digitaljun05

10QSB 1 digitaljunefinal.htm digitaljun05

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

___ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

(Name of small business issuer in its charter)

Delaware	0-50002	52-2175896
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
15/F East Wing Sincere Insurance Building 6 Hennessy Road, Wanchai Hong Kong
(Address of Principal Executive Office)

Issuer's telephone number: (239) 598-2300

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No....

Applicable only to issuers involved in bankruptcy proceedings during the past five years.

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes... No.....

Applicable only to corporate issuers

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. At June 30, 2005, the following shares were outstanding: 22,200,000.

Transitional Small Business Disclosure Format (Check one): Yes... No X

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND EXHIBITS

(a)

The unaudited financial statements of registrant for the six months ended June 30, 2005, follow. The financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented.

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2005

CONTENTS

	PAGES
Consolidated balance sheets	5

Consolidated statements of operations	6 - 7

Consolidated statements of cash flows	8

Notes to unaudited consolidated financial statements	9 - 12

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

		*30-Jun-05*	*31-Dec-04*
		*(Unaudited)*	*Audited*
		*USD*	*USD*
ASSETS
Current assets
	Cash and cash equivalents	52,892	71,343
	Trade accounts receivable	901,810	154,234
	Stock subscription receivable	0	100,000
	Related party receivable	0	36,346
	Prepaid expenses and other assets	36,022	105,666
Total current assets		990,724	467,589
	Plant and equipment, net	32,289	34,094
Total assets		1,023,013	501,683

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Trade accounts payable	906,059	236,292
	Accrued expenses	5,381	44,141
	Deposits	54,956	81,994
	Stockholders' loans	0	6,515
	Current portion of long-term debt	4,573	4,573
Total current liabilities		970,969	373,515

Long-term debt, less current portion		823	3,109

	MINORITY INTEREST	(4,509)	0

Stockholders' equity
	Common stock - Par value $.001; authorized 200,000,000
	shares authorized, 22,200,000 shares
	issued and outstanding	22,200	22,200
	Additional paid in capital	268,974	268,974
	Accumulated deficit	(236,082)	(166,753)
	Accumulated other comprehensive income	638	638

Total stockholders' equity		55,730	125,059

Total liabilities and stockholders' equity		1,023,013	501,683

See the accompanying notes to the unaudited consolidated financial statements

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		*Three months ended June 30*
		*2005*	*2004*
		*(Unaudited)*	*(Unaudited)*
		*USD*	*USD*

Sales revenues		427,278	245,385

Cost of goods sold		408,276	150,015

Gross profit		19,002	95,370

General and administrative expenses		169,834	59,802

Operating income (loss)		(150,832)	35,568

Other income (expense)
	Interest expense	(241)	-
	Other	10,006	17,142
		9,765	17,142

Income (loss) before income tax		(141,067)	52,710

Provision for income taxes		-	-

Net income (loss) before minority interest		(141,067)	52,710

Minority interest		4,509	-

Net income (loss) for the period		(136,558)	52,710

Net income (loss) per common share		(0.0062)	0.0078

Weighted average common shares outstanding		22,200,000	6,751,240

See the accompanying notes to the unaudited consolidated financial statements

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		*Six months ended June 30*
		*2005*	*2004*
		*(Unaudited)*	*(Unaudited)*
		*USD*	*USD*

Sales revenues		1,531,732	567,793

Cost of goods sold		1,304,822	452,703

Gross profit		226,910	115,090

General and administrative expenses		315,235	137,111

Operating loss		(88,325)	(22,021)

Other income (expense)
	Interest expense	(241)	(241)
	Other	14,728	18,783
		14,487	18,542

Loss before income tax		(73,838)	(3,479)

Provision for income taxes		-	-

Net loss before minority interest		(73,838)	(3,479)

Minority interest		4,509	0

Net loss for the period		(69,329)	(3,479)

Net loss per common share		(0.0031)	(0.00052)

Weighted average common shares outstanding		22,200,000	6,751,240

See the accompanying notes to the unaudited consolidated financial statements

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			*Six months ended June 30,*
			*2005*	*2004*
			*(Unaudited)*	*(Unaudited)*
			*USD*	*USD*
Operating activities:
Net loss			(69,329)	(3,479)

Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
	Depreciation and amortization		7,004	6,845
	Stock subscription collected		100,000	0
	Loss from write-off of related party receivable		36,346	0
	Changes in operating liabilities and assets:
		Trade accounts receivable	(747,576)	(42,379)
		Prepaid expenses and other assets	69,644	83,756
		Trade accounts payable	669,767	(74,392)
		Accrued expenses	(38,760)	3,600
		Deposits	(27,038)	2,258

Net cash provided by (used in) operating activities			58	(23,791)

Investing activities:
Purchase of fixed assets			(5,199)	(23,224)

	Net cash used in investing activities		(5,199)	(23,224)

Financing activities:
Principal payments on long-term debt			(2,286)	(1,482)
Proceeds from shareholders' loans			(6,515)	(7,166)
Minority interests			(4,509)	0
	Net cash used in financing activities		(13,310)	(8,648)

Decrease in cash and cash equivalents			(18,451)	(55,663)

Cash and cash equivalents, beginning of period			71,343	64,523

Cash and cash equivalent, end of period			52,892	8,860
Cash paid for interest			241	241
Cash paid for income taxes			0	0

See the accompanying notes to the unaudited consolidated financial statements

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF OPERATIONS

Digital Network Alliance International, Inc. (the Company) was incorporated on August 20, 1997 in the State of Delaware as Sheffield Products, Inc. On August 13, 2004 the Company acquired all of the outstanding stock of Digital Network Alliance Holdings (BVI) Inc., a British Virgin Islands Corporation (Digital BVI) in exchange for stock of the Company. On November 30, 2004 the Company changed its name to Digital Network Alliance International, Inc. The consolidated results of operations are primarily those of Digital BVI and its consolidated subsidiaries.

The principal activities of the consolidated company are that of provision of voice termination, satellite and broadband internet services throughout the Asia Pacific region, including Hong Kong, Singapore, Indonesia, Bangladesh, Pakistan and Mongolia.

BASIS OF PRESENTATION

The accompanying consolidated financial statements include those of the Company and its wholly owned subsidiaries; Digital BVI, Digital Network Alliance (S) Pte Ltd (Digital S), and Digital Network Alliance (HK) Limited (Digital HK). Digital BVI incorporated in British Virgin Islands on June 4, 2004, Digital S incorporated in the Republic of Singapore on October 19, 2001, and Digital HK incorporated in Hong Kong on November 12, 2001. The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and have been retroactively restated to give effect to the recapitalization due to a reverse merger consummated on August 13, 2004. This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in Singapore and Hong Kong. All necessary intercompany transactions and balances have been eliminated in consolidation, and all necessary adjustments have been made to present the consolidated financial statements in accordance with US GAAP.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Quarterly Financial Statements

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-QSB but do not include all of the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company’s 2004 financial statements in Form 10-KSB. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Economic and Political Risks

The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.

Cash and Cash Equivalents

For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and demand deposits held by banks. None of the Company’s deposits are insured by the Federal Deposit Insurance Corporation or any other entity of the U.S. government.

Trade Accounts Receivable

Trade accounts receivable are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount becomes questionable. No receivables have been deemed to be uncollectible as of June 30, 2005.

Prepaid Expenses

Prepaid expenses consist primarily of prepayments made to contractors for circuits and services not yet received by the Company.

Plant and Equipment

Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the useful lives of the assets. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales. Property and equipment are depreciated over their estimated useful lives as follows:

Computer equipment

2 years

Office equipment

4 years

Network equipment

3 years

Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company also evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deposits

The Company commonly receives payments of deposit in advance for circuits and voice termination services to be provided to customers. Those deposits are recognized into income in accordance with the Company’s revenue recognition policy, as stated below.

Revenue Recognition

Revenue from provision of voice termination, satellite and broadband internet services is recognized as earned when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured.

Advertising Expenses

Advertising costs will be expensed when and if incurred. The Company has incurred no advertising expenses to date.

Retirement Benefits

The Company has a defined contribution benefit plan. The Company’s contributions are discretionary. For the period ended June 30, 2005, the contribution made by Digital Network Alliance amounted to $3,251.

Foreign Currency and Comprehensive Income

The accompanying consolidated financial statements are presented in United States (US) dollars. The functional currency is the Singapore dollar (S$) and Hong Kong dollar (HK$). The consolidated financial statements are translated into US dollars from S$ and HK$ at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Estimates

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

Financing Transaction

During January 2005, the Company collected the subscription price of $100,000 for 100,000 shares of its common stock from certain private subscribers. The Company had no stock subscriptions receivable at June 30, 2005.

Loss Per Share

Basic loss per common share ("LPS") is calculated by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants.

The Company had no potentially dilutive securities outstanding at June 30, 2005.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, are what are known as “forward-looking statements,” which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-QSB and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.

OVERVIEW

Our overall objective is to build a comprehensive telecommunications network which delivers cost-effective services to our customers within the Asia Pacific region, and beyond. This is a long-term objective, involving many elements, and there is no assurance that it can be achieved. Our ability to do so will be dependent upon a number of factors including, but not limited to, our ability to achieve and maintain strategic partnerships and alliances with various local partners and suppliers, our ability to achieve and maintain consistently profitable operations and the availability of necessary working capital.

Our plan of operations for 2005 includes maintenance of our existing operations, and to the extent possible, expansion and improvement of our existing operations as well as commencement of new operations. The extent to which we will be able to expand and improve existing operations and commence new operations will be dependent to a large extent on the availability of working capital either from our pending stock offering, or from other sources. Since there is no assurance that the offering will be successful, or that working capital will be available to us from other sources, there is also no assurance regarding the extent to which we will be able to expand our current operations or commence new operations.

The Company does not directly carry on any business activities. Instead, all operations are carried on through its operating subsidiaries Digital Network Alliance (S) Pte., Ltd. (“Digital Singapore”) and Digital Network Alliance (HK) Ltd. (“Digital Hong Kong”), which are incorporated in Singapore and Hong Kong respectively. These operating subsidiaries were incorporated on November 12, 2001 and October 19, 2001, respectively, and each of them commenced operations in January 2002.

Through its operating subsidiaries, the Company is engaged in the business of providing satellite internet connections to customers in the Asia Pacific region, including Hong Kong, Singapore, Indonesia, Bangladesh, Pakistan and Mongolia, and the business of providing managed broadband services to commercial office buildings and apartment buildings in Singapore and Hong Kong.

The following discussion concerning the results of operations, liquidity and capital resources of Digital Network Alliance International, Inc. (the “Company”), is based solely upon the business operations that are carried on by the Company’s operating subsidiaries for the six-month interim periods ended June 30, 2005 and 2004.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004

Net sales for the six months ended June 30, 2005 were $1,531,732 as compared to $567,793 for the six months ended June 30, 2004. The increase of $963,939, or approximately 170% was primarily attributable to the fact that we received substantial revenues in 2005 from new services which were not offered in the 2004. Our new services include voice termination services in Hong Kong, from which we received revenues of approximately $101,594 during the six months ended June 30, 2005. We first began providing voice termination services during the fourth quarter of 2004, and we added a substantial number of new customers during the first and second quarters of 2005. The other new service, from which substantial revenues of approximately $712,000 were generated during the first quarter of 2005, is new managed network services in Indonesia. These managed network services include managed broadband services and network build out and system integration services which were provided to new customers in Jakarta, Indonesia. There is also an increase in our satellite services in the amount of $150,344. We have more customers in Pakistan during the six months of 2005.

Cost of goods sold for the six months ended June 30, 2005 was $1,304,822 compared to $452,703 for the same period of 2004. The increase of $852,119 or 188% was the result of initial set up costs for the new voice termination business and initial set up costs for the managed network services in Indonesia, which included building base stations in Jakarta. Although our costs of goods sold increased substantially during the first six months of 2005 as compared to the same period of 2004, we believe that our investment in equipment needed to provide new services will continue to result in increased revenues in future periods.

Gross profit increased significantly from $115,090 for the six months ended June 30, 2004 to $226,910 for the six months ended June 30, 2005. The increase in gross profit reflects the well-controlled costs of the satellite business and the substantial profit margin of the new managed broadband business in the Asia Pacific market.

Total operating expenses for the period ended June 30, 2005 totaled $315,235 compared to $137,111 for the same period ended 2004. The increase of $178,124 or 130% was primarily attributable to: (i) Salary expenses, due to the additional hiring of staff and related expenses, increased by approximately $73,134; (ii) professional fees, incurred in the course of the reverse takeover, increased by approximately $57,834; (iii) traveling expenses, related to sales and business development in the region, increased by $10,810; (iv) write off of related party receivable in the amount of $36,346.

Net loss before tax for the period ended June 30, 2005 was $(69,329) as compared to a net loss of $(3,479) for the period ended June 30, 2004. The increased loss is primarily due to nonrecurring operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

For the period ended June 30, 2005, the Company’s balance sheet reflects current assets of $990,724 and total current liabilities of $970,969, as compared to current assets of $467,589 and current liabilities of $373,515 as of December 31, 2004. These changes reflect a slight decrease in our liquidity ratio from 1.25 as of December 31, 2004 to 1.02 as of June 30, 2005.

As a result of the rapid expansion of our business during the second quarter of 2005, both our trade accounts receivable and our trade accounts payable increased substantially during the period. Our trade accounts receivable increased from $154,234 as of December 31, 2004, to $901,810 as of June 30, 2005, an increase of $747,576, or approximately 485%, while our trade accounts payable increased from $236,292 as of December 31, 2004 to $906,059 as of June 30, 2005, an increase of $669,767, or approximately 283%.

We intend to rely on timely collection of our trade accounts receivable and on prepayment deposits and monthly service fees from our customers as our primary sources of cash. Our primary use of cash will be payment of our trade accounts payable and maintenance of our current operations. However, to the extent our cash flow from operations is sufficient to do so, we intend to use it to continue to gradually expand our current operations.

ITEM 3.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

In addition, there has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB REPORT REFLECT MANAGEMENT’S BEST JUDGMENT BASED UPON FACTORS CURRENTLY KNOWN AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY VARY MATERIALLY.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUNREGISTERED SALES OF EQUITY SECURPROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6.

EXHIBITS

The following exhibits are filed herewith:

3.1

Articles of Incorporation (herein incorporated by reference from Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on September 12, 2002).

3.2

Bylaws (herein incorporated by reference from Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on September 12,2002).

31.1

Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIGITAL NETWORK ALLIANCE INTERNATIONAL, INC.

/s/ Terence Yap, President and Director

Date: August 12, 2005

/s/ Eppie Wong, Principal Accounting Officer and Director

Date: August 12, 2005

/s/ Edward Chan, Chief Operations Officer and Director

Date: August 12, 2005

/s/ Michael Yap, Director

Date: August 12, 2005

/s/ Leslie Ter Chiew Kim, Director

Date: August 12, 2005