of Share Swap Agreement and Profit Guarantee Agreement; return of 3,000,000 shares of common stock of the Company by the Sellers to the Applicants; and to have all the legal costs and other costs incurred in this arbitration to be reimbursed or born by the Sellers. The share certificate of the remaining 2,000,000 shares common stock is currently under the custody of IMOT Technology.
The Respondents at the same time also applied to a court in Haikou of the Hainan province to request that the Dispute be handled by the court. On April 29, 2007, this court ruled that the Dispute could be subject to its jurisdiction. IMOT Technology appealed to the Haikou Intermediate Court arguing that the dispute should be under the jurisdiction of the Arbitration Commission. On January 24, 2008, the Arbitration Commission had issued a verdict to state that the Stock Swap Agreement was invalid and the Respondents should return all IMOT shares to the Applicant.
(2) Hainan Special Economic Zone Property Rights Exchange Centre
Pursuant to an agreement (“the Agreement”) signed with a third party on December 16, 2003, IMOT Information Technology (Shenzhen) Ltd. (“IMOT Technology”) acquired 21% of the issued and outstanding capital of Hainan Special Economic Zone Property Rights Exchange Centre (“Hainan Exchange”).
In 2006, Hainan Exchange rejected the request of IMOT Technology to hold a general meeting for its shareholders, and Hainan Exchange also declined to provide any current financial information or reports. In addition, Hainan refused to fulfill certain obligations under the Co-operative Agreement. The Company is currently seeking legal advice as to those matters. The Company believes that Hainan Exchange has contravened its Articles of Association, and IMOT Technology has the right to sue under the current legislation.
(3) Shanghai Newray Photographic Equipment Co. Ltd
In prior years, IMOT Information Technology (Shenzhen) Ltd. (“IMOT Technology”) acquired 51% of the issued and outstanding capital of Shanghai Newray Photographic Equipment Co. Ltd (“Shanghai Newray”) from Mr. Tang who in turn acts as the trustee of IMOT Technology, holding shares in Shanghai Newray on behalf of IMOT Technology. On September 30, 2006, the shareholders in a special meeting passed a resolution (“the Resolution”) to take action to terminate the operation of Shanghai Newray. On November 2, 2006, Shanghai Newray set up a liquidation working team to take over the operations with one of its duties being to commence all the necessary procedures for the members’ voluntary liquidation.
Mr. Zhu, as the legal representative, manager and the executive director of Shanghai Newray, refused to comply with all the requests of the liquidation working team, resulting in delay of the liquidation procedures. On January 18, 2007, Mr. Tang took civil action under the Companies Law against Mr. Zhu. Under this action, Mr. Zhu Wei was requested to comply with the Resolution passed on September 30, 2006 to reimburse legal and other related costs of Rmb30,000 incurred by Mr. Tang for this case and also to bear all the court costs to be incurred.
On January 24, 2007, Shanghai Hongkou District Court accepted the case. Recently discovery was completed. However, IMOT could not contact Mr. Zhu. Consequently, the IMOT board of directors approved to write off the business of Shanghai Newray.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were put before our shareholders for a vote during the last quarter of our fiscal year.
PART II
ITEM 5.
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the National Association of Securities Dealers, Inc. Over-The-Counter Electronic Bulletin Board (the “OTC Bulletin Board”), and is traded under the symbol “IMOT”.
The following table represents the high and low bid prices for our common stock on the OTC Bulletin Board for each quarter during the last two fiscal years.
The above bid information is obtained from the “Finance” section of yahoo.com and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
As of September 25, 2008, there were approximately 616 holders of record of the Company’s common stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
We have never declared or paid any cash dividend on our common stock and do not expect to declare or pay any cash dividend in the foreseeable future.
In the fiscal year ended June 30, 2008, the Company issued common stock to various parties and redeemed common stock. The following transactions have not been reported by the Company in previous quarterly reports. The value of the common stock for each issuance was based on one of the following: the market price of the shares on the date of the transactions, the market price of the shares on the date the negotiations between the parties began or on the fair value of services received. The issuances were as follows:
On December 27, 2007 we redeemed 6,500,000 shares and 2,470,355 shares returned from the investment in Shanghai Fortune and Hi-Tech exchange respectively.
On June 16, 2008 we authorized the issuance of 881,950 shares and 6,000,000 shares of common stock with a value of $0.1258 per share to Alfredo Properties Limited for private placement and Rocky Wulianghai for bonus of services rendered for Intermost respectively. The stock was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. There was no general solicitation or advertising engaged in by the Company in making this offering, and the offerees and the parties they designated to receive the stock were accredited investors.
Equity Compensation Plan
On December 1, 2003 our Board of Directors adopted, and on January 28, 2004 our stockholders approved, the Intermost Corporation 2003 Equity Incentive Plan. As of June 30, 2008, no awards had been granted from the Plan.
Equity Compensation Plan Information (1)
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted average exercise
price of outstanding
options warrants and
rights
(b)
Number of securities
remaining available for
future issuance under the
equity compensation plan
(excluding securities
reflected in column (a)
(c)
Shareholder Approved
N/A
20,000,000
Not Approved by Shareholders
N/A
N/A
N/A
(1) Pursuant to the terms of the Intermost Corporation 2003 Equity Incentive Plan, awards may be granted for options to purchase common stock or for common stock.
ITEM 6.
ITEM 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Critical Accounting Policies and Estimates
Management’s discussion and analysis of results of operations and financial condition are based upon the Company’s consolidated financial statements. These statements have been prepared in accordance with the generally accepted accounting principles as used in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies rely upon assumptions, judgments and estimates and were used in the preparation of the Company’s consolidated financial statements:
Revenue Recognition
Revenues are recognized (i) with respect to services, at the time a project (or a milestone thereof) is completed and accepted by the customer, and (ii) with respect to products, at the time products are delivered to customers and collectability for such sales is reasonably assured. We have adopted Staff Accounting Bulletin No.101, Revenue Recognition (“SAB 101”) in our financial statements. SAB 101 provides in part further interpretive guidance for public companies on the recognition, presentation, and disclosure of revenues in financial statements. The adoption of SAB 101 did not have a material impact on our revenue recognition practices.
Accounts Receivable
We typically extend credit to our customers. From time to time, e-commerce solution services are provided under fixed-price contracts where the revenues and the payment of related receivable balances are due upon the achievement of certain milestones. Management estimates the probability of collection of the receivable balances and provides an allowance for doubtful accounts based upon its judgment in assessing the realization of these receivable balances taking into account aging, historical experience, the customer’s financial condition and general economic conditions.
Long-lived assets and goodwill
The Company periodically evaluates the carrying value of long-lived assets held or used whenever events and circumstances indicate that the carrying value of the asset may no longer be recoverable. An impairment loss, measured on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying value of the assets.
We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using discounted cash flows approach. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.
Overview
We believe that the People’s Republic of China represents an exciting emerging world market whose role in the global economy is increasing steadily. China’s economic growth rate, measured by its gross domestic product, has consistently been higher than 7% over the past 10 years. This economic growth is attributable to many factors, including investment in the country’s infrastructure, increased privatization of businesses and an abundant source of labor. Currently, we offer products and services to businesses and consumers located primarily in China. Our plan is to take advantage of China’s economic growth to expand our existing businesses and, possibly, in the future, to sell our products and services outside of China. We also have begun to acquire diverse businesses that are not dependent on, or directly related to, each other. We believe that diversification is a good hedge against the collapse of a single industry, such as the global collapse of the technology industry that occurred in 2000. We expect that any acquisitions we make will improve our financial condition, although we cannot guarantee any such result.
Currently our revenues are generated primarily by our subsidiaries, ChinaE and ChinaE Tech both of which distributes licenses for Chinese language translation software and offer web design and hosting services.
In response to the economic recovery, we began to diversify our business, so that we will no longer be dependent on one market for revenue. Generally, the issuance of our common stock represents some or all of the purchase price we pay for an acquired business. We believe that the continued active trading of our common stock will be important to the principals of target companies and future acquisitions may be dependent on the active trading of our common stock. However, our common stock has not been actively traded and, if our common stock continues to trade with limited volume and at current levels we may not be able to make acquisitions as planned.
During the fiscal year ended June 30, 2008 we incurred a net operating loss of $1,557,054. Our auditor, Albert Wong & Co., CPA, has issued a “going concern” opinion for our financial statements as of June 30, 2008.
Results of Operations
Following is summary financial information reflecting our operations for the periods indicated.
Year Ended June 30, 2008 Compared to Year Ended June 30, 2007
Net revenues.
Net revenues for the year ended June 30, 2008 decreased by $4,654K1, or 99%, to $26K from $4,680K for the year ended June 30, 2007.
1 As used in this Annual Report on Form 10-KSB, the letter “K” appearing immediately after a dollar amount denotes rounding to the nearest $1,000; as an example, $380,499 may be rounded to “$380K”
Net revenues during fiscal 2008 were derived principally from e-commerce solutions. Net revenues during fiscal 2007 were derived principally from e-commerce solutions, sales of photographic equipment and VOIP services. The term “e-commerce solutions” includes web site design and development and web hosting.
The following table reflects the total net revenues and percentage of net revenues by major category for the periods indicated:
Total revenues derived from e-commerce solutions decreased by $54K, or 67%, to $26K in fiscal 2008 as compared to $80K in fiscal 2007. Sales of photographic equipment decreased by $2K, or 100%, to $0K in fiscal 2007 as compared to $2K in fiscal 2007. Sales of VOIP services decreased by $4,599K, or 100%, to $0K in fiscal 2008 as compared to $4,599K in fiscal 2007.
The decrease in total net revenues and the character of those sales was primarily attributable to management’s decision to revise the Company’s plan of operation to develop our business beyond the market for Internet products and services as well as to the recovery of the economy of China.
Costs of Revenues.
Costs of revenues consist principally of salaries for computer network technicians, depreciation, and other costs including travel, employee benefits, office expenses and related expenses allocated to the engineering and technician staff.
The following table reflects the principal components of costs of revenues and the percentage of net revenues represented by each component for the periods indicated:
Compared to the 2007 fiscal year, the total costs of revenues for the 2008 fiscal year decreased by $4,540K, or 99%, to $68K. The decrease in costs of revenues was due to the exclusion of cost from digital security system, cost containment effort implemented by management and a deadline in sales. The decrease in salaries was due to the decrease of engineer and technician to develop the equity platform in the PRC. The principal components of costs of revenues during the 2008 fiscal year were costs associated with support of the engineering and technician staff, engineer and technician salaries, and depreciation of equipment utilized in connection with services.
Selling, General and Administrative Expense.
Selling, general and administrative expense (“SG&A”) consists principally of (1) sales commissions, advertising, trade show and seminar expenses, and direct-field sales expense, (2) salaries for administrative and sales staff, (3) corporate overhead, and (4) allowances for bad and doubtful accounts. The following table reflects the principal components of SG&A and the percentage of net revenues represented by each component for the periods indicated:
The principal components of SG&A during the 2008 year were sales and marketing salaries and commissions, other marketing expenditures, administrative salaries and benefits, and other corporate expenses, which includes legal and professional fees, general office expenses, traveling expenses, general employee benefit expense, depreciation consultancy fees.
For the 2008 fiscal year, SG&A increased by $549K, or 54%, to $1,566K as compared to $1,017K for the 2007 fiscal year. Sales and marketing salaries and commissions decreased 24% during the 2008 fiscal year, to $42K, as compared to $56K for the 2007 fiscal year. During the 2008 fiscal year, administrative salaries increased by $107K or 65% to $275K during the 2008 fiscal year, as compared to $166K in the 2007 fiscal year. Other corporate expense increased during the 2008 fiscal year, by $519K or 78% to $1,185K, as compared to $666K in the 2007 fiscal year. The increase in SG&A was principally attributable to the payment to Mr. Rocky Wulianghai in term of IMOT shares as a one-time bonus for services already rendered to IMOT.
Minority Interest.
We reported a minority interest in our losses of $1K for the 2008 fiscal year, reflecting the proportionate interest in the losses of Intermost Focus Advertising Company Ltd. owned by other parties as compared to a minority interest in an earnings of $17K for the 2007 fiscal year, reflecting the ownership of third parties in Shanghai Newray and Hainan Concord.
Liquidity and Capital Resources
To date, we have funded our operations with cash from our operating activities, sales of our securities and by using our common stock to make acquisitions and purchases.
At June 30, 2008 we had cash and cash equivalents of $640K and working capital of $1,747K as compared to $530K of cash and cash equivalents and $2,553K of working capital as of June 30, 2007.
Net cash used in operating activities totaled $1,300K during the 2008 fiscal year as compared to $1,848K of cash in operating activities used during the 2007 fiscal year. Cash generated from operating activities was partially offset by non-cash charges, including depreciation expense in the amount of $31K and amortization of intangible assets in the amount of $6K.
Net cash provided by investing activities was $134K for the 2008 fiscal year while net cash used in investing activities was $1,390K for the 2007 fiscal year. Funds used in investing activities consisted of addition of office equipment, increased in short-term investment and deposit of investment.
Net cash provided by financing activities was $555K for the 2008 fiscal year while net cash used in financing activities was $2,174K for the 2007 fiscal year. Funds provided by financing activity were the net proceeds from the issuance of common stock during fiscals 2008 and 2007.
We had no long term debt as of June 30, 2008. Except as otherwise described herein, we have no plans to make any major capital expenditures during the next 12 months and we are not aware of any trends or uncertainties that could affect sales of our products. We do not have any off balance sheet arrangements.
We have implemented various cost management measures to reduce our overhead. The Company will likely need to borrow money or obtain additional equity financing in order to sustain operations. At present, we have no commitments for funding and there is no assurance that funding will be available to us, or that any such funding would be on acceptable terms. If we need financing and cannot obtain it, we may be required to severely curtail, or even cease, our operations.
Our operating results have been, and will continue to be, affected by a wide variety of factors that could have a material adverse effect on revenues and profitability during any particular period. Some of these factors include:
·
Our ability to successfully implement our business plan;
·
Whether or not we will be able to obtain the additional capital necessary to support our operations;
·
Whether or not we will find joint venture prospects or acquisition prospects with which to enhance our business;
·
Whether or not we can successfully integrate acquisitions that we make into our business;
·
The level and rate of acceptance of our products and services by the Chinese people;
·
Continued growth in the use of the Internet in China;
·
Entry of new competition (including established companies from outside China and companies with substantially greater resources) into our market;
·
Fluctuations in the level of orders for services delivered in a quarter;
·
Rescheduling or cancellation of orders by customers;
·
Competitive pressures on selling prices;
·
Changes in product, service or customer mix;
·
Rapid changes in technology, which result in our technology becoming obsolete;
·
Availability and cost of computer technicians;
·
Loss of any strategic relationships;
·
Loss of our largest customers;
·
Our ability to introduce new products and services on a timely basis;
·
New product and service introductions by our competitors;
·
Fluctuations in exchange rates, and
·
Adverse changes in the general economic, social or political conditions in the People’s Republic of China.
ITEM 7.
ITEM 7.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: The board of directors and stockholders of
Intermost Corporation
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Intermost Corporation and subsidiaries as of June 30, 2008 and 2007 and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Intermost Corporation as of June 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Hong Kong
Albert Wong & Co.
October [ ], 2008
Certified Public Accountants
[Missing Graphic Reference]
INTERMOST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2008 AND 2007
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
INTERMOST CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2008 AND
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
INTERMOST CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2008 AND
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2008 AND
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
The accompanying notes are an integral part of the financial statements
ITEM 8.
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
After receiving certain queries from SEC on April 21, 2008 regarding the financial statements for the year ended June 30, 2007 and being unable to contact Samuel H. Wong & Co., LLC, CPA, PC, the Company dismissed Samuel H. Wong & Co., LLC, CPA, PC on May 23, 2008 and engaged Albert Wong & Co., CPA to serve as its registered independent auditor and to restate the financial statements of Company for the year ended June 30, 2007 and audit future financial statements.
ITEM 8A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to record, process, summarize and disclose this information within the time periods specified by the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by management, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective to ensure that we are able to record, process, summarize and report the information we are required to disclosure in the reports we file with the SEC within the required time periods.
Management is responsible for establishing and maintaining adequate internal control over financing reporting as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of June 30, 2008. We concluded that our internal control over financial reporting was effective as of June 30, 2008.
Change in Internal Controls Over Financing Reporting
In connection with certain recent restatements, the Company is re-evaluating its procedures concerning long-life asset impairment, its disclosure and presentation criteria, and its internal controls over financial reporting. The Company intends to examine enhancements to its internal controls over financial reporting to provide reasonable assurance that errors of the type recently encountered will not recur. In addition, the Company is examining the implementation of well-defined standards for long-life asset impairment. The Company expects to complete this reporting examination by December 31, 2008.
Except as set forth above, during the year ended June 30, 2008 there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 8B
OTHER INFORMATION
None.
PART III
ITEM 9.
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Identification of Directors, Executive Officers and Certain Significant Employees
The following table sets forth certain information regarding the directors and executive officers of the Company.
Name
Age
Position
Fred Peck
Director
Chia Hsun Wu
Director
Hiroshi Shinohara
Director
Rocky Wulianghai
President, Chief Executive Officer and Director
Thomas Lee
Chief Financial Officer
There are no family relationships among any of the directors or officers of the Company.
None of our directors or executive officers has, during the past five years,
·
had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,
·
been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding,
·
been subject to any order, judgment, or decree not subsequently reversed, suspended or vacated of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or
·
been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Business Experience
Fred Peck has served as a director of the Company since December 6, 2005. Mr. Peck is a funds manager, transaction superintendent and vice president of Boston Bank Taiwan Branch. Over 15 years experience in portfolio investment, risk investment, capital management, fundraising, acquisition and merger, project fund raising privatization.
Chia Hsun Wu has served as a director of the Company since November 3, 2006. Mr. Wu has extensive management and industrial experience and is a graduate from Oriental Institute of Technology. Mr. Wu has conducted scientific research at the National Taiwan University of Science and Technology. Mr. Wu is currently the Managing Director of FFBC Holdings Group.
Hiroshi Shinohara has served as a director of the Company since February 18, 2008. Mr. Shinohara graduated from Osaka University, with extensive experience in corporate financial analysis, business in merging and acquisition. Mr. Shinohara is currently the Managing Director of FFBC Management Co., Ltd., Japan.
Rocky Wulianghai has served as a director of the Company since December 6, 2005. Mr. Wulianghai was appointed as President and Chief Executive Officer on June 13, 2007. Mr. Wulianghai graduated from Michigan University with a Masters Degree in electronic engineering. Mr. Wulianghai is an experienced manager in capital management, a well-known writer in finance and was once a journalist, specifically editor-in-chief and a general editor in Taiwan Television. Mr. Wulianghai served as General Manager of Asia Capital Management Inc. (1998) and as director of FFBC Holdings Group (2001).
Thomas Lee was appointed as Chief Financial Officer of the Company on June 13, 2007. Mr. Lee was Chief Financial Officer of Management Recruiters International from June to September 2002. Mr. Lee simultaneously worked on a project for Superstore International Ltd. which began in September 2002 and ended in August 2003. From September 2003 to August 2004, Mr. Lee established a public relations company and reviewed a China architecture and re-design project. In 2004, Mr. Lee rejoined Management Recruiters International as Chief Financial Officer. In the same year, he joined the Ladies Recreations Club (Hong Kong) as Financial Consultant and Bund 18 Real Estate Management, Ltd (Shanghai) where he continues to serve as the Group Financial Officer.
Term of Office
All directors named above will serve until the next annual meeting of the Company’s shareholders and until their successors are elected and qualified. Officers will hold their positions at the pleasure of the Board of Directors.
Compliance With Section 16(a) of Exchange Act
Section 16(a) of the Securities Exchange Act requires our directors, executive officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission. Directors, executive officers and persons who own more than 10% of our common stock are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file.
The Company believes that, with respect to its fiscal year ended June 30, 2008, none of the Company’s directors and officers and none of the persons known to the Company to own more than 10% of the Company’s common stock, were required to file beneficial ownership reports with the Securities and Exchange Commission and no such reports were filed.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
For the 2008 fiscal year, all executive officers received their salaries from the Company and Mr. Rocky Wulianghai received 6,000,000 restricted shares in IMOT as a one-time bonus for services already rendered to IMOT. Executive officers include our current Chief Executive Officer and President, Rocky Wulianghai, and Chief Financial Officer, Thomas Lee.
The following table sets forth information concerning cash and non-cash compensation paid or accrued to our executive officers during the past fiscal year:
Summary Compensation Table
The amounts in the table below are calculated as of June 30, 2008
Name and
Principal
Position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Stock
awards
($)
(e)
Option Awards
($)
(4)
(f)
Non-Equity
Incentive Plan
Compensation
($)
(g)
Non-Qualified
Deferred
Compensation
Earnings
($)
(h)
All Other
Compensation
($)
(i)
Total
($)
(j)
Rocky Wulianghai,
CEO and
President (1)
41,230
754,800
796,030
Thomas Lee,
CFO (2)
107,199
107,199
(1) Mr. Rocky Wulianghai was appointed as Director of the Company on December 6, 2005 and Chief Executive Officer and President of the Company on June 13, 2007.
(2) Mr. Thomas Lee was appointed as Chief Financial Officer of the Company on June 13, 2007.
Director Compensation Table
The amounts in the table below are calculated as of June 30, 2008.
Name
(a)
Fees Earned
or Paid in
Cash ($)
(b)
Stock
Awards ($)
(c)
Option Awards ($)
(d)
Non-Equity
Incentive Plan
Compensation ($)
(e)
Nonqualified
Deferred
Compensation
Earnings
(f)
All Other
Compensation
($)
(g)
Total ($)
(h)
Rocky Wulianghai
41,230
754,800
796,030
Director’s Compensation
The Company reimburses its directors for out-of-pocket expenses incurred on behalf of the Company.
Other Compensation and Employment Arrangements
The Company has adopted and the stockholders have approved the Intermost Corporation 2003 Equity Incentive Plan. The following discussion is qualified in its entirety by the terms and provisions of the Plan.
The Plan authorizes awards of options, awards of stock (“Stock Award”) and the granting of bonus stock (“Stock Bonus”). Persons eligible to receive awards under the Plan include the Company's employees, officers and directors and its consultants, independent contractors and advisors. As of June 30, 2005, all of the Company’s employees, officers and directors were eligible to receive awards under the Plan. The number of persons covered by the Plan may increase if we add additional employees (including officers) and directors. As of the date of this Annual Report, no awards have been granted from the Plan.
The Company’s Board of Directors administers the Plan. For purposes of this discussion, the body administering the Plan will be referred to as the Administrator. The Administrator has the authority to determine, at its discretion, the number and type of awards that will be granted, the recipients of the awards, any exercise or purchase price required to be paid, when options may be exercised and the term of option grants. Awards under the Plan are not defined as to any group. The term of the Plan is 10 years from the date the Plan was adopted by the Board of Directors. We have reserved 20,000,000 shares of our common stock for awards to be made under the Plan.
The exercise price for stock options granted to officers and directors must be the fair market value of the common stock on the date of grant. The exercise price for stock options granted to eligible persons other than officers and directors may not be less than 85% of the fair market value of the common stock on the date of grant. The term of an option may not exceed 10 years.
A Stock Award is an offer by the Company to sell to an eligible person shares of common stock that may or may not be subject to restrictions. Stock Awards granted to officers and directors must be granted at the fair market value of the common stock on the date of the award. Stock Awards granted to eligible persons who are not officers or directors may not be granted at less than 85% of the fair market value of the common stock on the date of the award. Stock Awards may be subject to vesting conditions, as determined by the Administrator.
A Stock Bonus is a grant of shares that may be awarded to an eligible person. A Stock Bonus may be subject to vesting conditions, as determined by the Administrator. A Stock Bonus may be awarded for any reason determined by the Administrator, including, but not limited to, extraordinary services rendered to the Company by an eligible person, as an award for performance achieved by the Company or upon satisfaction of performance goals by the eligible person.
In the United States, a recipient will not recognize any taxable income at the time an option is granted. However, upon exercise of an option, the recipient will include in income as compensation an amount equal to the difference between the fair market value of the shares on the date of exercise and the recipient's exercise price. The included amount will be treated as ordinary income by the recipient and may be subject to withholding. Upon resale of the shares by the recipient, any subsequent appreciation or depreciation in the value of the shares will be treated as capital gain or loss. There is no tax consequence to the Company as a result of either the grant or the vesting of stock options.
ITEM 11.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Common Stock
The following table is furnished as of June 30, 2008, to indicate beneficial ownership of shares of the Company’s common stock by (1) each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company’s common stock, (2) each director and named officer of the Company, individually, and (3) all officers and directors of the Company as a group.
Class of Stock
Name and Address of
Beneficial Owner1
Number of Shares
Beneficially Owned
Percent of
Class
Common
Alfredo Properties Limited2
20,881,950
9.79%
Common
First Core Capital Finance Limited2
22,000,000
10.31%
Common
First Federal Holdings Limited2
40,000,000
18.75%
Common
Magnate Trading Services Limited2
6,666,000
3.13%
Common
Piaster Assets Inc.
6,666,000
3.13%
Common
Original Group Holdings Limited2
6,668,000
3.13%
Common
Rocky Wulianghai3
6,000,000
2.81%
(1)
Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of each person or group.
(2)
Fred Peck is director and shareholder of Alfredo Properties Limited and may be deemed to be the beneficial owner of the share held by Alfredo Properties Limited. During 2008, Mr. Peck purchased 881,950 restricted shares in IMOT, which shares are held in name of Alfredo Properties Limited.
(3)
Rocky Wulianghai is the CEO and president of the Company. During 2008, Mr. Wulianghai received 6,000,000 restricted shares in IMOT as a one-time bonus for services already rendered to IMOT.
Equity Compensation Plan Information
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
Equity compensation
plans (excluding
securities reflected in
column (a))
(c)
Equity compensation
plans approved by
security holders
Not applicable
20,000,000
Equity compensation
plans not approved by
security holders
Not applicable
Total
Not Applicable
20,000,000
ITEM 12.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
No directors, executive officers or immediate family members of such individuals were engaged in transactions with us or any of our subsidiaries during the fiscal years ended June 30, 2006, June 30, 2007 and June 30, 2008. Furthermore, we have no “interlocking” relationships in which any of our executive officers are a member of the board of directors of another entity whose executive officers are a member of our Board of directors.
ITEM 13.
ITEM 13.
EXHIBITS AND REPORTS ON FORMS 8-K
(a)
Exhibits
Exhibit
Number
Description of Exhibit
2.1
Articles of Merger (1)
3.1
Articles of Incorporation (1)
3.2
Bylaws (1)
10.1
Cooperative Agreement re: formation of Jiayin E-Commerce joint venture (2)
10.2
Agreement Regarding Transfer of Properties on 38th Floor, Guomao Building (3)
10.3
Shareholding Transfer Agreement dated May 23, 2003 between IMOT Information Technology (Shenzhen) Ltd. and Shanghai Newray Business Development Co., Ltd. (4)
10.4
Share Transfer Agreement among IMOT Information Technology (Shenzhen) Ltd., Shenzhen Golden Anke Technology Co. Ltd., Intermost Corporation, Tu Guoshen and Li Zhiquan (5)
10.5
Sale and Purchase Agreement among IMOT Information Technology (Shenzhen) Ltd., Shanghai Fortune Venture Limited, North Shanghai Branch of Shanghai Technology Property Right Exchange Center and Intermost Corporation (6)
10.6
Distributorship Agreement dated November 28, 2002 between KanHan Technologies Limited and ChinaE.com Information Technology Ltd. (7)
10.7
Intermost Corporation 2003 Equity Incentive Plan (8)
10.8
Joint Venture Agreement among Intermost Corporation and Entities and/or Individuals Collectively Referred to as “Investors.”*
Code of Ethics (9)
Letter on Change in Certifying Accountant (10)
Significant Subsidiaries *
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a)*
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a)*
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
(1)
Incorporated by reference to the respective exhibits filed with the Registrant’s 10-KSB Amendment filed with the SEC on October 15, 2004
(2)
Incorporated by reference to the respective exhibits filed with Registrant’s Registration Statement on Form 10-SB (Commission File No. 0-30430).
(3)
Incorporated by reference to the respective exhibits filed with the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000.
(4)
Incorporated by reference to the exhibit filed with the Registrant’s Current Report on Form 8-K filed with the SEC on June 9, 2003.
(5)
Incorporated by reference to the exhibit filed with the Registrant’s Current Report on Form 8-K filed with the SEC on August 17, 2004.
(6)
Incorporated by reference to the exhibit filed with the Registrant’s Current Report on Form 8-K filed with the SEC on April 26, 2004.
(7)
Incorporated by reference to the exhibit filed with the Registrant’s Current Report on Form 8-K filed with the SEC on February 14, 2003.
(8)
Incorporated by reference to the exhibit filed with the Registrant’s Proxy Statement filed with the SEC on January 6, 2004.
(9)
Incorporated by reference to the exhibit filed with the Registrant’s 10-KSB Amendment filed with the SEC on October 25, 2004.
(10)
Incorporated by reference to the exhibit filed with the Registrant’s Current Report on Form 8-K filed with the SEC on March 8, 2004.
*
Filed herewith.
(b) Reports on Form 8-K
On October 30, 2007 the Registrant filed a Current Report disclosing the resignation of Mr. Shim Yang from the board as director, effective as of October 25, 2007.
On February 21, 2008 the Registrant filed a Current Report disclosing pursuant to a Special Shareholders Meeting, the amendments of Bylaws to reduce the number of directors, within an authorized range of directors of three to seven, from four to seven, effective as of February 18, 2008, and also, disclosing the departure of Wilbert Kam, Catalina Chan and Deng Xiang Xiong from the board of directors and election of Hiroshi Shinohara as director, effective as of February 21, 2008.
On May 23, 2008 the Registrant filed a Current Report disclosing the dismissal of Samuel H. Wong & Company, LLP and the engagement of Albert Wong & Company, LLP as the Company’s independent accountant, effective as of May 23, 2008.
On August 15, 2008 the Registrant filed a Current Report disclosing that the Registrant approved a settlement agreement (the “Settlement Agreement”) by and among the Company, IMOT Information Technology (Shenzhen) Co., Ltd., Shenzhen Inter-Anke Digital Technology Co., Ltd. (“Anke”), and ChinaE.com Equity Platform Holding (Group) Co., Ltd., effective on August 11, 2008. The Settlement Agreement provides for (i) Anke to pay to the Company the sum of USD$1,000,000, (ii) the Company to transfer to Anke all of the shares of stock representing the Company’s 49% ownership interest in Anke, and (iii) a termination of the Share Transfer Agreement by among the Company and Anke executed March 31, 2004, pursuant to which the Company initially acquired the Anke shares.
On August 15, 2008 the Registrant filed a Current Report disclosing certain material impairments of certain investment and long-lived assets and the non-reliance on its audit report for the year ended June 30, 2007.
On August 13, 2008 the Registrant filed a Current Report disclosing the dismissal of Gruber & Company, LLC as the Company’s independent accountant, effective on May 15, 2007.
On October 14, 2008 the Registrant filed a Current Report therein disclosing that it had concluded that, in the same context and for the same reasons as the prior nonreliance and restatements, the Company would amend its quarterly reports for the periods ended September 30, 2007 and March 31, 2008, and also disclosing that the Registrant had moved its principal executive offices to: Suite 5204, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during the fiscal years ended June 30, 2007 and June 30, 2006 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered.
* Audit fee for fiscal years ended June 30, 2008 and June 30, 2007 were accrued to the auditors, Albert Wong & Co., CPA.
Documents filed as part of this report:
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES AND EXHIBITS
ALBERT WONG & CO.
CERTIFIED PUBILC ACCOUNTANTS
7th Floor, Nan Dao Commercial Building
359-361 Queen’s Road Central
Hong Kong
Tel : 2851 7954
Fax: 2545 4086
ALBERT WONG
B Soc., Sc., LL.B., P.C.LL., Barrister-at-law, C.P.A.(Practising).
To:
The board of directors and stockholders of
Intermost Corporation
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Intermost Corporation and subsidiaries as of June 30, 2008 and 2007 and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Intermost Corporation as of June 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Hong Kong
Albert Wong & Co.
October [ ], 2008
Certified Public Accountants
INTERMOST CORPORATION
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2008 AND 2007
(Stated in US Dollars)
See accompanying notes to consolidated financial statements
INTERMOST CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT JUNE 30, 2008 AND 2007
(Stated in US Dollars)
See accompanying notes to consolidated financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
See accompanying notes to consolidated financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
See accompanying notes to consolidated financial statements
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
INTERMOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
See accompanying notes to consolidated financial statements
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Intermost Corporation (hereinafter referred to as the “Company”, including its subsidiaries and associated companies when the context so requires) was originally incorporated in the State of Utah on March 6, 1985 under the name Utility Communications International, Inc. The Company changed its name from Utility Communications International, Inc. to Intermost Corporation on October 23, 1998. In February 2003, the Company re-domiciled from the State of Utah to the State of Wyoming.
On October 23, 1998, the Company acquired a 100% interest in Intermost Limited ("IL"), a company incorporated in the British Virgin Islands, by issuing 4,970,000 shares of its common stock with a par value of US$0.001 per share (after the redenomination of par value and a stock split) to the shareholders of IL.
The acquisition of IL by the Company was treated as a reverse acquisition since IL was the continuing entity as a result of the exchange reorganization.
The Company is engaged in providing, directly and through its subsidiaries and associated companies, business portal and e-commerce solutions in the People’s Republic of China (the "PRC" or "China"). The Company's fiscal year-end is June 30.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Method of Accounting
The Group maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The consolidated financial statements and notes are representations of management. Accounting policies adopted by the Group conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of consolidated financial statements, which are compiled on the accrual basis of accounting.
(b)
Principles of Consolidation
The consolidated financial statements include the accounts of Intermost Corporation (the Company) and its eleven subsidiaries (of which three were totally impaired), two associate companies (of which one was totally impaired) and one affiliated company, constituting the group. Significant inter-company transactions have been eliminated in consolidation. The consolidated financial statements include 100% of the assets and liabilities of these majority-owned subsidiaries, and the ownership interests of minority investors are recorded as minority interests.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b)
Principles of Consolidation (Continued)
The Company’s subsidiaries and affiliated companies and their principal activities as of June 30, 2008 are summarized as follows:
Name
Place of
incorporation of organization
Percentage of
Equity Interest Attributable to the Company
Principal Activities
Intermost Limited (“IL”)
British Virgin Islands
100%
Investment holding
ChinaE.com E-Commerce Co. Ltd. (Formerly known as China E.com Information Technology Ltd. (“CECITL”))*
PRC
100%
Business portal and
e-commerce solutions
IMOT Information Technology (Shenzhen) Ltd. (“IITSL”)*
PRC
100%
Investment holding
ChinaE.com Investment Consultants (Shenzhen) Company Ltd. (“CECICSL”)**
PRC
100%
Inactive
Intermost (H.K.) Limited (“IHKL”)
Hong Kong
100%
Inactive
Shenzhen Bank Union & Jiayin E-commerce Company Ltd. (“SBUJE”)**
PRC
55.30%
Inactive
Intermost Focus Advertising Company Ltd.(“IFACL”)**
PRC
90%
Inactive
Shanghai Newray Photographic Equipment Co., Ltd. (“SNPE”)**
PRC
51%
Inactive
ChinaE.com Technology (Shenzhen) Ltd.(“CECTSL”)*
PRC
100%
Business postal and
e-commerce solutions
Hainan Concord Financial Products Development Co., Ltd. (“HCFPDCL”)**
PRC
80%
Inactive
Shenzhen International Hi-Tech Property Right Exchange Centre (“SIHTPREC”)***
PRC
15%
Private equity exchange
Golden Anke (GATL) ***
PRC
49%
Inactive
Hainan Special Economic Zone Property Right Exchange Center (PREC)***
PRC
21%
Private Property Right Exchange
Leader Palace (LP)
British Virgin Islands
100%
Inactive
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b)
Principles of Consolidation (Continued)
* CECITL, IITSL and CECTSL are wholly foreign owned enterprises established in the PRC to be operated for a period of 10 years until 2008. CECITL has changed its name into Chinae.com E-Commerce Co. Ltd. and extended the operating period until 2018.
** SBUJE, IFACL, SNPE, HCFPDCL and CECICSL are equity joint ventures established in the PRC to be operated for a period of 10 years until 2009, 2010, 2013, 2015 and 2026 respectively. They are subsidiaries of the Company and their operations are consolidated into the Company's financial statements. The investment of SBUJE was totally impaired at Sept 30, 2007 and the investments in SNPE and HCFPDCL were totally impaired at June 30, 2008.
*** PREC is equity joint venture established in the PRC to operate for a period of years until 2033. PREC is associated companies of the Company and is accounted for under the equity method of accounting. SIHTPREC is an affiliated company and is accounted for under the cost method. On the restated June 30, 2007 financial statements, the investment of GATL was totally impaired.
The Company owns certain of its subsidiaries through trusts that were created by a Declaration of Trust executed by Huang Liqiong and Jun Liang in February 2000. The trusts were created by, and therefore are revocable by, IL. Accordingly, IL consolidates the operations of CECITL since it is the beneficial owner of a majority of the outstanding interests and, through its ability to revoke the trusts, retains control of these interests.
(c)
Use of estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
(d)
Economic and political risks
The Company’s operations are mainly conducted in the PRC and Taiwan (ROC). Accordingly, the Company’s business, financial condition and results of operations in the PRC and Taiwan may be influenced by the political, economic and legal environment in the PRC and Taiwan, and by the general state of the PRC and Taiwan economy.
The Company’s major operations in the PRC and Taiwan are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC and Taiwan, and by changes in government administration, governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e)
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts only in the PRC, Taiwan and Hong Kong. The Company does not maintain any bank accounts in the United States of America.
(f)
Restricted cash
Restricted cash represents time deposit accounts in Mega International Commercial Bank under one year Performance Guarantee Contract between Innocom Telecom Holdings and Leader Palace International Limited to secure the performance of Innocom as a service provider to Chunghwa Telecom Co. Ltd. The contract was ended at April 9, 2008 and renewed another year to April 9, 2009.
(g)
Account receivable
Accounts receivable is carried at the net invoiced value charged to customer. The Company records an allowance for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of future performance.
(h)
Inventories
Inventories are raw materials which are stated at the lower of weighted average cost or market value. As of June 30, 2008, no inventory was recorded.
(i) Investments
The non-marketable equity security investments are presented at historical cost because the Company does not have significant influence over the underlying investments. These investments are subject to a periodic impairment review. To the extent any impairment is considered other-than-temporary, the investment is written down to its fair value and the loss is recorded as interest income and other, net. See Note 14 for impairment of investment.
(j)
Property and equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
Computer equipment
years
Motor vehicles
years
Furniture and office equipment
years
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Property and equipment (Continued)
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
(k)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis. See Note 5 for goodwill impairment details.
(l)
Accounting for the impairment of long-lived assets
Impairment of Long-Lived Assets is evaluated for impairment at a minimum on an annual basis whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Company's average cost of capital.
See Note 4 for impairment of deposit of investment and Note 14 for impairment of investment in associated company.
(m)
Associated Company
An associated company is a business enterprise in which the Company owns between 20% and 50% of the equity capital, and does not have direct or indirect or joint control, and therefore, has only limited ability to participate in financial and operating policy decisions.
The Company's investment in associated companies is accounted for under the equity method of accounting, whereby the investment is initially recorded at cost and the carrying amount is adjusted thereafter for the post acquisition change in the Company's share of the associated company's results of operations. See Note 14 for investment in associated company impairment details.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n)
Revenue recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”. The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value-added tax laws have been complied with, and collectability is probable.
Revenues from the sale of photographic equipment and digital security imaging system are recognized from the invoiced value of the goods supplied to customers. Revenues are recognized upon delivery of goods and passage of title to customers.
Revenues from the sale of VOIP services are recognized upon the services provided and invoices sent out to customers.
Revenue from web-site development contracts is recognized based on the terms of the contract. The Company uses either the percentage of completion when the contract is long-term or the completed contract method when the contract is short-term to recognize such revenue. Contracts are short-term in nature and require acceptance by the customer pursuant to the respective contracts are accounted for under the completed contract method. Revenues are allocated to the elements of the contract based on the fair values of the elements. Provisions for estimated contract losses are recognized in the year the loss becomes probable and can be reasonably estimated.
Revenue from maintenance contracts is recognized on a straight-line basis over the term of the maintenance contract, generally twelve months. The unearned portion of maintenance revenue is classified as deferred revenue and amortized over the life of the contract.
(o)
Stock compensation
The Company may periodically issue shares of common stock for services rendered or for financing costs. Such shares are valued based on the market price of the shares on the transaction date.
The Company may periodically issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.
The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which establishes a fair value method of accounting for stock-based compensation plans.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o)
Stock compensation (Continued)
The provisions of SFAS No. 123 allow companies to either record an expense in the financial statements to reflect the estimated fair value of stock options to employees, or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", but to disclose on an annual basis the pro forma effect on net income (loss) and net income (loss) per share had the fair value of the stock options been recorded in the financial statements. SFAS No. 123 was amended by SFAS No. 148, which now requires companies to disclose in interim financial statements the pro forma effect on net income (loss) and net income (loss) per common share of the estimated fair market value of stock options issued to employees. The Company has elected to continue to account for stock-based compensation plans utilizing the intrinsic value method. Accordingly, compensation cost for stock options will be measured as the excess, if any, of the fair market price of the Company's common stock at the date of grant above the amount an employee must pay to acquire the common stock.
In accordance with SFAS No. 123, the cost of stock options and warrants issued to non-employees is measured at the grant date based on the fair value of the award. The fair value of the stock-based award is determined using the Black-Scholes option-pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.
Stock options issued to non-employee directors at fair market value will be accounted for under the intrinsic value method.
The Company did not have any stock options outstanding during the year ended June 30, 2008. Accordingly, no pro forma financial disclosure is provided herein.
(p)
Advertising
The Company expensed all advertising costs as incurred. Advertising expenses included in selling expenses were $1,220 and $3,125 for the years ended June 30, 2008 and 2007 respectively.
(q)
Income taxes
The Company uses the accrual method of accounting to determine and report its taxable income and tax credit in the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(q)
Income taxes (Continued)
Income tax liabilities computed according to the United States, People’s Republic of China (PRC), Taiwan (ROC) and Hong Kong SAR tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.
In respect of the Company’s subsidiaries domiciled and operated in China, Taiwan and Hong Kong, the taxation of these entities can be summarized as follows:
The subsidiaries incorporated in PRC are subject to the corporation income tax rate of 33% for 2007 and 25% for 2008. However, in accordance with the relevant tax laws and regulations of PRC, the local corporation income tax rate is 15%.
The subsidiary incorporated in BVI while operated in Taiwan will be considered a non-resident for tax purposes to the profit-seeking enterprise income tax which is from 0% to 25%. However, it will be subject to profit-seeking enterprise income tax only for its income derived from Taiwan sources.
The subsidiaries are subject to Hong Kong profits tax rate of 17%.
The Company is subject to United States federal corporate income tax according to Internal Revenue Code Sections 951 and 957. Corporate income tax is imposed on graduated rates in the range of:
Taxable Income
Rate
Over
But not over
Of Amount Over
15%
-
50,000
-
25%
50,000
75,000
50,000
34%
75,000
100,000
75,000
39%
100,000
335,000
100,000
34%
335,000
10,000,000
335,000
35%
10,000,000
15,000,000
10,000,000
38%
15,000,000
18,333,333
15,000,000
35%
18,333,333
-
-
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(r)
Earnings per share
In September 2004, the Emerging Issues Task Force (“EITF”) reached consensus on EITF 04-8 “The effect of Contingently Convertible Debt on Diluted Earnings per Share.” The new rule requires companies to include shares to be issued upon conversion of contingently convertible debt in their diluted earnings per share (“EPS”) calculations regardless of whether or not the debt is currently convertible. Potential shares should be calculated using the if-converted method or the net share settlement method. The change has no effect on net income, but it does affect the related dilution per share amount. The new rule is effective for reporting periods ending on or after December 31, 2004.
(s)
Foreign currency translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currencies of the Company are Hong Kong Dollar (HKD), Taiwan Dollar (TWD) and Renminbi (RMB). The consolidated financial statements are translated into United States dollars from HKD, TWD and RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
June 30, 2008
June 30, 2007
Year end HKD : US$ exchange rate
7.8037
7.8172
Average yearly HKD : US$ exchange rate
7.7949
7.7959
June 30, 2008
June 30, 2007
Year end TWD : US$ exchange rate
30.4355
32.8599
Average yearly TWD : US$ exchange rate
31.8569
32.9517
June 30, 2008
June 30, 2007
Year end RMB : US$ exchange rate
6.8718
7.6248
Average yearly RMB : US$ exchange rate
7.2906
7.8285
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(t)
Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current components of other comprehensive income are the foreign currency translation adjustment.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(u)
Reclassification
Certain amounts in the prior year have been reclassified to conform to the current year’s presentation.
(v)
Recent accounting pronouncements
In December 2007, the SEC issued Staff Accounting Bulletin No. 110(“SAB 110”). SAB 110 permits companies to continue to use the simplified method, under certain circumstances, in estimating the expected term of “plain vanilla” options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously stated that the Staff would not expect a company to use the simplified method for share grants after December 31, 2007. Adoption of SAB 110 is not expected to have a material impact on the Group’s consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Group is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Group is currently evaluating the impact of SFAS 160 on its consolidated financial statements but does not expect it to have a material effect.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), "Business Combinations”. SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, an any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Group is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Group is currently evaluating the impact of SFAS 141(R) on its consolidated financial statements but does not expect it to have a material effect.
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 161 “Disclosures about Derivative Instruments and Hedging Activities”. SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact of SFAS 161 on its consolidated financial statements but does not expect it to have a material effect.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
3.
DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES
Deposits, prepayments and other receivables are summarized as follow:
(a)
Cash loan interest receivable from an un-related third party of US$250,000 and US$350,000 at 12% p.a. for periods from July 1, 2007 to January 24, 2008 and July 1, 2006 to June 30, 2007 respectively.
(b)
The amount receivable from the minority stockholders of Shanghai Newray Photographic Equipment Co., Ltd. of RMB245,000 is unsecured, non-interest bearing, and due and payable on demand.
(c)
An advance to supplier of RMB 2,574,289 for the VOIP services. This advance is unsecured, non-interest bearing, and due on demand.
(d)
Trade deposit of security systems and spare parts prepaid to the suppliers for the sales orders placed by the customers.
(e)
Other receivables are the amount that will be collected from an associated company, Golden Anke Technology, Ltd. It is unsecured, non-interest bearing, and, due and payable on demand.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
4.
DEPOSIT OF INVESTMENT
The initial deposit $1,400,000 was paid to an unrelated company in Taiwan for a pending acquisition. In June 2008, the company was no longer active in the acquisition. The expected refund could be confirmed at $150,000. The remaining part of the deposit $1,250,000 less $32,525 translation adjustment, at $1,217,475, was unable to confirm. No other future cash flow value could be calculated and so impairment should be provided in current year to reflect the deposit loss.
5.
GOODWILL
On May 29, 2003, the Company completed the acquisition of a 51% interest in Shanghai Newray Photographic Equipment Co., Ltd. ("SNPE"), a company incorporated in Shanghai, PRC. SNPE had no operations prior to the acquisition and had no assets and liabilities other than cash balances. Subsequent to the acquisition, staff with expertise in the photographic business in Shanghai was recruited and SNPE commenced business operations, including sales of photographic equipment, and sales of LCD monitors to PRC Railway Dept.
Consequently, based on the results of the Company's discounted cash flows calculation, and the discontinuance of the primary business activity of Shanghai Newray Photographic Equipment Co., Ltd. it is management's conclusion that the Shanghai Newray Photographic Equipment Co., Ltd. has no goodwill. The Company has recorded an impairment charge of RMB 4,568,552 (US $563,323) in the fiscal year ended June 30, 2006.
On August 10, 2004, the Company's wholly-owned subsidiary, IMOT Information Technology (Shenzhen) Ltd. ("IMOT Technology"), received all necessary government approval required to complete the transfer of 51% of the issued and outstanding shares of Golden Anke Technology, Ltd. ("Golden Anke") from two of its shareholders to IMOT Technology.
The total purchase price of RMB27,542,592 consisted of 12,000,000 shares of the Company's common stock valued at RMB26,827,200 (US$0.27 per share) and commission expenses of RMB715,392 ($86,400) paid to an unrelated advisor. The value of the common stock issued was based on the market value of the common stock at the completion date of the acquisition.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
5.
GOODWILL (Continued)
Goodwill of RMB17,152,456 represented the excess of the purchase price over the fair value of the net tangible asset acquired. The goodwill has been included in the digital security system segment.
Pursuant to the Stock Exchange Agreement relating to Hainan Concord Financial Products Development Co., Ltd. ("Development"), IITSL issued to the Development Stockholders 5,000,000 shares of the Company's restricted common stock having a value of RMB7,617,600 (US$920,000). The consideration for the transaction was determined by arm's-length negotiations between the parties, none of whom is related.
The total purchase price of RMB8,213,760 consisted of 5,000,000 shares of the Company’s common stock valued at RMB7,617,600 (US$0.184 per share) and commission expenses of RMB596,160 (US$72,000) paid to unrelated advisor. The value of the common stock issued was based on the market value of the common issued was based on the market value of the common stock at the completion dated of the acquisition.
Goodwill of RMB7,272,437 represented the excess of the purchase price over the fair value of the net tangible asset acquired. The goodwill has been included in the unallocated segment.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
6.
SHORT-TERM LOAN
The Company loaned to an un-related third party of US$250,000 and US$350,000 on November 28, 2005 and December 12, 2005, respectively with interest rate at 12% p.a. and due and payable on September 28, 2006 and September 12, 2006 respectively. These loans are still outstanding and the Company is continuously charging the loan interest accordingly.
7.
PLANT AND EQUIPMENT, NET
Plant and equipment comprise the followings:
Depreciation expenses were $30,587 and $ 28,146 for the years ended June 30, 2008 and 2007 respectively.
8.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables are summarized as follows:
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
9.
INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in, or derived from, the tax jurisdiction in which they operate.
The Company is subject to the United States federal corporate income tax at a rate of 33%. IL was incorporated under the International Business Companies Act of the British Virgin Islands and, accordingly, is exempted from payment of the British Virgin Islands income taxes. The subsidiaries (IITSL, CECITL, SBUJE, IFACL, CECTSC and HCFPDCL) established in the PRC are subject to PRC enterprise income taxes at a rate of 15%. SNPE is subject to a special PRC enterprise income tax at a rate 0.5% of turnover. The subsidiary (LP) established in British Virgin Islands while operated in Taiwan is subject to Taiwan non-resident profit-seeking enterprise income tax, which is from 0% to 25%, only for the income derived from Taiwan sources. Since the company derived most of the income outside Taiwan, there will be no domestic income tax effect for the operation of LP. IHKL is subject to Hong Kong profits tax at a rate of 17.5%.
The reconciliation of the United States federal income tax rate to the effective income tax rate based on loss before income taxes stated in the consolidated statements of operations is as follows:
Deferred taxation consisted of:
The change in valuation allowance from June 30, 2007 to June 30, 2008 is primarily related to the tax effects of the increase in the net operating loss in the current fiscal year. The Company has net operating loss carry forwards totaling approximately $1.6 million as of June 30 2008, primarily relating to operations in the PRC and Taiwan. A valuation allowance has been established for the full amount of the deferred tax benefit related to those loss carry forwards and other deferred tax assets as management believes that their realization is uncertain.
10.
ADVANCE FROM A RELATED PARTY
Advance from a related party, China Equity Platform Holding Group Ltd. is unsecured, interest free and with no fixed term of repayment.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
11.
STOCKHOLDERS’ EQUITY
Year ended June 30, 2008
On June 16, 2008, we authorize the issuance of 881,950 and 6,000,000 shares of common stock with a value of $0.001 per share to Alfredo Properties Ltd. and Mr. Rocky Wulianghai for private placement and director’s compensation respectively. The stock was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. There was no general solicitation or advertising engaged in by the Company in making this offering and the offeree and the parties they designated to receive the stock were accredited investor.
On June 12, 2008, the Company approved to issue 6,000,000 shares of common stock at the price of $0.1258 per share to the chief executive officer of the Company, Mr. Rocky Wulianghai, for the compensation of services $754,800 for the calendar years of 2006 and 2007. The shares were allotted on June 16, 2008. On the date of allotment, the share market value of common stock was $0.1 per share, the Company had recorded the common stock $6,000 and additional paid-in capital $594,000 and recognized the difference as adjustment to other comprehensive income $154,800.
Year ended June 30, 2007
On September 25, 2006, November 17, 2006 and May 21, 2007, we authorize the issuance of 20,000,000, 20,000,000 and 22,000,000 shares respectively of common stock with a value of $0.05 per share to First Federal Holding Ltd. for private placement. The stock was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. There was no general solicitation or advertising engaged in by the Company in making this offering and the offeree and the parties they designated to receive the stock were accredited investor.
On November 17, 2006, we authorized the issuance of 80,000 shares of common stock with a value of $0.05 per share to an individual. The stock was issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. There was no general solicitation or advertising engaged in by the Company in making this offering and the offeree and the parties they designated to receive the stock were accredited investor.
The Company redeemed 2,470,000 shares at $0.326 from Shenzhen International Hi-Tech Property Right Exchange Centre in December 2006. This redemption represented the reduction of the investment of $261,737.
The Company invested 25% of SFVI in October 2003. The Company decided to withdraw the investment in May 2006.
The Company redeemed 6,500,000 shares at $0.18 and the loss was erroneously overstated by $390,000. This accounting error had been corrected to the accumulated deficit at June 30, 2007 as prior year adjustment.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
12.
COMMITMENTS
Operating Leases - The Company has operating lease agreements for office premises, which expiring through February 2011. Future minimum rental payments under agreements classified as operating leases with non-cancelable terms for the next one year and thereafter are as follows:
Rental expense paid for the years ended June 30, 2008 and 2007 were $54,864 and $60,238 respectively.
13.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in respect of its operating segments. The Company's reportable segments are E-Commerce Solutions, System Sales Integration, Phone Payment System, Web Advertisement, Sales of Computer Software, Photographic Business and Digital Security System Business. E-Commerce Solutions comprises revenue from web-site development contracts and maintenance contracts. The Photographic Business consists of sales of photographic equipment and the Digital Security System Business consists of sales of digital image security surveillance system.
Each segment is managed separately because each business requires different technology and marketing strategies. The Company evaluates performance based on operating earnings of the respective business units. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The corporate assets include primarily cash and cash equivalents and deposits and other receivables. There were no significant inter-company transactions during any of the reported periods. In determining operating income (loss) by reportable segment, general corporate expenses and other income and expense items of a non-operating nature are not consider, as such items are not allocated to the Company's segments. Segment information for the year ended June 30, 2008 and 2007 are as follows:
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
13.
SEGMENT INFORMATION (Continued)
For the year ended June 30, 2008, the Company is principally engaged in one operating segment only. Accordingly, no segmental analysis is presented.
(a)
Net revenues
(b)
Net profit/(loss)
(c)
Assets
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
13.
SEGMENT INFORMATION (Continued)
(d) Other items
(e) Major customers and concentrations:
For the year ended June 30, 2007, the three largest customers in the VOIP segment, accounted for 86% and in VOIP segment, accounted for 85% of total revenues, respectively.
14.
IMPAIRMENT OF INVESTMENT IN ASSOCIATED COMPANY
An investment in an associated company Golden Anke Technology, Ltd. with an equity balance of $3,454,693 was found being impaired and written-off in last year statement of income. No further impairment is made in the current year. See Note 3(e) for the balance to be recovered.
15.
GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $1,557,594for the year ended June 30, 2008 and has an accumulated deficit of $20,846,563 as of June 30, 2008. The Company also continues to experience negative cash flows from operations. The Company will be required to raise additional capital to fund its operations, and will continue to attempt to raise capital resources from both related and unrelated parties until such time as the Company is able to generate revenues sufficient to maintain itself as a viable entity. These factors have raised substantial doubt about the Company's ability to continue as a going concern. There can be no assurances that the Company will be able to raise additional capital or achieve profitability. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company plans to strengthen its core business, control its overall expenditures, improve the efficiency of its operations and continue its efforts to expand by acquiring other business opportunities.
INTERMOST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)
16.
SUBSEQUENT EVENT
The Company had entered into a joint venture agreement with other PRC investors on February 19, 2008 to spin off the subsidiaries and investments in operating equity exchange. The PRC investors will form a new company to hold these subsidiaries and investments and seek an independent listing of the new company on a US exchange. The name of the new company is China Equity Platform Holding Group Limited. When the spin off process is completed, IMOT will get 60% -common stock of the newly formed company. The spin off process is still under processing and waiting for the approval from PRC Officials. The subsidiary and associate companies will be spin off are listed as following:
ChinaE.com Technology (Shenzhen) Company Limited
ChinaE.com Investment Consultant (Shenzhen) Company Limited
ChinaE.com E-commerce Company Limited
Intermost Focus Advertising Company Limited
Shenzhen International Hi-Tech Property Right Exchange Centre
Hainan Special Economic Zone Property Rights Exchange Centre
17.
RESTATEMENTS
On October 26, 2007, the Company filed the consolidated balance sheets as of June 30, 2007 and 2006, its consolidated statements of income, stockholders’ equity and cash flow for the year ended June 30, 2007, in Form 10KSB Part III Item 14 Page 37-63 with the Securities and Exchange Commission (SEC). The Company received a comment letter from the Office of the Chief Accountant of the Division of Corporation Finance of SEC regarding certain disclosures in the Company’s financial statements for the year ended June 30, 2007. The Company could not reach the original auditor for assistance. Therefore, it determined to re-do the 2007 audit and restate the financial statements. The restated financial statements will be filed with SEC. The effects of the restatements are shown in the following tables.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS (Continued)
As a result of restatement of the consolidated balance sheet as of June 30, 2007, total assets decreased from $15,885,552 as originally reported, to $9,942,070, a decrease of $5,943,482. The decrease of total assets was derived from decrease $303,525 in cash and cash equivalents, decrease $730,648 in deposit, prepayment and other receivable, increase $150,000 deposit in investment and decrease $5,362,834 investment in associated companies and increase $303,525 in restricted cash. There were no changes in liabilities. The minority interest was decrease from $732,762 to $267,046, a $561,725 reduction. The corresponding changes in Stockholders’ equity were increase of $981,469 in additional paid-in capital, increase of accumulated deficit $5,897,510 and decrease of accumulated other comprehensive income $561,725. The total stockholders’ equity was restated from $10,166,558 as originally reported, to $4,688,792, a decrease of $5,477,766. The total liabilities and stockholders’ equity were restated from $15,885,552 as originally reported, to $9,942,070, a decrease of $5,943,482.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
As a result of restatement of consolidated income and comprehensive income for the year ended June 30, 2007, total net loss increased from $3,090,547 as originally reported, to $8,598,057, an increase of $5,507,510. The increase loss was composed of decrease $928,969 in selling, general and administrative expenses, increase 49,818 in written-off loan receivables and 3,398 in other receivable, increase $3,119,872 impairment of goodwill, $3,454,693 impairment of associated company, $1,217,475 impairment of deposit of investment and decrease $1,408,777 equity in earnings of associated companies. The movement of shares provided from stock transfer agent was applied to calculate the weighted average number of common stock, and so, the net loss per share was changed from $0.0242 to $0.0469, an increase of $0.0227. The basic and dilute weighted average number of common stock was changed from 127,894,970 to 183,458,168, an increase of 55,563,192.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
As a result of the restatement, the net cash provided by operating activities for the year ended June 30, 2007 decreased by $3,825,873 from $1,977,901 as originally reported, to ($1,847,972); net cash used in investing activities decreased by $2,374,002 from ($3,764,175) as originally reported,, to ($1,390,173); net cash provided by financing activities decrease by $2,851,69 from $2,458,785 as originally reported, to $2,173,616; and the effect of foreign currency translation on cash and cash equivalents was increased by $1,594,997 from ($531,142) as originally reported, to $902,373. The cash and cash equivalents at end of year was decreased by $303,525 from $833,993 as originally reported, to $530,468 owing to the reclassification of cash and cash equivalents to restricted cash.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERMOST CORPORATION
By: /s/ Rocky Wulianghai
Rocky Wulianghai
President and Chief Executive Officer
By: /s/ Thomas Lee
Thomas Lee
Chief Financial Officer
Dated: November 6, 2008
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date: November 6, 2008
/s/ Fred Peck
Director
Fred Peck
/s/ Chia Hsun Wu
Director
Chia Hsun Wu
/s/ Hiroshi Shinohara
Director
Hiroshi Shinohara
/s/ Rocky Wulianghai
Director, President and Chief Executive Officer
Rocky Wulianghai