Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended September 30, 2009
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o
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TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 333-62236
SUBAYE,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
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35-2089848
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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349
Dabeilu, Shiqiao, Panyu,
Guangzhou,
Guangdong,
China 511400
(Address
of principal executive offices) (Zip Code)
86
2039990266
(Registrant’s
telephone number, including area code)
MyStarU.com,
Inc.
(Registrant’s
former name)
6
North Twelfth Road
Country
Garden,
Shunde
District
Foshan
City, China 528312
(Registrant’s
former address)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act:
Common
stock, par value $.001 per share
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes þ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
o Yes þ No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
þ Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o Yes þ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o (do not check if
a smaller reporting company)
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Smaller
reporting company þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o Yes þ No
Revenues
for year ended September 30, 2009: $47,987,000
The
aggregate market value of the registrant’s voting common stock held by
non-affiliates as of March 31, 2009 based
upon the closing price reported for such date on the OTC Bulletin Board was
$10,133,933.
As of
December 29, 2009, the registrant had 6,664,131* shares of its common stock
issued and outstanding.
*The
number of shares outstanding reflects a 100 to 1 reverse split of the
registrant’s common stock, effectuated on October 23, 2009. Figures
referring to shares of the registrant’s common stock in this Form 10-K for the
reporting period ending September 30, 2009 are provided on a post-reverse split
basis.
TABLE
OF CONTENTS
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PART
I
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Item
1. Business.
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3
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Item
1A. Risk Factors.
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7
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Item
2. Properties.
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15
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Item
3. Legal Proceedings.
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15
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Item
4. Submission of Matters to a Vote of Security Holders.
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PART
II
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Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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15
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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18
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Item
8. Financial Statements and Supplementary Data.
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27
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Item
9A(T). Controls and Procedures.
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28
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PART
III
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Item
10. Directors, Executive Officers, and Corporate
Governance.
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28
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Item
11. Executive Compensation.
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30
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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32
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Item
13. Certain Relationships and Related Transactions, and Director
Independence.
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33
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Item
14. Principal Accounting Fees and Services.
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33
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PART
IV
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Item
15. Exhibits, Financial Statement Schedules.
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34
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PART
I
Subaye,
Inc., a Delaware corporation, together with its consolidated subsidiaries
(“Subaye,” “SBAY” or the “Company”), is a leading video advertising and
entertainment media provider in China. Subaye’s platform includes
production, upload, storage, sharing and publishing onto more than 33 main video
sharing portal websites. Subaye also offers SaaS business solutions and is in
the process of developing what Subaye believes is the first online shopping mall
in the world that will utilize 3D imaging throughout the online customer
interface. The Company’s www.subaye.com and www.x381.com websites
generated revenues during the year ended September 30, 2009, while its other
web-based businesses are under development or offering free services to
potential customers at this time. Subaye’s video sharing services, SaaS
solutions and its online shopping mall will be fully integrated in 2010.
Subaye’s members will use Subaye’s SaaS online content management software to
manage their online video and graphic showcases, maintain customer data and to
manage operations within their webshops at the online shopping
mall. As of November 30, 2009, the Company had 63,311 members. The
Company’s video database consisted of 72,126 profiles of corporate video
showcases. These showcases offer a cost-effective venue for small to mid-size
enterprises (“SMEs”) to advertise their products and services and establish and
enhance their corporate brands. The visitors of Subaye’s websites, namely
www.subaye.com, view the video showcases for Subaye’s members in order to select
products or services they wish to purchase. The www.subaye.com website and its
affiliated websites provide visitors with easy access to an index of over 3.12
million video clips, images and web pages. Additional services such
as general education and basic online media promotions are provided through the
Company’s websites and through licensing arrangements.
Subaye
utilizes its experience and contacts within the entertainment media industry in
Asia to produce and place advertisements on behalf of its customers. Subaye’s
management also routinely invests the Company’s funds in entertainment
productions in Asia. Typically, these investments consist of the purchase of the
full or partial copyrights to an entertainment production. On December 22, 2009,
“Dayoucun,” the Company’s third significant Asian motion picture investment was
released in Taiwan, Hong Kong and throughout mainland China in over 1,000
theaters. The Company invested in “The Pye-Dog” and “Big Movie,” both
of which are motion pictures previously released in Asia in 2007 and 2005,
respectively. In 2010, Subaye expects several of its motion picture investments
to generate significant revenues.
Subaye’s
trade services are offered to customers based in Asia, North America and Europe.
These customers order products through Subaye and ship products both
domestically within China and internationally. Subaye’s trade services provide
solutions for both importing and exporting transactions.
For the
year ended September 30, 2009, the Company reported revenues of $47,987
thousand, an increase of 64% from revenues of $29,172 thousand reported for the
year ended September 30, 2008. Net income was $9,778 thousand for the
year ended September 30, 2009 as compared to $3,780 thousand for the year ended
September 30, 2008. The Company continued to expand its video advertising
membership base. We generated an additional $17,144 thousand in
revenues from the online membership services business segment in 2009, as
compared to 2008.
The table
below displays the segment revenue and segment net income growth in Subaye’s
three business segments for the year ended September 30, 2009 as compared to
September 30, 2008, prior to adjustments for the income in the minority interest
of our subsidiaries.
|
Growth Rate, For the Year Ended September 30, 2009
|
|
|
Business Segment
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|
Segment
Revenues
|
|
|
Segment
Net Income
|
|
|
|
|
|
|
|
|
|
|
Online
Membership Services
|
|
|
180 |
% |
|
|
243 |
% |
|
Entertainment
Media
|
|
|
43 |
% |
|
|
(30 |
)% |
|
Trade
Services
|
|
|
(11 |
)% |
|
|
13 |
% |
Customers
Subaye’s
customers generally consist of SMEs in China. SMEs utilize Subaye’s video
advertising solutions, trade services and advertising solutions and promotions
within the entertainment media industry in China. As of September 30, 2009, the
Company’s customer base consisted of approximately 60,000 SMEs, most of whom
operate in Guangdong Province, China.
Sales
and Marketing
Our
employees, including senior management, conduct our primary sales and marketing
efforts. Our primary sales staff operate out of our office in Guangzhou City,
China.
We
actively participate in tradeshows involving the e-commerce and entertainment
media industries in Asia. We are currently focused on aggressive development of
our businesses with and have recently committed to numerous advertising and
marketing expenditures in order to generate increased growth within our various
business segments. We will continue to incur significant advertising
spending in 2010. Even so, we have always depended heavily on word of
mouth marketing and the quality of our products and services to increase
revenues. This also continues to be an important form of business
development for us.
We invest
regularly in copyrights covering programming rights for motion pictures,
internet broadcasts of motion pictures, related DVDs and television programming.
We have not yet invested in any ventures outside of Asia but it is possible we
will make investments in other markets in the future.
As of
September 30, 2009 and 2008, we had a total of 311 and 189 employees,
respectively. The chart below provides a general breakout of our employee ranks
as of each of the two most recent fiscal years.
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|
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As of September 30,
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|
|
|
|
2009
|
|
|
2008
|
|
|
Management
and Administrative
|
|
|
51 |
|
|
|
32 |
|
|
Research
and Development
|
|
|
48 |
|
|
|
36 |
|
|
Sales
and Marketing
|
|
|
212 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Employees
|
|
|
311 |
|
|
|
189 |
|
Research
and Development
We
incurred research and development expenses for the years ended September 30,
2009 and 2008 of $118 thousand and $123 thousand, respectively.
Video
Advertising Industry Overview and Market Opportunity
According to the China Internet Network
Information Center, as of June 30, 2009 China had 338 million internet users,
which is the largest population of internet users in the world. Additionally,
China has a total of 42 million SMEs, which represents a total potential market
for Subaye’s video advertising solutions of approximately $60.5 billion.
Guangdong Province, where we currently operate on a full scale, has
approximately 3.6 million SMEs, representing a total potential market of $5.2
billion.
www.subaye.com
The
Company's www.subaye.com website is focused on providing a video showcase
advertising solution for its members to sell their goods and services into the
Chinese marketplace. This website’s video advertising
product generated $22,023 thousand and $7,680 in revenues for the years
ended September 30, 2009 and 2008, respectively.
We
launched the internet video services on our www.subaye.com website and began
generating revenues from corporate video uploading services in November 2006. We
have grown significantly since we commenced operations. Our corporate video
uploading services users totaled 63,311 members as of November 30, 2009. Our
paying members are charged a monthly fee of approximately 800 Renminbi, or
$120. As of November 30, 2009, we had 17,299 paying members. The
remainder of the members are utilizing the website free of charge for varying
periods of time based on our promotional activities.
|
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www.subaye.com Members
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|
www.subaye.com Company Profiles
|
|
|
|
|
As of the
End of
Month**
|
|
|
Month Over
Month
Growth
|
|
|
As of the
End of
Month
|
|
|
Month Over
Month
Growth
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31, 2007
|
|
|
6,562 |
|
|
|
|
|
|
9,807 |
|
|
|
|
|
February
28, 2007
|
|
|
9,230 |
|
|
|
41 |
% |
|
|
12,101 |
|
|
|
23 |
% |
|
March
31,2007
|
|
|
10,625 |
|
|
|
15 |
% |
|
|
21,204 |
|
|
|
75 |
% |
|
April
30, 2007
|
|
|
11,447 |
|
|
|
8 |
% |
|
|
26,323 |
|
|
|
24 |
% |
|
May
31, 2007
|
|
|
11,699 |
|
|
|
2 |
% |
|
|
27,989 |
|
|
|
6 |
% |
|
June
30, 2007
|
|
|
11,968 |
|
|
|
2 |
% |
|
|
29,821 |
|
|
|
7 |
% |
|
July
31, 2007
|
|
|
12,500 |
|
|
|
4 |
% |
|
|
32,560 |
|
|
|
9 |
% |
|
August
31, 2007
|
|
|
12,876 |
|
|
|
3 |
% |
|
|
36,999 |
|
|
|
14 |
% |
|
September
30, 2007
|
|
|
15,121 |
|
|
|
17 |
% |
|
|
38,123 |
|
|
|
3 |
% |
|
October
31, 2007
|
|
|
15,903 |
|
|
|
5 |
% |
|
|
39,400 |
|
|
|
3 |
% |
|
November
30, 2007
|
|
|
16,023 |
|
|
|
1 |
% |
|
|
40,995 |
|
|
|
4 |
% |
|
December
31, 2007
|
|
|
16,348 |
|
|
|
2 |
% |
|
|
45,243 |
|
|
|
10 |
% |
|
January
31, 2008
|
|
|
18,859 |
|
|
|
15 |
% |
|
|
53,343 |
|
|
|
18 |
% |
|
February
29, 2008 *
|
|
|
19,015 |
|
|
|
1 |
% |
|
|
40,301 |
|
|
|
(24 |
)% |
|
March
31,2008
|
|
|
19,659 |
|
|
|
3 |
% |
|
|
46,233 |
|
|
|
15 |
% |
|
April
30, 2008
|
|
|
23,788 |
|
|
|
21 |
% |
|
|
49,112 |
|
|
|
6 |
% |
|
May
31, 2008
|
|
|
26,442 |
|
|
|
11 |
% |
|
|
64,410 |
|
|
|
31 |
% |
|
June
30, 2008
|
|
|
29,323 |
|
|
|
11 |
% |
|
|
68,894 |
|
|
|
7 |
% |
|
July
31, 2008
|
|
|
29,743 |
|
|
|
1 |
% |
|
|
69,996 |
|
|
|
2 |
% |
|
August
31, 2008
|
|
|
30,127 |
|
|
|
1 |
% |
|
|
70,889 |
|
|
|
1 |
% |
|
September
30, 2008
|
|
|
32,366 |
|
|
|
7 |
% |
|
|
71,884 |
|
|
|
1 |
% |
|
October
31, 2008
|
|
|
34,121 |
|
|
|
5 |
% |
|
|
73,298 |
|
|
|
2 |
% |
|
November
30, 2008
|
|
|
34,545 |
|
|
|
1 |
% |
|
|
73,999 |
|
|
|
1 |
% |
|
December
31, 2008
|
|
|
35,989 |
|
|
|
4 |
% |
|
|
75,435 |
|
|
|
2 |
% |
|
January
31, 2009
|
|
|
36,169 |
|
|
|
1 |
% |
|
|
75,685 |
|
|
|
0 |
% |
|
February
29, 2009
|
|
|
36,199 |
|
|
|
0 |
% |
|
|
75,985 |
|
|
|
0 |
% |
|
March
31,2009
|
|
|
36,991 |
|
|
|
2 |
% |
|
|
76,685 |
|
|
|
1 |
% |
|
April
30, 2009
|
|
|
39,822 |
|
|
|
8 |
% |
|
|
80,025 |
|
|
|
4 |
% |
|
May
31, 2009
|
|
|
40,338 |
|
|
|
1 |
% |
|
|
81,399 |
|
|
|
2 |
% |
|
June
30, 2009
|
|
|
41,111 |
|
|
|
2 |
% |
|
|
81,555 |
|
|
|
0 |
% |
|
July
31, 2009
|
|
|
41,576 |
|
|
|
1 |
% |
|
|
81,979 |
|
|
|
1 |
% |
|
August
31, 2009
|
|
|
43,199 |
|
|
|
4 |
% |
|
|
83,278 |
|
|
|
2 |
% |
|
September
30, 2009
|
|
|
43,838 |
|
|
|
1 |
% |
|
|
85,113 |
|
|
|
2 |
% |
|
October
31, 2009
|
|
|
56,434 |
|
|
|
29 |
% |
|
|
89,981 |
|
|
|
6 |
% |
|
November
30, 2009 *
|
|
|
63,311 |
|
|
|
12 |
% |
|
|
72,126 |
|
|
|
(20 |
)% |
* During
November 2009 and February 2008, the Company conducted a campaign to remove
corporate profiles which were either considered to be of poor quality or were
not associated with customers who were continuing to pay for our services.
Subaye anticipates this process will be necessary at least once
annually.
**The number of members of
www.subaye.com disclosed in this chart includes both paying and non-paying
members of www.subaye.com.
From July
1, 2007 through December 31, 2007, Subaye.com offered a special promotion to
allow potential member users and current member users to use of our website free
of charge. As a result, no revenue was generated by the video advertising
platform during this time period.
www.x381.com
The
Company's www.x381.com website is focused on selling goods and services to the
marketplace in China. This website generated approximately $29
thousand and $0 in revenues for the years ended September 30, 2009 and 2008.
During September 2009, Subaye decided to discontinue services at www.x381.com for the time
being while the online shopping mall is in development. When the online shopping
mall is launched in June 2010, Subaye will invite the former members of www.x381.com to launch and
promote the online shopping mall. Ultimately, much of the infrastructure and
design features of www.x381.com will
be utilized and potentially integrated directly into the design of Subaye’s
online shopping mall.
Subaye
provided services at the www.x381.com website to its members free of charge
since the website was developed in July 2007. In July 2009 the
Company charged a one time fee of approximately $100 per member.
Other
Websites
We are
continuing to develop the www.goongood.com and www.goongreen.org websites but
have temporarily delayed the official launch of any revenue-generating business
models associated with these websites.
MyStarU.com
and Icurls.com
The
Company purchased www.mystaru.com on October 1, 2006, and www.icurls.com on
November 20, 2006. We expect to use the two websites in 2010 to continue to
develop the Company’s offerings in the arts education market. Through the date
of this report, Subaye has sold $2,200 thousand in “master franchise licenses”
and $1,800 thousand in "end user licenses" to unrelated parties in China. The
third party purchasers are intent on utilizing Subaye’s education-related
web-based offerings in certain sectors of China.
The
web-based offerings consists of a state-of-the-art streaming video platform with
education courses in the music and movie industries in China. The courseware was
developed using Guangzhou Subaye's EDU v5.0 Education Management System. The
multimedia content is produced using Adobe Flash(r) video synchronized
presentations and demonstrative video clips. Users can view multimedia
performing training presentations that include downloadable video files of
course materials and are then able to upload their own video files to teachers
for analysis, which affords users the opportunity to have questions answered by
course teachers. Subaye intends to use this new capability to reach hundreds of
thousands of young people who are interested in entering the performing arts,
music and movie industries.
Entertainment
Media Industry Overview and Market Opportunity
According to the Associated Press and
China Daily, motion picture box office receipts in mainland China
reached $629,000 thousand in 2008, an increase of 30.5% over the receipts for
2007. China currently restricts the nationwide release of foreign motion
pictures such that only 20 foreign motion pictures can be released in China
during a year. Approximately 40% of the motion picture box office receipts were
generated by foreign motion pictures released nationwide in China. We feel
China’s current policy within the entertainment industry along with the
population in China provides our partners with a tremendous opportunity to
produce profitable motion pictures in the coming years. We do not believe
China’s policy with regard to the entertainment industry will change in the
coming years. It is our intention to utilize the assets and contacts we
currently have in order to participate and profit from the growth of the
entertainment industry in China. We expect to profit from our direct investment
in copyrights to Chinese entertainment assets, and will also continue to produce
advertisements and develop marketing plans for customers who are searching for
advertising and marketing opportunities in the entertainment media industry in
China.
Trade
Services Industry Overview and Market Opportunity
On December 18, 2009, the China
Institute for World Trade Organization, released a report which forecasted 15%
growth in Chinese imports during 2010 and 13% growth in Chinese exports. If
these growth rates are in fact realized, we expect our trade services business
segment will benefit directly and our online membership services business
segment should benefit indirectly from the forecasted resurgence in
international trade.
We
operate our trade services business exclusively in Guangdong Province, which is
one of the most significant international import and export centers in China and
also serves a large portion of the domestic trade market in China. We conduct
our trade services business through our subsidiary, Guangzhou Panyu Metals and
Materials Limited, which holds the necessary licenses to conduct international
and domestic trading and provide logistics services to our customers. The
Company has embraced China’s move towards domestic trade and will be working to
develop domestic trade business as new opportunities in China continue to become
available seemingly on a daily basis.
Business
Strengths
First
Mover
We are one of only a few significant
businesses operating a video advertising platform in China. Subaye’s largest and
most successful competitor is www.taobao.com, is operated by Alibaba.
Alibaba is one of the premier internet portals in China. Alibaba had over $500
million in revenues over the past 12 months, but has not embraced video
advertising yet. If this company adopted video advertising, it would likely take
several years of development and operational organization in order to implement
a successful and comparable video advertising platform to ours. We believe the
graphic-based competition will eventually become obsolete. As a result of our
first mover status, it is our goal to be a clear leader in the video advertising
field for many years to come.
Comprehensive
Marketing as Opposed to Product Specific Advertising
We offer the members of www.subaye.com
a video advertising solution that can be designed to market a member’s entire
business as opposed to a particular product. Other graphic-based advertising
solutions such as those available at www.taobao.com and www.ebay.com are only
capable of showcasing a particular image, which is usually nothing more than a
picture of a product or possibly a group of products.
Access
to the Entertainment Media Industry
The management and certain members of
the Board of Directors have significant experience and contacts within the
entertainment media industry in Asia. Subaye routinely invests in entertainment
productions in Asia. We have been successful in developing and placing
advertisements for our customers within motion pictures released in Asia. We do
not believe any of our current competitors can offer such services. It is our
belief that the additional advertising solutions we are able to provide in the
entertainment media industry provide us with a key advantage over our
competitors. We expect our customers who utilize our experience and contacts
within the entertainment media industry will pay a significant premium for this
form of marketing.
Customer
Relationships
We develop video showcases and other
varied marketing solutions and also provide business guidance related to both
the international and domestic trading markets. We typically work with our
customers through direct face-to-face meetings. We believe we provide business
guidance to these customers beyond just basic advice and that the combination of
our contacts, experience and expertise in the marketing and advertising
industries are incomparable. We believe this method of doing business results in
more loyal and beneficial relationships with our customers.
Technology
Our
technology, namely our internet infrastructure and customer-friendly SaaS
software, has been developed and refined over approximately the past 5 years. We
believe we have the most efficient and effective internet infrastructure and
user interface of any video advertising business in China.
Pricing
We provide products and services with
competitive pricing. The paying members of www.subaye.com are charged fees of
approximately $120 per month for our video advertising product. We believe our
closest competitor is www.taobao.com, a Chinese website operated by Alibaba.
Customers of www.taobao.com are charged approximately 10 times the monthly fee
of $120 that we charge at www.subaye.com. Still, we believe our
platform at www.subaye.com is more comprehensive and beneficial to our customers
than the platforms offered by our competitors.
Business
Strategy
Expansion
of Customer Base
We will
continue to seek expansion of our membership base within the video advertising
business segment. We increased our sales force and provided additional training
to the sales force in the past year. We are constantly offering new promotional
terms and offerings in order to attract new members. We also expect our trade
services business segment to generate substantial new business in the coming
years as Subaye considers itself to be an experienced international trading
company that also has the necessary domestic contacts to develop a strong and
successful domestic trade services business.
Acquisition of Assets or Businesses
We will
continue to seek out additional assets, namely websites and copyrights, and will
likely complete numerous asset or business acquisitions in the
future. Future potential acquisitions will be contemplated by the
Company’s management with the knowledge and understanding that we have gained
from operations and business development work completed in recent
years. In general, we intend to review potential acquisitions that we
believe will generate profits over the initial 5 year term that equals or
exceeds the total purchase price of the asset or business.
Company
History
Subaye,
Inc. is a Delaware corporation. The Company was originally incorporated on
January 6, 1997 in the State of Indiana under the corporate name MAS Acquisition
XXI Corp. On December 21, 2000, the Company acquired Telecom Communications of
America, a sole proprietorship in California, and changed its name to Telecom
Communications, Inc. On February 28, 2005, the Company reincorporated in the
State of Delaware by merging with a Delaware corporation of the same name. The
surviving Delaware corporation succeeded to all of the rights, properties and
assets and assumed all of the liabilities of the original Indiana corporation.
On June 16, 2006, the Company acquired approximately 46% of Subaye.com, Inc. On
May 16, 2007, the Company acquired an additional 18% of Subaye.com, Inc. On July
10, 2007, the Company changed its name from Telecom Communications, Inc. to
MyStarU.com, Inc. During the fiscal year ended September 30, 2009, the Company
acquired an additional approximate 5% of Subaye.com, Inc through a series of
transactions involving the repayment of debts owed to the Company from
Subaye.com, Inc. and an additional cash investment in Subaye.com, Inc by the
Company. On October 26, 2009, the Company changed its name to Subaye,
Inc. On November 6, 2009, we acquired approximately 31% of
Subaye.com, Inc., upon which Subaye.com, Inc. became a wholly-owned subsidiary
of Subaye.
Risks
Related to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Accordingly, you should consider our future prospects
in light of the risks and uncertainties experienced by early stage companies in
evolving industries such as the internet industry in China. As a result of our
limited operating history, we have limited financial data that you can use to
evaluate our business and prospects. As a result of these factors, the future
revenue and income potential of our business is uncertain. If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
sustained losses in the past and our historical financial information may not be
representative of our future results of operations.
We have
experienced growth in recent periods, in part, due to the growth in China’s
internet industry, which may not be representative of future growth or be
sustainable. We cannot assure you that our historical financial information is
indicative of our future operating results or financial performance, or that our
profitability will be sustained.
We
face significant competition and may suffer from a loss of users and customers
as a result.
We face
significant competition in almost every aspect of our business, particularly
from other companies that seek to provide internet video services to users and
provide online marketing services to customers. Our main competitors include
U.S.-based internet video providers such as Google, Yahoo! and Microsoft, as
well as other Chinese internet companies. These Chinese competitors include
internet portals such as Netease, Sina and Sohu, other internet video service
providers, such as Baidu, and business-to-business, or B2B, service providers
such as Alibaba. We compete with these entities for both users and customers on
the basis of user traffic, quality (relevance) and quantity (index size) of the
video online, availability and ease restriction of use of products and services,
the number of customers, distribution channels and the number of associated
third-party websites. In addition, we may face greater competition from our U.S.
competitors as a result of, among other things, a relaxation on the foreign
ownership restrictions of Chinese internet content and advertising companies,
improvements in online payment systems and internet infrastructure in China and
our U.S. competitors’ increased business activities in China.
Many of
these competitors have significantly greater financial resources than we do.
They also have longer operating histories and more experience in attracting and
retaining users and managing customers than we do. They may use their experience
and resources to compete with us in a variety of ways, including by competing
more heavily for users, customers, distributors and networks of third-party
websites, investing more heavily in research and development and making
acquisitions. If any of our competitors provide comparable or better Chinese
language video sharing experience, our user traffic could decline significantly.
Any such decline in traffic could weaken our brand, result in loss of customers
and users and have a material adverse effect on our results of
operations.
We also
face competition from traditional advertising media, such as newspapers,
magazines, yellow pages, billboards and other forms of outdoor media, television
and radio. Most large companies in China allocate, and will likely continue to
allocate, most of their marketing budgets to traditional advertising media and
only a small portion of their budgets to online marketing. If these companies do
not devote a larger portion of their marketing budgets to online marketing
services provided by us, or if our existing customers reduce the amount they
spend on online marketing, our results of operations and future growth prospects
could be adversely affected.
Our
business depends on a strong network, and if we are not able to maintain and
enhance our network, we may lose customers, resulting in a reduction in
revenue.
We have
developed our user base primarily by word-of-mouth and incurred limited brand
promotion expenses prior to 2009. We have recently initiated brand promotion
efforts, but we cannot assure you that our new marketing efforts will be
successful in further promoting our brand. If we fail to promote and maintain
the "Subaye" brand, or if we incur excessive expenses in this effort, our
business and results of operations could be materially and adversely
affected.
If
we fail to continue to innovate and provide relevant products and services, we
may not be able to generate sufficient user traffic levels to remain
competitive, resulting in a loss of customers and reduction in
revenue.
Our
success depends on providing products and services that people use for a
high-quality internet video experience. Our competitors are constantly
developing innovations in internet video and online marketing as well as
enhancing users’ online experience. As a result, we must continue to invest
significant resources in research and development to enhance our internet video
technology and our existing products and services and introduce additional high
quality products and services to attract and retain users. If we are unable to
anticipate user preferences or industry changes, or if we are unable to modify
our products and services on a timely basis, we may lose users and customers.
Our operating results would also suffer if our innovations do not respond to the
needs of our users and customers, or are not appropriately timed with market
opportunities or are not effectively brought to market. As video technology
continues to develop, our competitors may be able to offer video sharing results
that are, or that are perceived to be, substantially similar to or better than
those generated by our video services. This may force us to expend significant
resources in order to remain competitive.
If
we fail to keep up with rapid technological changes, our future success may be
adversely affected due to a loss of customers and reduced ability to attract new
customers.
The
internet industry is subject to rapid technological changes. Our future success
will depend on our ability to respond to rapidly changing technologies, adapt
our services to evolving industry standards and improve the performance and
reliability of our services. Our failure to adapt to such changes could harm our
business. New marketing media could also adversely affect us. For example, the
number of people accessing the internet through devices other than personal
computers, including mobile telephones and hand-held devices, has increased in
recent years. If we are slow to develop products and technologies that are more
compatible with those devices or non-PC communications devices, we may not be
successful in capturing a significant share of this increasingly important
market for media and other services. In addition, the widespread adoption of new
internet, networking or telecommunications technologies or other technological
changes could require substantial expenditures to modify or adapt our products,
services or infrastructure. If we fail to keep up with rapid technological
changes to remain competitive in our rapidly evolving industry, our future
success may be adversely affected.
We
may not be able to prevent others from unauthorized use of our intellectual
property, which could result in a reduction of income and loss of
customers.
We rely
on a combination of copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect our intellectual property
rights. The protection of intellectual property rights in China may not be as
effective as those in the United States or other countries. The steps we have
taken may be inadequate to prevent the misappropriation of our technology.
Reverse engineering, unauthorized copying or other misappropriation of our
technologies could enable third parties to benefit from our technologies without
paying us. Moreover, unauthorized use of our technology could enable our
competitors to offer internet videos online, or online advertising services that
are comparable to or better than ours, which could harm our business and
competitive position. From time to time, we may have to enforce our intellectual
property rights through litigation. Such litigation may result in substantial
costs and diversion of resources and management attention.
Online
marketing is a relatively novel concept in China and our business strategy may
prove to be ineffective, resulting in loss of customers and
revenue.
If our
Online Membership Services business segment fails to retain existing customers
or attract new customers for our online marketing services, our business and
growth prospects could be seriously harmed. Our online marketing customers will
not continue to do business with us if their investment does not generate sales
and ultimately consumers, or if we do not deliver their web pages in an
appropriate and effective manner. Our customers may discontinue their business
with us at any time and for any reason as they are not subject to fixed-term
contracts. Failure to retain our existing online marketing customers or attract
new customers for our online marketing services could seriously harm our
business and growth prospects.
Our
reliance on third-party distributors poses operational risks to our
business.
Because
we primarily rely on distributors in providing services through www.subaye.com,
our failure to retain key distributors or attract additional distributors could
materially and adversely affect our business.
Online
marketing is at an early stage of development in China and is not as widely
accepted by or available to businesses in China as in the United States. As a
result, we rely heavily on a nationwide distribution network of third-party
distributors for our sales to, and collection of payment from our customers. If
our distributors do not provide quality services to our customers or otherwise
breach their contracts with our customers, we may lose customers and our results
of operations may be materially and adversely affected. We do not have long-term
agreements with any of our distributors, including our key distributors, and
cannot assure you that we will continue to maintain favorable relationships with
them. Our distribution arrangements, except for those with our key distributors,
are non-exclusive. Furthermore, some of our distributors also contract with our
competitors or potential competitors and may not renew their distribution
agreements with us. In addition, as new methods for accessing the internet,
including the use of wireless devices, become available, we may need to expand
our distribution network. If we fail to retain our key distributors or attract
additional distributors on terms that are commercially reasonable, our business
and results of operations could be materially and adversely
affected.
Our
strategy of acquiring complementary businesses, assets and technologies may fail
which could reduce our ability to compete for customers.
As part
of our business strategy, we have pursued, and intend to continue to pursue,
selective strategic acquisitions of businesses, assets and technologies that
complement our existing business. We may make other acquisitions in the future
if suitable opportunities arise. Acquisitions involve uncertainties and risks,
including:
• potential
ongoing financial obligations and unforeseen or hidden liabilities;
• failure
to achieve the intended objectives, benefits or revenue-enhancing
opportunities;
• costs
and difficulties of integrating acquired businesses and managing a larger
business; and
• diversion
of resources and management attention.
Our
failure to address these risks successfully may have a material adverse effect
on our financial condition and results of operations. Any such acquisition may
require a significant amount of capital investment, which would decrease the
amount of cash available for working capital or capital expenditures. In
addition, if we use our equity securities to pay for acquisitions, we may dilute
the value of your shares. If we borrow funds to finance acquisitions, such debt
instruments may contain restrictive covenants that could, among other things,
restrict us from distributing dividends. Such acquisitions may also generate
significant amortization expenses related to intangible assets.
We
may not be able to manage our expanding operations effectively which could
impede our growth.
The
Company was organized on January 6, 1997 and we have expanded our operations
rapidly. We anticipate significant continued expansion of our business as we
address growth in our user-base, customer-base and market opportunities. To
manage the potential growth of our operations and personnel, we will be required
to improve operational and financial systems, procedures and controls, and
expand, train and manage our growing employee base. Furthermore, our management
will be required to maintain and expand our relationships with other websites,
internet companies and other third parties. We cannot assure you that our
current and planned personnel, systems, procedures and controls will be adequate
to support our future operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
quarterly and annual revenues and costs and expenses as a percentage of our
revenues may be significantly different from our historical or projected rates.
Our operating results in future quarters may fall below expectations. Any of
these events could cause the price of our common stock to fall.
Our user
traffic tends to be seasonal. For example, we generally experience less user
traffic during public holidays in China. In addition, advertising spending in
China has historically been cyclical, reflecting overall economic conditions as
well as budgeting and buying patterns. Our rapid growth has lessened the impact
of the cyclicality and seasonality of our business. As we continue to grow, we
expect that the cyclicality and seasonality in our business may cause our
operating results to fluctuate.
Our
business may be adversely affected by third-party software applications that
interfere with our receipt of information from, and provision of information to,
our users, which may impair our users’ experience, resulting in a loss of
customers.
Our
business may be adversely affected by third-party malicious or unintentional
software applications that make changes to our users’ computers and interfere
with our products and services. These software applications may change our
users’ internet experience by hijacking queries to our websites, altering or
replacing our video play results, or otherwise interfering with our ability to
connect with our users. The interference often occurs without disclosure to or
consent from users, resulting in a negative experience that users may associate
with our websites and the Company itself. These software applications may be
difficult or impossible to remove or disable, may reinstall themselves and may
circumvent other applications’ efforts to block or remove them. The ability to
provide a superior user experience is critical to our success. If our efforts to
combat these software applications are unsuccessful, our reputation may be
harmed. This could result in a decline in user traffic and, consequently, our
revenues.
The
successful operation of our business depends upon the performance and
reliability of the internet infrastructure and fixed telecommunications networks
in China and diminished reliability could result in loss of confidence among our
users which could lead to reduced revenues or loss of customers.
Our
business depends on the performance and reliability of the internet
infrastructure in China. Almost all access to the internet is maintained through
state-owned telecommunication operators under the administrative control and
regulatory supervision of the Ministry of Information Industry of China. In
addition, the national networks in China are connected to the internet through
international gateways controlled by the Chinese government. These international
gateways are the only channels through which a domestic user can connect to the
internet. We cannot assure you that a more sophisticated internet infrastructure
will be developed in China. We may not have access to alternative networks in
the event of disruptions, failures or other problems with China’s internet
infrastructure. In addition, the internet infrastructure in China may not
support the demands associated with continued growth in internet
usage.
We
rely on highly skilled personnel and, if we are unable to retain or motivate key
personnel or hire qualified personnel, we may not be able to grow
effectively.
Our
performance and future success depends on the talents and efforts of highly
skilled individuals. We will need to continue to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization.
Competition in our industry for qualified employees is intense. Our continued
ability to compete effectively depends on our ability to attract new employees
and to retain and motivate our existing employees.
As
competition in our industry intensifies, it may be more difficult for us to
hire, motivate and retain highly skilled personnel. If we do not succeed in
attracting additional highly skilled personnel or retaining or motivating our
existing personnel, we may be unable to grow effectively.
If
we are unable to adapt or expand our existing technology infrastructure to
accommodate greater traffic or additional customer requirements, we may lose
customers.
Our
www.subaye.com website regularly serves a large number of users and customers
and delivers a large number of daily video views. Our technology infrastructure
is highly complex and may not provide satisfactory service in the future,
especially as the number of customers using our web-based services increases. We
may be required to upgrade our technology infrastructure to keep up with the
increasing traffic on our websites, such as increasing the capacity of our
hardware servers and the sophistication of our software. If we fail to adapt our
technology infrastructure to accommodate greater traffic or customer
requirements, our users and customers may become dissatisfied with our services
and switch to our competitors’ websites, which could harm our
business.
If
we fail to detect click-through fraud, we could lose the confidence of our
customers and our revenues could decline.
We may
become exposed to the risk of fraudulent clicks on ads posted by individuals
seeking to increase the advertising fees paid to our web publishers when we
commence internet advertising services. Although we have not historically
generated revenues from advertising, we may do so in the future. We may have to
refund revenue that our advertisers have paid to us and that was later
attributed to click-through fraud. Click-through fraud occurs when an individual
clicks on an ad displayed on a website for the sole intent of generating the
revenue share payment to the publisher rather than to view the underlying
content. From time to time it is possible that fraudulent clicks will occur and
we would not allow our advertisers to be charged for such fraudulent clicks.
This would negatively affect the profitability of our online advertising agency
business, and this type of fraudulent act could hurt our brand. If fraudulent
clicks are not detected, the affected advertisers may experience a reduced
return on their investment in our performance-based advertising network, which
could lead the advertisers to become dissatisfied with our online advertising
agency business, and in turn lead to loss of advertisers and the related
revenue. At the moment, we have no specific plans to focus on mitigating this
risk through specific actions but we may need to subscribe to certain applicable
software platforms that detect click-through fraud and possibly work with
consultants to further mitigate this risk. This could adversely affect our
business and our prospects.
Interruption
or failure of our information technology and communications systems could impair
our ability to effectively provide our products and services, which could damage
our reputation and harm our operating results.
Our
ability to provide our products and services depends on the continuing operation
of our information technology and communications systems. Any damage to or
failure of our systems could interrupt our service. Service interruptions could
reduce our revenues and profits, and damage our brand if our system is perceived
to be unreliable. Our systems are vulnerable to damage or interruption as a
result of terrorist attacks, war, earthquakes, floods, fires, power loss,
telecommunications failures, computer viruses, interruptions in access to our
websites through the use of “denial of service” or similar attacks, hacking or
other attempts to harm our systems, and similar events. Our servers, which are
hosted at third-party internet data centers, are also vulnerable to break-ins,
sabotage and vandalism. Some of our systems are not fully redundant, and our
disaster recovery planning does not account for all possible scenarios. The
occurrence of a natural disaster or a closure of an internet data center by a
third-party provider without adequate notice could result in lengthy service
interruptions.
In
October 2006, Subaye.com failed to provide internet video sharing results for
approximately four hours as a result of an error in operations. If we experience
frequent or persistent system failures on our website, our reputation and brand
could be permanently harmed. The steps we plan to take to increase the
reliability and redundancy of our systems are expensive, reduce our operating
margin and may not be successful in reducing the frequency or duration of
service interruptions.
If
our software contains bugs, we could lose the confidence of users, resulting in
loss of customers and a reduction of revenue.
Our
online systems, including our websites, our enterprise video play software and
other software applications and products, could contain undetected errors or
“bugs” that could adversely affect their performance. We regularly update and
enhance our website and our other online systems and introduce new versions of
our software products and applications. The occurrence of errors in any of these
may cause us to lose market share, damage our reputation and brand name, and
materially and adversely affect our business.
Concerns
about the security of electronic commerce transactions and confidentiality of
information on the internet may reduce use of our network and impede our
growth.
A
significant barrier to electronic commerce and communications over the internet
in general has been a public concern over security and privacy, including the
transmission of confidential information. If these concerns are not adequately
addressed, they may inhibit the growth of the internet and other online services
generally, especially as a means of conducting commercial transactions. If a
well-publicized internet breach of security were to occur, general internet
usage could decline, which could reduce traffic to our destination websites and
impede our growth.
We
have limited business insurance coverage and potential liabilities could exceed
our ability to pay them.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
Risks
Related to Our Corporate Structure
Chinese
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions which could result in significant disruptions to
our operations and/or our ability to generate revenues.
There are
substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including, but not limited to, the laws and
regulations governing our business, or the enforcement and performance of our
contractual arrangements with our vendors and customers. Subaye is considered a
foreign person or foreign enterprise under Chinese law. As a result, we are
subject to Chinese law limitations on foreign ownership of internet and
advertising companies. These laws and regulations are relatively new and may be
subject to change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.
Chinese
laws currently provide limited guidance as to whether an internet video provider
that provides video result links to domestic news websites is required to obtain
an approval from the State Council News Office. Chinese laws also do not provide
clear guidance as to whether an internet video provider that provides links to
online audio/video products is required to obtain an internet culture permit
from the Ministry of Culture or a license for broadcasting audio/video programs
from the State Administration of Radio, Film and Television. If the
interpretation of existing laws and regulations changes or new regulations comes
into effect requiring us to obtain any such licenses, permits or approvals, we
cannot assure you that we may successfully obtain them, and we may need to
remove links to news and audio/video products until we obtain the requisite
licenses, permits and approvals.
The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Complexity,
uncertainties and changes in Chinese regulation of internet business and
companies could affect our operations, including placing limitations on our
ability to own key assets, such as our websites.
The
Chinese government extensively regulates the internet industry including foreign
ownership of, and the licensing and permit requirements pertaining to companies
in the internet industry. These internet-related laws and regulations are
relatively new and evolving, and their interpretation and enforcement involve
significant uncertainty. As a result, in certain circumstances it may be
difficult to determine what actions or omissions may be deemed to be a violation
of applicable laws and regulations. Issues, risks and uncertainties relating to
Chinese government regulation of the internet industry include the
following:
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We
only have contractual control over our websites. We do not own the
websites due to the restriction of foreign investment in businesses
providing value-added telecommunication services in China, including
online information services.
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There
are uncertainties relating to the regulation of the internet business in
China, including evolving licensing practices, which means that permits,
licenses or operations at some of our companies may be subject to
challenge. This may disrupt our business, or subject us to sanctions,
requirements to increase capital or other conditions or enforcement, or
compromise enforceability of related contractual arrangements, or have
other harmful effects on us.
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Certain
Chinese government authorities have stated publicly that they are in the
process of promulgating new laws and regulations that will regulate
internet activities. The areas of regulation may include online
advertising, online news displaying, online audio-video program
broadcasting and the provision of culture-related information over the
internet. Other aspects of our online operations may be regulated in the
future. If our operations do not comply with these new regulations at the
time they become effective, we could be subject to
penalties.
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The
interpretation and application of existing Chinese laws, regulations and
policies and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, internet businesses in China,
including our business.
In
order to comply with Chinese laws limiting foreign ownership of internet and
advertising businesses, we conduct our ICP (independent content provider) and
online advertising businesses through our subsidiary, Guangzhou Subaye Computer
Tech Limited. If the Chinese government determines that these contractual
arrangements do not comply with applicable regulations, our ability to operate
could be significantly reduced resulting in loss of customers and
revenue.
The
Chinese government restricts foreign investment in internet and advertising
businesses. Accordingly, we operate our websites and our online advertising
business in China through Guangzhou Subaye Computer Tech Limited ”GZ Subaye,”
our wholly-owned subsidiary. GZ Subaye holds the licenses and approvals
necessary to operate our website and our online advertising business in China.
We cannot assure you, however, that we will be able to enforce these contracts.
Although we believe we comply with current Chinese regulations, we cannot assure
you that the Chinese government would agree that these operating arrangements
comply with Chinese licensing, registration or other regulatory requirements,
with existing policies or with requirements or policies that may be adopted in
the future. If the Chinese government determines that we do not comply with
applicable law, it could revoke our business and operating licenses, require us
to discontinue or restrict our operations, restrict our right to collect
revenues, block our website, require us to restructure our operations, impose
additional conditions or requirements with which we may not be able to comply,
impose restrictions on our business operations or on our customers, or take
other regulatory or enforcement actions against us that could be harmful to our
business.
Risks
Related to Doing Business in China
If
the internet and, in particular, online marketing are not broadly adopted in
China, our ability to increase revenue and sustain profitability could be
significantly reduced.
The use
of the internet as a marketing channel is at an early stage in China. Internet
and broadband penetration rates in China are both relatively low compared to
those in most developed countries. Many of our current and potential customers
have limited experience with the internet as a marketing channel, and have not
historically devoted a significant portion of their marketing budgets to online
marketing and promotion. As a result, they may not consider the internet
effective in promoting their products and services as compared to traditional
print and broadcast media.
Regulation
and censorship of information disseminated over the internet in China may
disrupt our operations and subject us to liability for information linked to our
websites, resulting in reduced income.
The
Chinese government has adopted regulations governing internet access and the
distribution of news and other information over the internet. Under these
regulations, internet content providers and internet publishers are prohibited
from posting or displaying over the internet content that, among other things,
violates Chinese laws and regulations, impairs the national dignity of China, or
is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to
comply with these requirements may result in the revocation of licenses to
provide internet content and other licenses and the closure of the concerned
websites. In the past, failure to comply with such requirements has resulted in
the closure of certain websites. The website operator may also be held liable
for such censored information displayed on or linked to the
website.
In
addition, the Ministry of Information Industry has published regulations that
subject website operators to potential liability for content displayed on their
websites and the actions of users and others using their systems, including
liability for violations of Chinese laws prohibiting the dissemination of
content deemed to be socially destabilizing. The Ministry of Public Security has
the authority to order any local internet service provider to block any internet
website at its sole discretion. From time to time, the Ministry of Public
Security has stopped the dissemination over the internet of information which it
believes to be socially destabilizing. The State Secrecy Bureau is also
authorized to block any website it deems to be leaking State secrets or failing
to meet the relevant regulations relating to the protection of State secrets in
the dissemination of online information.
Although
we attempt to monitor the content in our video sharing results at
www.subaye.com, we are not able to control or restrict the content of other
internet content providers linked to or accessible through our websites, or
content generated or placed on www.subaye.com by our users. To the extent that
Chinese regulatory authorities find any content displayed on our websites
objectionable, they may require us to limit or eliminate the dissemination of
such information on our websites, which may reduce our user traffic and have an
adverse effect on our business. In addition, we may be subject to penalties for
violations of those regulations arising from information displayed on or linked
to our websites, including a suspension or shutdown of our online
operations.
Chinese
government authorities may deem certain third-party websites unlawful and could
require us to remove links to such websites, which may reduce our user traffic
and reduce revenues.
The
internet industry in China, including the operation of online activities, is
extensively regulated by the Chinese government. Various Chinese government
authorities, such as the State Council, the Ministry of Information Industry,
the State Administration for Industry and Commerce, the State Press and
Publication Administration and the Ministry of Public Security are empowered to
issue and implement regulations governing various aspects of the internet and
online activities. Substantial uncertainties exist regarding the potential
impact of current and future Chinese laws and regulations on internet video
providers. We are not able to control or restrict the operation of third-party
websites linked to or accessible through our website. If third-party websites
linked to or accessible through our websites operate unlawful activities such as
online gambling on their websites, Chinese regulatory authorities may require us
to remove the links to such websites or suspend or shut down the operation of
such websites. This in turn may reduce our user traffic and adversely affect our
business. In addition, we may be subject to potential liabilities for providing
links to third-party websites that operate unlawful activities.
Intensified
government regulation of internet cafes could restrict our ability to maintain
or increase user traffic to our website.
In April
2001, the Chinese government began tightening its regulation of internet cafes.
In particular, a large number of unlicensed internet cafes have been closed. In
addition, the Chinese government has imposed higher capital and facility
requirements for the establishment of internet cafes. Furthermore, the Chinese
government’s policy, which encourages the development of a limited number of
national and regional internet cafe chains and discourages the establishment of
independent internet cafes, may slow down the growth of internet cafes.
Recently, the Ministry of Culture, together with other government authorities,
issued a joint notice suspending the issuance of new internet cafe licenses. It
is unclear when this suspension will be lifted. So long as internet cafes are
one of the primary venues for our users to access our website, any reduction in
the number, or any slowdown in the growth, of internet cafes in China could
limit our ability to maintain or increase user traffic to our
website.
If
Chinese law were to phase out the preferential tax benefits currently being
extended to foreign invested enterprises and “new or high-technology
enterprises” located in a high-tech zone, we would have to pay more taxes, which
could result in reduced income.
Under
Chinese laws and regulations, a foreign invested enterprise may enjoy
preferential tax benefits if it is registered in a high-tech zone and also
qualifies as a “new or high-technology enterprise” or a “software developer
enterprise.” If the Chinese law were to phase out preferential tax benefits
currently granted to “new or high-technology enterprises” and technology
consulting services, we would be subject to the standard statutory tax rate,
which currently is 25%, and we would be unable to obtain business tax refunds
for our provision of technology consulting services. Loss of these preferential
tax treatments could have a material and adverse effect on our financial
condition and results of operations.
Governmental
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our cash receipts are primarily derived from cash transfers from our Chinese
subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our Chinese subsidiaries and our affiliated entities to remit
sufficient foreign currency to pay cash or other payments to us, or otherwise
satisfy their foreign currency denominated obligations. Under existing Chinese
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The Chinese government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may
not be able to pay dividends in foreign currencies to our shareholders,
including holders of our Common Stock.
Recent
Chinese regulations relating to acquisitions of Chinese companies by foreign
entities may create regulatory uncertainties that could limit our Chinese
subsidiaries’ ability to distribute dividends or otherwise adversely affect the
implementation of our acquisition strategy.
The
Chinese State Administration of Foreign Exchange, or SAFE, issued a public
notice in January 2005 concerning foreign exchange regulations on mergers and
acquisitions in China. The public notice states that if an offshore company
intends to acquire a Chinese company, such acquisition will be subject to strict
examination by the relevant foreign exchange authorities. The public notice also
states that the approval of the relevant foreign exchange authorities is
required for any sale or transfer by the Chinese residents of a Chinese
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.
In April
2005, SAFE issued another public notice clarifying the January notice. In
accordance with the April notice, if an acquisition of a Chinese company by an
offshore company controlled by Chinese residents had been confirmed by a Foreign
Investment Enterprise Certificate prior to the issuance of the January notice,
each of the Chinese residents is required to submit a registration form to the
local SAFE branch to register his or her respective ownership interests in the
offshore company. The SAFE notices do not specify the timeframe during which
such registration must be completed. The Chinese resident must also amend such
registration form if there is a material event affecting the offshore company,
such as, among other things, a change to share capital, a transfer of stock, or
if such company is involved in a merger and an acquisition or a spin-off
transaction or uses its assets in China to guarantee offshore obligations. We
have notified our shareholders who are Chinese residents to register with the
local SAFE branch as required under the SAFE notices. However, we cannot provide
any assurances that all of our shareholders who are Chinese residents will
comply with our request to make or obtain any applicable registrations or
approvals required by these SAFE notices. The failure or inability of our
Chinese resident shareholders to comply with the registration procedures set
forth therein may subject us to fines and legal sanctions, restrict our
cross-border investment activities, or limit our Chinese subsidiaries’ ability
to distribute dividends to our company.
As it is
uncertain how the SAFE notices will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future
strategy. For example, we may be subject to more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of
dividends and foreign-currency-denominated borrowings, which may adversely
affect our results of operations and financial condition. In addition, if we
decide to acquire a Chinese company, we cannot assure you that we or the owners
of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the
SAFE notices. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
On July 21, 2005, the Chinese government changed its decade-old policy of
pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB
is permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. While the international reaction to the RMB
revaluation has generally been positive, there remains significant international
pressure on the Chinese government to adopt an even more flexible currency
policy, which could result in a further and more significant appreciation of the
RMB against the U.S. dollar. Our revenues and costs are mostly denominated in
RMB, while a significant portion of our financial assets are denominated in U.S.
dollars. We rely entirely on dividends and other fees paid to us by our
subsidiaries and affiliated entity in China. Any significant revaluation of RMB
may materially and adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable on, our stock in
U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would
make any new RMB denominated investment or expenditure more costly to us, to the
extent that we need to convert U.S. dollars into RMB for such purposes. An
appreciation of RMB against the U.S. dollar would also result in foreign
currency translation losses for financial reporting purposes when we translate
our RMB denominated financial assets into U.S. Dollars, as the U.S. Dollar is
our reporting currency.
Risks
Related to Our Stock Being Publicly Traded
Our
stock price may be volatile.
We cannot
predict the extent to which a trading market will develop for our common stock
or how liquid that market might become. The trading price of our common stock is
expected to be highly volatile as well as subject to wide fluctuations in price
in response to various factors, some of which are beyond our control. These
factors include:
|
|
•
|
Quarterly
variations in our results of operations or those of our
competitors.
|
|
|
•
|
Announcements
by us or our competitors of acquisitions, new products, significant
contracts, commercial relationships or capital
commitments.
|
|
|
•
|
Our
ability to develop and market new and enhanced products on a timely
basis.
|
|
|
•
|
Changes
in governmental regulations or in the status of our regulatory
approvals.
|
|
|
•
|
Changes
in earnings estimates or recommendations by securities
analysts.
|
|
|
•
|
General
economic conditions and slow or negative growth of related
markets.
|
In
addition, the stock market in general, and the market for technology companies
in particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of those
companies. These broad market and industry factors may seriously harm the market
price of our Common Stock, regardless of our actual operating performance. In
addition, in the past, following periods of volatility in the overall market and
the market price of a company’s securities, securities class action litigation
has often been instituted against these companies. Such litigation, if
instituted against us, could result in substantial costs and a diversion of our
management’s attention and resources.
You
may experience substantial dilution if we raise funds through the issuance of
additional equity and/or convertible securities.
We may
engage in equity financing in the future in order to raise funds for working
capital, financing expansion efforts and/or investing in research and
development. Such financing may result in a substantial dilution of your equity
stake in our company.
The
Company has an operating lease for an office in Foshan City, People’s Republic
of China. The office has a gross area of approximately 4,010 square
feet, for a term of 36 months from July 1, 2008 through June 30, 2011 in the
amount of $173,232.
The
Company has an operating lease for its headquarters in Guangzhou City, People’s
Republic of China. The office has a gross area of approximately
22,000 square feet, for a term of 24 months from February 1, 2009 through
January 31, 2011 in the amount of $211,776.
Item 3. Legal
Proceedings.
As of the
date of this filing, the Company is not a party to any legal proceeding that
could reasonably be expected to have a material impact on our operations or
finances.
PART
II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market
Information
Our
common stock is currently traded on a limited basis on the OTCBB in the United
States of America under the symbol “SBAY.OB.” The quotation of our common stock
on the OTCBB does not assure that a meaningful, consistent and liquid trading
market currently exists. We cannot predict whether a more active market for our
common stock will develop in the future. In the absence of an active trading
market:
|
|
·
|
Investors
may have difficulty buying and selling or obtaining market
quotations;
|
|
|
·
|
Market
visibility for our common stock may be limited;
and
|
|
|
·
|
A
lack of visibility of our common stock may have a depressive effect on the
market price for our common
stock.
|
The
reported high and low sale prices for the common stock are shown below for the
periods indicated. The prices reflect inter-dealer prices, without retail
mark-up, markdown or commissions, and may not always represent actual
transactions. As of December 23, 2009, we had approximately 195 stockholders of
record. We anticipate many more shares are held in “street name” whereby our
transfer agent does not have a record the individual or entity who holds the
stock certificates.
|
Period
|
|
High*
|
|
|
Low*
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended December 31, 2007
|
|
$ |
60.00 |
|
|
$ |
13.00 |
|
|
Quarter
ended March, 2008
|
|
$ |
32.00 |
|
|
$ |
12.00 |
|
|
Quarter
ended June 30, 2008
|
|
$ |
20.00 |
|
|
$ |
12.00 |
|
|
Quarter
ended September 30, 2008
|
|
$ |
14.00 |
|
|
$ |
8.00 |
|
|
Quarter
ended December 31, 2008
|
|
$ |
60.00 |
|
|
$ |
13.00 |
|
|
Quarter
ended March, 2009
|
|
$ |
32.00 |
|
|
$ |
12.00 |
|
|
Quarter
ended June 30, 2009
|
|
$ |
20.00 |
|
|
$ |
12.00 |
|
|
Quarter
ended September 30, 2009
|
|
$ |
14.00 |
|
|
$ |
8.00 |
|
On
September 30, 2009, SBAY was quoted at $9.00 per share.
*On
October 23, 2009, the Company effectuated a 100 for 1 reverse
split. The prices above reflect the price per share adjusted for the
reverse split.
Dividends
There are
no present material restrictions that limit the ability of the Company to pay
dividends on common stock or that are likely to do so in the future. The Company
has not paid any dividends with respect to its common stock, and does not intend
to pay dividends in the foreseeable future.
Our common stock may be subject to
the “penny stock” rules as promulgated under the Exchange
Act.
In the
event that no exclusion from the definition of “penny stock” under the Exchange
Act is available, then any broker engaging in a transaction in our common stock
will be required to provide its customers with a risk disclosure document,
disclosure of market quotations, if any, disclosure of the compensation of the
broker-dealer and its sales person in the transaction, and monthly account
statements showing the market values of our securities held in the customer’s
accounts. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer’s confirmation of sale. Certain brokers are less willing to engage in
transactions involving “penny stocks” as a result of the additional disclosure
requirements described above, which may make it more difficult for holders of
our common stock to dispose of their shares.
Future Sales of Large Amounts of
Common Stock Could Adversely Affect the Market Price of Our Common
Stock and Our Ability to Raise Capital.
Future
sales of our common stock by existing stockholders pursuant to Rule 144 under
the Securities Act of 1933, as amended (the “Securities Act”), or following the
exercise of future option grants, could adversely affect the market price of our
common stock. Our directors and executive officers and their family members are
not under lockup letters or other forms of restriction on the sale of their
common stock. The issuance of any or all of these additional shares upon
exercise of options will dilute the voting power of our current stockholders on
corporate matters and, as a result, may cause the market price of our common
stock to decrease. Further, sales of a large number of shares of common stock in
the public market could adversely affect the market price of the common stock
and could materially impair our future ability to generate funds through sales
of common stock or other equity securities.
Recent Sales of Unregistered
Securities.
On June
9, 2009, we sold 60,000 shares of common stock at $6.00 a share for $360
thousand to Gui Wen Cai.
On June
9, 2009, we sold 5,600 shares of common stock at $6.00 a share for $34 thousand
to Todd Heinzl.
On August
3, 2009, we sold 500,000 shares of common stock at $6.00 a share for $3,000
thousand Wukuang IE Limited.
On August
17, 2009, we sold 60,000 shares of common stock at $7.00 a share for $420
thouand to Bon Air Group Limited.
On August
17, 2009, we sold 55,000 shares of common stock at $7.00 a share for $385
thousand to Gui Wen Cai.
On
September 25, 2009, we sold 100,000 shares of common stock and warrants to
purchase an additional 220,000 shares of common stock at $12.00 per share for
$800 thousand to Wukuang IE Limited.
On
November 6, 2009, the Company entered into a Share Exchange Agreement with
certain shareholders of its subsidiary, Subaye.com, Inc. Pursuant to the terms
of the Share Exchange, the Company issued 3,408,852 shares of its common stock
in exchange for all outstanding shares of common stock of Subaye.com, Inc. the
Company did not already own (the “Share Exchange”). As a result of the Share
Exchange, Subaye.com, Inc. became a wholly-owned subsidiary of the
Company.
The
securities were issued in reliance on an exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”),
and all securities re “restricted securities” within the meaning under the
Securities Act.
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATION
• Highlights
and Executive Summary
• Results
of Operations—an analysis of the Company’s consolidated results of operations,
for the two years presented in the consolidated financial
statements
• Liquidity
and Capital Resources—an analysis of the effect of the Company’s operating,
financing and investing activities on the Company’s liquidity and capital
resources
• Off-Balance
Sheet Arrangements—a discussion of such commitments and
arrangements
• Critical
Accounting Policies and Estimates—a discussion of accounting policies that
require significant judgments and estimates
• New
Accounting Pronouncements—a summary and discussion of the Company’s plans for
the adoption of relevant new accounting standards relevant
The following discussion contains
forward-looking statements that reflect the Company’s plans, estimates and
beliefs. Actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this Prospectus particularly in "Special Note Regarding Forward-Looking
Statements," "Market Data" and "Risk Factors."
Highlights
and Executive Summary
For the
year ended September 30, 2009, the Company reported revenues of $47,987
thousand, an increase of 64% from revenues of $29,172 thousand reported for the
year ended September 30, 2008. Net income was $9,778 thousand for the
year ended September 30, 2009 as compared to $3,780 thousand for the year ended
September 30, 2008. The Company continued to expand its video advertising
membership base. We generated an additional $17,144 thousand in
revenues from the online membership services business segment in 2009, as
compared to 2008.
The table
below displays the segment revenue and segment net income growth in Subaye’s
three business segments for the year ended September 30, 2009 as compared to
September 30, 2008, prior to adjustments for the income in the minority interest
of our subsidiaries.
|
Growth Rate, For the Year Ended September 30, 2009
|
|
|
Business Segment
|
|
Segment
Revenues
|
|
|
Segment Net
Income
|
|
|
|
|
|
|
|
|
|
|
Online
Membership Services
|
|
|
180 |
% |
|
|
243 |
% |
|
Entertainment
Media
|
|
|
43 |
% |
|
|
(30 |
)% |
|
Trade
Services
|
|
|
(11 |
)% |
|
|
13 |
% |
Results
of Operations
Income
Statement Items
The
following tables set forth key components of the Company’s results of operations
for the three months ended September 30, 2009 and 2008,
respectively. All dollar amounts, except per share amounts referenced
herein are “in thousands”.
Years
Ended September 30, 2009 and 2008
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Increase
(Decrease)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
47,987 |
|
|
$ |
29,172 |
|
|
$ |
18,815 |
|
|
|
64 |
% |
|
Cost
of Sales
|
|
|
24,642 |
|
|
|
20,220 |
|
|
|
4,422 |
|
|
|
22 |
% |
|
Gross
Profit
|
|
|
23,345 |
|
|
|
8,952 |
|
|
|
14,393 |
|
|
|
161 |
% |
|
Operating
Expenses
|
|
|
10,525 |
|
|
|
3,972 |
|
|
|
6,553 |
|
|
|
165 |
% |
|
Income
From Operations
|
|
|
12,820 |
|
|
|
4,980 |
|
|
|
7,840 |
|
|
|
157 |
% |
|
Income
Taxes
|
|
|
- |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
100 |
% |
|
Minority
Interest in Income of Subsidiary
|
|
|
(3,042 |
) |
|
|
(1,194 |
) |
|
|
(1,848 |
) |
|
|
(155 |
)% |
|
Net
Income
|
|
|
9,778 |
|
|
|
3,780 |
|
|
|
5,998 |
|
|
|
159 |
% |
|
Other
Comprehensive Income
|
|
|
24 |
|
|
|
37 |
|
|
|
(13 |
) |
|
|
(35 |
)% |
|
Comprehensive
Income
|
|
|
9,802 |
|
|
|
3,817 |
|
|
|
5,985 |
|
|
|
157 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
$ |
5.33 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
-
Fully Diluted
|
|
$ |
5.32 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Share Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
1,836,217 |
|
|
|
1,532,405 |
|
|
|
|
|
|
|
|
|
|
-
Fully Diluted
|
|
|
1,839,230 |
|
|
|
1,532,405 |
|
|
|
|
|
|
|
|
|
Revenues
increased by $18,815:
Revenues
were $47,987 for the year ended September 30, 2009 compared to $29,172 for the
year ended September 30, 2008. The increase of $18,815 is due primarily to the
Company’s growth in its online membership services business segment, which
totaled $17,144 in additional revenues in 2009 as compared to
2008. For the years ended September 30, 2009 and 2008, the Company
recorded revenues of approximately $26,651 and $9,507, respectively, for its
online membership services business segment, all of which was derived from the
www.subaye.com and www.x381.com websites. Revenues from online
membership services were generated primarily from monthly subscription fees paid
by the members of www.subaye.com. Additional revenues from the sale of SaaS
software licenses totaled $4,426 and $0 for the years ended September 2009 and
2008, respectively. During the period from October 1, 2007 through December 31,
2007, the Company did not charge any membership fees for its members to use the
www.subaye.com website. Subaye expects to generate significant growth in 2010 in
its online membership services business segment as a result of new advertising
and marketing plans recently developed by management, updates to the user
interface of www.subaye.com and the launch and integration of Subaye’s online
shopping mall, all of which should drive additional internet traffic and
potential new business to www.subaye.com. For the years ended September 30, 2009
and 2008, the Company recorded $10,275 and $7,179 in revenues, respectively, for
the Company's entertainment media business segment. The Company's licensing and
outright sales of its entertainment assets, namely copyrights, continued
according to management's plans. During the years ended September 30,
2009 and 2008, Subaye sold copyrights to 3 and 2 motion pictures for $6,203 and
$2,405, respectively. During 2010, Subaye anticipates significant revenues from
the release of Dayoucun, the Company’s third significant motion picture
investment to be released in Asia since 2005. We will also look to generate
revenues from other copyrights we hold for Dayoucun, namely the DVD and
international motion picture rights, respectively. Subaye currently only holds
copyrights to motion pictures and does not produce motion pictures. Subaye’s
production partners are currently in production on motion pictures associated
with our copyrights for Qianfu and Paobu. We anticipate that Subaye could
generate significant revenues from each of these motion pictures in
2010. The revenues for the trade services business segment were
$11,061 and $12,486 in 2008, respectively. The Company believes its
trade services business segment has recovered well from the recent global
financial crisis. Subaye is now focusing on business opportunities within China
but will also continue to operate and expand its international
business.
Costs
of Sales increased by $4,422:
Costs of
sales were $24,642 for the year ended September 30, 2009 compared to $20,220 for
the year ended September 30, 2008. Amortization of the Company's websites which
was included in costs of sales for the years ended September 30, 2009 and 2008
totaled $3,368 and $2,186, respectively. Amortization of the
Company's computer software which was included in costs of sales for the years
ended September 30, 2009 and 2008 totaled $3,128 and $965,
respectively. Amortization of the Company's copyrights which was
included in costs of sales for the years ended September 30, 2009 and 2008
totaled $1,042 and $50, respectively. The costs of sales recorded
upon the sale of copyright licenses totaled approximately $5,405 in 2009 as
compared to $2,107 in 2008. The costs of sales for the trade services
business segment were approximately $10,792 in 2009 versus $12,211 in
2008.
Operating
expenses increased by $6,553:
For the
year ended September 30, 2009, we incurred operating expenses of $10,525 as
compared to $3,972 for the year ended September 30, 2008. Advertising expense
was $7,222 and $873 for the years ended September 30, 2009 and 2008,
respectively. Subaye incurred a one-time expense of $6,737 during the year ended
September 30, 2009 related to an advertising promotion whereby the members of
www.subaye.com each received 1,600 DVDs. Each DVD included an introductory
promotion specific to the member and a copy of the motion picture released in
2005, titled Big Movie: Subaye. Subaye owns the DVD copyright to Big Movie:
Subaye. The members used the DVDs for promotional activities with their
customers, many of whom are also potential members of www.subaye.com. Bad debt
expense was $332 and $(185) for the years ended September 30, 2009 and 2008,
respectively. Depreciation expense totaled $57 and $382 for the years ended
September 30, 2009 and 2008, respectively. Stock-based compensation expense
totaled $1,375 and $1,538 for the years ended September 30, 2009 and 2008,
respectively, due to a decrease in 2009 issuances of stock to consultants and
employees as compared to 2008. Other selling, general and administrative
expenses for the year ended September 30, 2009 and 2008 totaled approximately
$1,539 and $1,364, respectively.
Net
income increased by $5,998:
Subaye
generated net income of $9,778 for the year ended September 30, 2009 as compared
to $3,780 for the year ended September 30, 2008 as a result of the substantial
growth of the online membership services business segment.
Corporate
tax
The
Company accounts for income taxes under the Financial Accounting Standards
Board’s Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes – US GAAP” (“ASC
740”).. ASC 740 requires the recognition of deferred income tax liabilities and
assets for the expected future tax consequences of temporary differences between
the income tax basis and the financial reporting basis of assets and
liabilities. Provisions for income taxes consist of taxes currently due plus
deferred taxes. ASC 740 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties.
The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
United
States of America
Since we
had no operations within the United States, there is no provision for United
States taxes and there are no deferred tax amounts as of September 30, 2009 and
2008, respectively.
Delaware
The
Company is incorporated in Delaware but does not conduct business in Delaware.
Therefore, the Company is not subject to state corporate income
tax.
British
Virgin Islands
3G
Dynasty and Subaye IIP are incorporated in the British Virgin Islands and, under
the current laws of the British Virgin Islands, are not subject to income
taxes.
Hong
Kong
MyStarU
Ltd. and Media Group International Ltd. are incorporated in Hong Kong and are
subject to Hong Kong taxation on its activities conducted in Hong Kong and
income arising in or derived from Hong Kong. No provision for Hong Kong profits
tax has been made as these subsidiaries incurred losses during the years ended
September 30, 2009 and 2008, respectively. The applicable Hong Kong statutory
tax rate for the years ended September 30, 2009 and 2008 is 17.5%.
People’s
Republic of China
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (“the Income Tax Laws”). Under the Income Tax Laws,
foreign investment enterprises (“FIE”) are generally subject to an income tax at
an effective rate of 25% on income as reported in their statutory financial
statements after appropriate tax adjustments unless the enterprise is located in
specially designated regions of cities for which more favorable effective tax
rates apply. Upon approval by the Chinese tax authorities, FIEs scheduled to
operate for a period of 10 years or more and that are engaged in manufacturing
and production may be exempt from income taxes for two years, commencing with
their first profitable year of operations, after taking into account any losses
brought forward from prior years, and thereafter with a 50% exemption for the
next three years.
No
provision for Enterprise income tax in China had been made for the years ended
September 30, 2009 and 2008 due to the fact that the Company is exempt from the
China tax based on the statutory provisions granting a tax holiday for a two
year period, as stated above, for the years ended September 30, 2009 and
2008.
On
January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the prior
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The key changes in the new law are:
|
|
a.
|
The
new standard EIT rate of 25% replaced the 33% rate that had been
applicable to both DES and FIEs, except for High Tech companies who pay a
reduced rate of 15%. The Company believes it qualifies as a “High Tech
Company.”
|
|
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of five years or
until the tax holiday term is completed, whichever is
sooner.
|
The
Company and its subsidiaries were all established before March 16, 2007 and are
therefore is qualified to continue enjoying the reduced tax rate as described
above through the year ended September 30, 2009.
No
provision for enterprise income tax in the PRC had been made for the years ended
September 30, 2009 and 2008 due to the fact that certain subsidiaries of the
Company are exempt from PRC tax based on the statutory provisions granting a tax
holiday for a two year period, as stated above, specifically for the years ended
September 30, 2009 and 2008, respectively. The Company’s tax holiday
expired on October 1, 2009. The following table details the aggregate
effect of the tax holiday on the Company’s results of operations for the two
most recent fiscal years.
|
|
|
Year Ended
September
30, 2009
(Thousands)
|
|
|
Year Ended
September
30, 2008
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Tax Without Consideration of Tax Holiday
|
|
$
|
2,932
|
|
|
$
|
924
|
|
|
PRC
Tax Savings as a Result of Tax Holiday
|
|
$
|
(2,932
|
)
|
|
$
|
(924
|
)
|
|
Increase
in Basic and Diluted Earnings Per Share as a Result of Tax
Holiday
|
|
$
|
1.60
|
|
|
$
|
0.60
|
|
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the years ended September 30, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
Statutory rates
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Foreign
income
|
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
China
tax rates
|
|
|
25.0 |
% |
|
|
33.0 |
% |
|
China
income tax exemption
|
|
|
(25.0 |
)% |
|
|
(33.0 |
)% |
|
Effective
income tax rates
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Value Added
Tax
Enterprises
or individuals who sell products, engage in repair and maintenance, or import
and export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax rate applicable to the Company is 6% of the
gross sales price. No credit is available for VAT paid on the
purchases.
Liquidity
and Capital Resources
We
believe that our currently-available working capital and collection of our
accounts receivable, should be adequate to sustain our operations at least
through the end of fiscal year 2010.
As of
September 30, 2009, we had a cash balance of $321, consisting of money held in
bank in mainland China and Hong Kong banks and cash in hand. We currently have
no cash positions in the United States of America or any other countries. We
have been funding our operations through receipts from customers and
equity-based financing such as the sale of our common stock.
Management
has invested substantial time evaluating and considering numerous proposals for
possible investments, acquisitions or business combinations, either sought out
by management or presented to management by investment professionals, the
Company’s advisers and others. We continue to consider acquisitions, business
combinations, or start up proposals, which could be advantageous to our
shareholders. No assurance can be given that any such project, acquisition or
combination will be concluded, or that all these actions will be approved by our
Board of Directors.
Net cash
provided by operations for the year ended September 30, 2009 was $2,052. We
generated $9,778 in net income for the year ended September 30, 2009. A total of
$7,595 in depreciation and amortization was recorded for the year ended
September 30, 2009. We recorded $1,375 in amortization expense related to stock
based compensation. We recorded income in the minority interest of the Company’s
subsidiaries of $3,042. Accounts receivable increased by $5,651. The net
additional investments in copyrights for the year ended September 30, 2009
totaled $5,546. Lastly, a total of $8,152 was spent as a deposit to be applied
to future inventory purchases for the online shopping mall, once it is complete.
In the future, we may use cash in our operations due to the continuing
implementation of our business model and increased expenses from costs
associated with being a public company.
Net cash
used in investing activities for the year ended September 30, 2009 was $6,877.
It represented the purchase of three websites for a total of $3,963 and
installment payments on Subaye’s new website for the online shopping mall
totaling $2,919. Additionally, we incurred expenditures for furniture and
fixtures for our new office of $5.
Net cash
provided by financing activities for the year ended September 30, 2009 was
$4,819. It represented the issuance of 680,600 shares of the Company's common
stock for an aggregate purchase price of $4,999 less repayments of short term
bank loans of $180.
Our
future growth is dependent on our ability to raise capital for expansion, and to
seek additional revenue sources. If we decide to pursue any acquisition
opportunities or other expansion opportunities, we may need to raise additional
capital, although there can be no assurances that such capital-raising
activities would be successful.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that will have a current or future effect on
our financial condition and changes in financial condition in 2010 or
2009.
Protection
of Intellectual Property
The
Company currently holds$17,623 in copyrights covering programming rights for
movies, internet broadcasts, DVDs and television programming. We cannot
guarantee that if a competitor or anyone else were to commence litigation
against us, we would be able to adequately defend our position and retain
ownership and value in the intellectual property.
Capital
Requirements
In 2009
and 2008, the Company raised significant financing by issuing equity securities,
namely the Company’s common stock. If management determines that additional
financing is necessary, we may not be able to continue to find adequate sources
of financing in the future. Certain business segments in which we have committed
to expanding operations, namely the “Entertainment Media” business segment,
involve very significant capital requirements.
Impact
of Inflation
We
believe that inflation has had a negligible effect on operations during the
years ended September 30, 2009 and 2008, respectively. We believe that we can
offset inflationary increases in the cost of sales by increasing sales and
improving operating efficiencies.
Trends,
Events, and Uncertainties
The
present demand for our products will be dependent on, among other things, market
acceptance of the Company’s concept, the quality of its products, and general
economic conditions which are cyclical in nature. The Company’s business
operations may be adversely affected by increased competition and prolonged
recessionary periods in China.
Dividends
We do not
expect to pay dividends for the foreseeable future. As a result, you
could lose your entire investment in the Company.
Table
of Contractual Obligations
The
following is a table outlining the Company’s actual and projected significant
contractual obligations as of September 30, 2009.
|
|
|
For the Years Ended September 30,
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Total
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations (1)
|
|
$ |
164 |
|
|
$ |
79 |
|
|
$ |
- |
|
|
$ |
— |
|
|
$ |
- |
|
|
$ |
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
164 |
|
|
$ |
79 |
|
|
$ |
- |
|
|
$ |
— |
|
|
$ |
- |
|
|
$ |
243 |
|
|
(1)
|
On
July 1, 2008, the Company entered into a lease for new office space North
Twelfth Road, Country Garden, Shunde District, Foshan City, Guangdong,
China 528312 for approximately $5 thousand per month through June 30,
2011.
|
On
February 1, 2009, the Company entered into a lease agreement to utilize
approximately 22,000 square feet of office space at 349 Dabei Road, Shiqiao
Street, Panyu District, Guangzhou City, Guangdong, China 511400 for
approximately $9 thousand per month through January 31, 2011.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements, which have been
prepared in accordance with GAAP. In connection with the preparation of
consolidated financial statements, the Company is required to make assumptions
and estimates about future events, and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and the related disclosures.
The assumptions, estimates and judgments included within these estimates are
based on historical experience, current trends and other factors we believe to
be relevant at the time the consolidated financial statements were prepared. On
a regular basis, the accounting policies, assumptions, estimates and judgments
are reviewed to ensure that the consolidated financial statements are presented
fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from
the assumptions and estimates, and such differences could be
material.
The
preparation of consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions are used for, but are not limited to:
(1) asset impairments and (2) depreciable lives of assets. Future
events and their effects cannot be predicted with certainty, and accordingly,
accounting estimates require the exercise of judgment. The accounting estimates
used in the preparation of the consolidated financial statements will change as
new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. We evaluate and update these
assumptions and estimates on an ongoing basis and may employ outside experts to
assist with these evaluations. Actual results could differ from the estimates
that have been used.
Significant
accounting policies are discussed in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements. We
believe the following accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, as they require
management to make difficult, subjective or complex judgments, and to make
estimates about the effect of matters that are inherently
uncertain.
|
Description
|
|
Judgments and Uncertainties
|
|
Effect if Actual Results
Differ from Assumptions
|
|
Impairment
of Long Lived Assets
|
|
|
|
|
| |
|
|
|
|
|
The
carrying amounts of long-lived assets are reviewed periodically in order
to assess whether the recoverable amounts have declined below the carrying
amounts.
|
|
These
assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is
reduced to recoverable amount. The recoverable amount is the greater of
the net selling price and the value in use. It is difficult to
precisely estimate selling price because quoted market prices for the
Company’s assets or cash-generating units are not readily available. In
determining the value in use, expected cash flows generated by the asset
or the cash-generating unit are discounted to their present value, which
requires significant judgment relating to level of sales volume, selling
price and amount of operating costs. The Company uses all readily
available information in determining an amount that is a reasonable
approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sales volume,
selling price and amount of operating costs.
|
|
Estimates
contemplated by the Company with regard to the recoverability of carrying
amounts for its long lived assets may prove to be inaccurate, in which
case property, plant and equipment may be understated or overstated. In
the future, if property, plant and equipment are determined to be
overvalued, the Company would be required to recognize such costs in
operating expenses at the time of such determination. Likewise, if
property, plant and equipment are determined to be undervalued, operating
expenses may have been over-reported in previous periods and the Company
would be required to recognize such additional operating income at the
time of sale.
|
|
|
|
|
|
|
| |
|
|
|
|
|
The
estimated depreciable life of long lived assets is estimated upon the
acquisition of assets.
|
|
These
assets are reviewed by management and assigned a specific depreciable
life. The depreciable life is used to estimate the term for
which the assets cost basis should be depreciated or expense
over. The Company uses all readily available information in
determining a depreciable life that is a reasonable approximation of the
actual depreciable life of an asset.
|
|
Estimates
for depreciable life contemplated by the Company may prove to be
inaccurate, in which case property, plant and equipment may be understated
or overstated. In the future, if property, plant and equipment are
determined to be overvalued, the Company would be required to recognize
such costs in operating expenses at the time of such determination.
Likewise, if property, plant and equipment are determined to be
undervalued, operating expenses may have been over-reported in previous
periods and the Company would be required to recognize such additional
operating income at the time of
sale.
|
New
Accounting Policies and Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued
amended revenue recognition guidance for arrangements with multiple
deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of management’s best estimate of selling price
for individual elements of an arrangement when vendor specific objective
evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE)
is unavailable. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. The company is
currently assessing its implementation of this new guidance, but does not expect
a material impact on the consolidated financial statements.
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be
adopted in the same period that the company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
The company is currently assessing its implementation of this new guidance, but
does not expect a material impact on the consolidated financial
statements.
On
October 1, 2009, the company adopted the revised FASB guidance regarding
business combinations which was required to be applied to business combinations
on a prospective basis. The revised guidance requires that the acquisition
method of accounting be applied to a broader set of business combinations,
amends the definition of a business combination, provides a definition of a
business, requires an acquirer to recognize an acquired business at its fair
value at the acquisition date and requires the assets and liabilities assumed in
a business combination to be measured and recognized at their fair values as of
the acquisition date (with limited exceptions). There was no impact upon
adoption and the effects of this guidance will depend on the nature and
significance of business combinations occurring after the effective
date.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The company adopted this guidance in the quarter ended
September 30, 2009 and there was no material impact on the consolidated
financial statements.
On July 1, 2009, the FASB
issued the FASB Accounting Standards Codification (the Codification). The
Codification became the single source of authoritative nongovernmental U.S.
GAAP, superseding existing FASB, American Institute of Certified Public
Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.
The Codification eliminates the previous US GAAP hierarchy and establishes one
level of authoritative GAAP. All other literature is considered
non-authoritative. The Codification was effective for interim and annual periods
ending after September 15, 2009. The company adopted the Codification
for the year ending September 30, 2009. There was no impact to the
consolidated financial results as this change is disclosure-only in
nature.
In
June 2009, the FASB issued amendments to the accounting rules for
variable interest entities (VIEs) and for transfers of financial assets. The new
guidance for VIEs eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity and requires
ongoing qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QSPEs) are no
longer exempt from consolidation under the amended guidance. The amendments also
limit the circumstances in which a financial asset, or a portion of a financial
asset, should be derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented, and/or when the
transferor has continuing involvement with the transferred financial asset. The
company will adopt these amendments for interim and annual reporting periods
beginning on October 1, 2010. The company does not expect the adoption of these
amendments to have a material impact on the consolidated financial
statements.
In
May 2009, the FASB issued guidelines on subsequent event accounting which
sets forth: 1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; 2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. These guidelines were effective for
interim and annual periods ending after June 15, 2009, and the company
adopted them in the quarter ended June 30, 2009. There was no impact on the
consolidated financial statements.
In
April 2009, the FASB issued guidance on determining fair value when the
volume and level of activity for an asset or liability has significantly
decreased, and in identifying transactions that are not orderly. Based on the
guidance, if an entity determines that the level of activity for an asset or
liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate fair
value. The guidance was effective on a prospective basis for interim and annual
periods ending after June 15, 2009. The company adopted this guidance in
the quarter ended June 30, 2009, and there was no material impact on the
consolidated financial statements.
In
April 2009, the FASB issued guidance on the recognition and presentation of
other-than-temporary impairments on investments in debt securities. If an
entity’s management asserts that it does not have the intent to sell a debt
security and it is more likely than not that it will not have to sell the
security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This guidance was effective on a prospective basis
for interim and annual periods ending after June 15, 2009. The company
adopted this guidance for the quarter ended June 30, 2009, and there was no
material impact on the consolidated financial statements.
In
April 2009, the FASB issued additional requirements regarding interim
disclosures about the fair value of financial instruments which were previously
only disclosed on an annual basis. Entities are now required to disclose the
fair value of financial instruments which are not recorded at fair value in the
financial statements in both their interim and annual financial statements. The
new requirements were effective for interim and annual periods ending after
June 15, 2009 on a prospective basis. The company adopted these
requirements in the quarter ended June 30, 2009. There was no impact on the
consolidated financial results as this relates only to additional
disclosures.
In
April 2009, the FASB issued an amendment to the revised business
combination guidance regarding the accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies. The
requirements of this amended guidance carry forward without significant revision
the guidance on contingencies which existed prior to January 1, 2009.
Assets acquired and liabilities assumed in a business combination that arise
from contingencies are recognized at fair value if fair value can be reasonably
estimated. If fair value cannot be reasonably estimated, the asset or liability
would generally be recognized in accordance with the Accounting Standards
Codification (ASC) Topic 450 on contingencies. There was no impact upon
adoption.
In
April 2008, the FASB issued new requirements regarding the determination of
the useful lives of intangible assets. In developing assumptions about renewal
or extension options used to determine the useful life of an intangible asset,
an entity needs to consider its own historical experience adjusted for
entity-specific factors. In the absence of that experience, an entity shall
consider the assumptions that market participants would use about renewal or
extension options. The new requirements apply to intangible assets acquired
after October 1, 2009. The adoption of these new rules did not have a
material impact on the Consolidated Financial Statements.
In
December 2007, the FASB issued new guidance on noncontrolling interests in
consolidated financial statements. This guidance requires that the
noncontrolling interest in the equity of a subsidiary be accounted for and
reported as equity, provides revised guidance on the treatment of net income and
losses attributable to the noncontrolling interest and changes in ownership
interests in a subsidiary and requires additional disclosures that identify and
distinguish between the interests of the controlling and noncontrolling owners.
Pursuant to the transition provisions, the company adopted this new guidance on
October 1, 2009 via retrospective application of the presentation and
disclosure requirements.
In
March 2008, the FASB issued new disclosure requirements regarding
derivative instruments and hedging activities. Entities must now provide
enhanced disclosures on an interim and annual basis regarding how and why the
entity uses derivatives; how derivatives and related hedged items are accounted
for, and how derivatives and related hedged items affect the entity’s financial
position, financial results and cash flow. Pursuant to the transition
provisions, the company adopted these new requirements on October 1, 2009.
These new requirements do not impact the consolidated financial results as they
are disclosure-only in nature.
The FASB
guidance on fair value measurements and disclosures became effective
January 1, 2008. However, in February 2008, the FASB delayed the
effective date regarding fair value measurements and disclosures of nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to October 1, 2009. The adoption of these provisions
related to nonfinancial assets and nonfinancial liabilities on October 1,
2009 did not have a material impact on the consolidated financial
statements.
In
June 2008, the FASB issued guidance in determining whether instruments
granted in share-based payment transactions are participating securities. The
guidance became effective on October 1, 2009 via retrospective application.
According to the new guidance, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating
securities and, therefore, are included in computing earnings per share (EPS)
pursuant to the two-class method. The two-class method determines earnings per
share for each class of common stock and participating securities according to
dividends or dividend equivalents and their respective participation rights in
undistributed earnings. The adoption of these provisions is not expected to have
a material impact on the consolidated financial statements.
Item 8. Financial Statements and
Supplementary Data.
SUBAYE,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F1
|
|
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
|
F2
|
|
Consolidated
Statements of Operations and Comprehensive Income for the Years Ended
September 30, 2009 and 2008
|
|
F3
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended September 30, 2009
and 2008
|
|
F4
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2009 and
2008
|
|
F5
|
|
Notes
to Consolidated Financial Statements for the Years Ended September 30,
2009 and 2008
|
|
F6-F29
|
Report of Independent Registered
Public Accounting Firm
To the
Board of Directors and Stockholders of
Subaye,
Inc. and Subsidiaries,
We have
audited the accompanying consolidated balance sheets of Subaye, Inc. and
Subsidiaries, a Delaware corporation, as of September 30, 2009 and 2008, and the
related consolidated statements of operations and comprehensive income,
stockholders’ equity, and cash flows for the years ended September 30, 2009 and
2008. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits include consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstance, but not for expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. 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 Subaye, Inc.
and Subsidiaries, a Delaware corporation, as of September 30, 2009 and 2008, and
the results of its consolidated operations and comprehensive income,
stockholders' equity, and its cash flows for the years ended September 30, 2009
and 2008, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DNTW
Chartered Accountants, LLP
Markham,
Canada
December
29, 2009
(FORMERLY
KNOWN AS MYSTARU.COM, INC.)
CONSOLIDATED
BALANCE SHEETS
|
|
|
As of September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In Thousands)
|
|
|
Assets
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
321 |
|
|
$ |
303 |
|
|
Accounts
Receivable, Net of Allowance for Doubtful Accounts of $363 in 2009, $31 in
2008
|
|
|
15,706 |
|
|
|
10,387 |
|
|
Prepaid
Expenses
|
|
|
1,902 |
|
|
|
2,265 |
|
|
Deposit
for Purchase of Inventoriable Assets
|
|
|
8,152 |
|
|
|
— |
|
|
Other
Current Assets
|
|
|
1,843 |
|
|
|
749 |
|
|
Total
Current Assets
|
|
|
27,924 |
|
|
|
13,704 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net of Accumulated Depreciation of $20,198 in 2009,
$13,645 in 2008
|
|
|
10,626 |
|
|
|
10,302 |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
|
|
|
|
|
|
|
Copyrights,
Net of Accumulated Amortization of $1,674 in 2009, $1,550 in
2008
|
|
|
17,623 |
|
|
|
13,119 |
|
|
Goodwill
|
|
|
557 |
|
|
|
557 |
|
|
Total
Intangible Assets, Net
|
|
|
18,180 |
|
|
|
13,676 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
56,730 |
|
|
$ |
37,682 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$ |
4,978 |
|
|
$ |
4,968 |
|
|
Short
Term Debt
|
|
|
863 |
|
|
|
1,043 |
|
|
Total
Current Liabilities
|
|
|
5,841 |
|
|
|
6,011 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
5,841 |
|
|
|
6,011 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Consolidated Subsidiaries
|
|
|
10,180 |
|
|
|
7,138 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 Par Value, 50,000,000 Shares Authorized, 0 Shares Issued and
Outstanding as of September 30, 2009 and 2008
|
|
|
— |
|
|
|
— |
|
|
Common
Stock, $0.001 Par Value; 300,000,000 Shares Authorized; 2,479,243 and
1,560,143 Issued and Outstanding as of September 30, 2009 and
2008
|
|
|
3 |
|
|
|
2 |
|
|
Additional
Paid in Capital
|
|
|
32,422 |
|
|
|
24,456 |
|
|
Deferred
Stock Based Compensation
|
|
|
(2,908 |
) |
|
|
(1,285 |
) |
|
Shares
to be Issued
|
|
|
30 |
|
|
|
— |
|
|
Accumulated
Other Comprehensive Income
|
|
|
54 |
|
|
|
30 |
|
|
Retained
Earnings
|
|
|
11,108 |
|
|
|
1,330 |
|
|
Total
Shareholders' Equity
|
|
|
40,709 |
|
|
|
24,533 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
56,730 |
|
|
$ |
37,682 |
|
The
accompanying notes to these consolidated financial statements are an integral
part of these balance sheets.
(FORMERLY
KNOWN AS MYSTARU.COM, INC.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
OTHER COMPREHENSIVE INCOME
|
|
|
For the Years Ended September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In Thousands, Except
Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
47,987 |
|
|
$ |
29,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
24,642 |
|
|
|
20,220 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
23,345 |
|
|
|
8,952 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
7,222 |
|
|
|
873 |
|
|
Other
General and Administrative Expenses
|
|
|
3,303 |
|
|
|
3,099 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
10,525 |
|
|
|
3,972 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
12,820 |
|
|
|
4,980 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
- |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
Before Minority Interest
|
|
|
12,820 |
|
|
|
4,974 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Income of Subsidiary
|
|
|
(3,042 |
) |
|
|
(1,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
9,778 |
|
|
|
3,780 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
24 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
9,802 |
|
|
$ |
3,817 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
5.33 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
5.32 |
|
|
$ |
2.47 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,836,217 |
|
|
|
1,532,405 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,839,230 |
|
|
|
1,532,405 |
|
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
(FORMERLY
KNOWN AS MYSTARU.COM, INC.)
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(In
Thousands Except Shares Outstanding)
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
|
No
Par
Value
|
|
|
Shares
to be
Issued
|
|
|
Deferred
Stock
Based
Compen-
sation
|
|
|
Additional
Paid in
Capital
|
|
|
Accumu-
lated
Other
Compre-
hensive
Income
|
|
|
(Accumu-
lated
Deficit)
Retained
Earnings
|
|
|
Total
Stockholder’s
Equity
|
|
|
Balance,
September
30, 2007
|
|
|
1,462,880 |
|
|
$ |
2 |
|
|
$ |
- |
|
|
$ |
(479 |
) |
|
$ |
23,051 |
|
|
$ |
(7 |
) |
|
$ |
(2,450 |
) |
|
$ |
20,117 |
|
|
Issuance
of Stock for Cash
|
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
600 |
|
|
|
- |
|
|
|
- |
|
|
|
600 |
|
|
Investment
in Subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
199 |
|
|
|
- |
|
|
|
- |
|
|
|
199 |
|
|
Issuance
of Stock for Services
|
|
|
30,263 |
|
|
|
- |
|
|
|
- |
|
|
|
(2,344
|
) |
|
|
606 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,738
|
) |
|
Issuance
of Stock For Settlement
|
|
|
17,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Amortization
of Stock Based Compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,538 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,538 |
|
|
Foreign
Currency Translation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37 |
|
|
|
- |
|
|
|
37 |
|
|
Net
Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,780 |
|
|
|
3,780 |
|
|
Balance,
September 30, 2008
|
|
|
1,560,143 |
|
|
|
2 |
|
|
|
- |
|
|
|
(1,285
|
) |
|
|
24,456 |
|
|
|
30 |
|
|
|
1,330 |
|
|
|
24,533 |
|
|
Issuance
of Stock For Cash
|
|
|
680,600 |
|
|
|
1 |
|
|
|
10 |
|
|
|
- |
|
|
|
4,988 |
|
|
|
- |
|
|
|
- |
|
|
|
4,999 |
|
|
Issuance
of Stock for Services
|
|
|
238,500 |
|
|
|
- |
|
|
|
20 |
|
|
|
(2,998
|
) |
|
|
2,978 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Amortization
of Stock Based Compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,375 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,375 |
|
|
Foreign
Currency Translation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
|
|
24 |
|
|
Net
Income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,778 |
|
|
|
9,778 |
|
|
Balance, September 30,
2009
|
|
|
2,479,243 |
|
|
$ |
3 |
|
|
|
30 |
|
|
$ |
(2,908 |
) |
|
|
32,422 |
|
|
$ |
54 |
|
|
$ |
11,108 |
|
|
$ |
40,709 |
|
The
accompanying notes to these consolidated financial statements are an integral
part of these statements.
(FORMERLY
KNOWN AS MYSTARU.COM, INC.)
CONSOLIDATED
STATEMENTS
OF CASHFLOWS
|
|
|
For the Years Ended
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In Thousands)
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
9,778
|
|
|
$
|
3,780
|
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities—
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
7,595
|
|
|
|
4,778
|
|
|
Amortization
of Stock Based Compensation
|
|
|
1,375
|
|
|
|
1,538
|
|
|
Bad
Debt Expense (Recovery)
|
|
|
332
|
|
|
|
(185
|
)
|
|
Minority
Interests
|
|
|
3,042
|
|
|
|
1,194
|
|
|
(Increase)
Decrease in Assets—
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(5,651
|
)
|
|
|
(2,111
|
)
|
|
Prepaid
Expenses
|
|
|
363
|
|
|
|
(637
|
)
|
|
Deposit
for Inventoriable Assets
|
|
|
(8,152
|
)
|
|
|
—
|
|
|
Other
Current Assets
|
|
|
(1,094
|
)
|
|
|
(126
|
)
|
|
Copyrights
|
|
|
(5,546
|
)
|
|
|
(6,856
|
)
|
|
Increase
(Decrease) in Liabilities —
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
|
(227
|
)
|
|
|
1,274
|
|
|
Related
Party Payable
|
|
|
-
|
|
|
|
(6
|
)
|
|
Other
Current Liabilities
|
|
|
237
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By Operating Activities
|
|
|
2,052
|
|
|
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Cash
Proceeds Upon Acquisition of MGI
|
|
|
-
|
|
|
|
3
|
|
|
Capital
Expenditures
|
|
|
(6,877
|
)
|
|
|
(5,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(6,877
|
)
|
|
|
(5,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
From Short Term Debt
|
|
|
(180
|
)
|
|
|
1,043
|
|
|
Proceeds
From Issuance of Common Stock
|
|
|
4,999
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By Financing Activities
|
|
|
4,819
|
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes in Cash
|
|
|
24
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Cash
|
|
|
18
|
|
|
|
(848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Year
|
|
|
303
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
End of Year
|
|
$
|
321
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid During the Year for
|
|
|
|
|
|
|
|
|
|
Interest,
Net of Amounts Capitalized
|
|
$
|
—
|
|
|
$
|
6
|
|
|
Income
Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Supplemental
Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of Stock for Services, Deferred Compensation
|
|
$
|
2,998
|
|
|
$
|
606
|
|
|
Issuance
of Stock by Subsidiary for Services, Deferred Compensation
|
|
$
|
—
|
|
|
$
|
1,738
|
|
|
Accounts
Receivable Used for Acquisition of Website
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
Acquisition
of MGI Through Issuance of Common Stock of Subsidiary
|
|
$
|
—
|
|
|
$
|
200
|
|
|
Acquisition
of Websites Through Issuance of Common Stock
|
|
$
|
—
|
|
|
$
|
1,535
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
(FORMERLY
KNOWN AS SUBAYE, INC.)
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS DESCRIPTION AND ORGANIZATION
Subaye,
Inc., a Delaware corporation (together with its consolidated subsidiaries,
“Subaye” or the “Company”) is a leading video advertising and entertainment
media provider in China. Subaye’s platform includes production,
upload, storage, sharing and publishing onto more than 33 main video sharing
portal websites. Subaye also offers SaaS business solutions and is in the
process of developing what Subaye believes is the first online shopping mall in
the world that will utilize 3D imaging throughout the online customer interface.
Subaye’s video sharing services, SaaS solutions and its online shopping mall
will be fully integrated in 2010. Subaye’s members will use Subaye’s SaaS online
content management software to manage their online video and graphic showcases,
maintain customer data and to manage operations within their webshops at the
online shopping mall. Subaye utilizes its experience and contacts within the
entertainment media industry in Asia to produce and place advertisements on
behalf of its customers. The Company also routinely invests the Company’s funds
in entertainment productions in Asia. Typically, these investments consist of
the purchase of the full or partial copyrights to an entertainment production.
Subaye’s trade services are offered to customers based in Asia, North America
and Europe. These customers order products through Subaye and ship products both
domestically within China and internationally. Subaye’s trade services provide
solutions for both importing and exporting transactions.
The
Company was originally incorporated on January 6, 1997 in the State of Indiana
under the corporate name MAS Acquisition XXI Corp. On December 21, 2000, the
Company acquired Telecom Communications of America, a sole proprietorship in
California, and changed its name to Telecom Communications, Inc. On February 28,
2005, the Company reincorporated in the State of Delaware by merging with a
Delaware corporation of the same name. The surviving Delaware corporation
succeeded to all of the rights, properties and assets and assumed all of the
liabilities of the original Indiana corporation. On July 10, 2007, the Company
changed its name from Telecom Communications, Inc. to MyStarU.com, Inc. On
October 23, 2009, the Company changed its name to Subaye, Inc. The Company's
common stock continues to be quoted under the symbol, “SBAY.OB,” on the FINRA
over-the-counter bulletin board (“OTCBB”) in the United States of
America.
The
Company operates in three distinct business segments:
1. Online
Membership Services - The Company provides online content and member services
for commercial use.
2.
Entertainment Media - The Company produces and places advertising solutions on
behalf of its customers and routinely invests in entertainment arts productions
in China.
3. Trade
Services – The Company operates a domestic and international importing and
exporting services operation to acquire and distribute goods within China or
internationally.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
Basis of
presentation
The
consolidated financial statements, prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”), include
the assets, liabilities, revenues, expenses and cash flows of the Company and
all its subsidiaries. This basis of accounting differs in certain material
respects from that used for the preparation of the books and records of the
Company’s principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in China (“PRC GAAP”) the
accounting standards used in the place of their domicile. The
accompanying consolidated financial statements reflect necessary adjustments not
recorded in the books and records of the Company’s subsidiaries to present them
in conformity with GAAP.
The
consolidated financial statements of the Company reflect the activities of the
parent and the following subsidiaries. All significant intercompany accounts,
transactions and cash flows are eliminated on consolidation.
|
Subsidiaries
|
|
Countries Registered In
|
|
Percentage of
Ownership
|
|
|
MyStarU
Ltd.
|
|
Hong
Kong, The People’s Republic of China
|
|
|
100.00
|
% |
|
3G
Dynasty Inc.
|
|
British
Virgin Islands
|
|
|
100.00
|
% |
|
Subaye.com
|
|
United
States of America, Delaware
|
|
|
69.03
|
% |
|
Subaye
IIP Limited
|
|
British
Virgin Islands
|
|
|
69.03
|
% |
|
Guangzhou
Panyu Metals & Materials Limited
|
|
The
People’s Republic of China
|
|
|
100.00
|
% |
|
Guangzhou
Subaye Computer Tech Limited
|
|
The
People’s Republic of China
|
|
|
69.03
|
% |
|
Media
Group International Limited
|
|
Hong
Kong, The People’s Republic of China
|
|
|
69.03
|
% |
MyStarU
Ltd.
MyStarU
Ltd. operates the Company’s online educational platforms, and manages the Subaye
franchise programs.
3G
Dynasty
3G
Dynasty is a holding company utilized by the Company to manage its investments
in intellectual properties such as movie copyrights.
Subaye.com
Subaye.com
is a holding company utilized by the Company to manage its investments in Subaye
IIP Limited.
Subaye IIP
Limited
Subaye
IIP Limited is a holding company utilized by the Company to manage its
investments in Subaye.com, Guangzhou Subaye Computer Technology Limited and
Media Group International, Inc.
Guangzhou Panyu Metals &
Materials Limited
Guangzhou
Panyu Metals & Materials Limited ("Panyu") operates the Company’s importing
and exporting business.
Guangzhou Subaye Computer
Technology Limited
Guangzhou
Subaye Computer Technology Limited ("Guangzhou Subaye") provides technical
expertise with regard to computer software, hardware, internet infrastructure
and networking for the Company and its employees and markets and sells computer
software, namely IBS Version 5.0.
Media Group International
Limited
Media
Group International Limited ("MGI") provides media, advertising and marketing
expertise for the Company and markets and sells its services such as advertising
product placement services and media management services within the PRC
entertainment market and overseas.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company’s principal
operating subsidiaries established in the PRC use their local currency, Renminbi
(RMB), as their functional currency. Results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statements of stockholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders’ equity and
amounted to $54 thousand and $30 thousand as of September 30, 2009 and 2008,
respectively.
Revenue
Recognition
The
Company negotiates contracts with its customers, which may include revenue
arrangements with multiple deliverables. The Company’s accounting policies are
defined such that each deliverable under a contract is accounted for separately
in accordance with the relevant sections of the Financial Accounting Standards
Board’s (the “FASB”) Accounting Standards Codification (the “ASC”), namely ASC
Topic 605-25 “Revenue
Recognition Multiple- Element Arrangements.” Historically, the
Company has not entered into contracts with its customers that provided for
multiple deliverables.
The
Company has identified the following five revenue streams, as
follows:
Online
Membership Services - Monthly Website Subscriptions
Revenue
for the monthly subscription from the members who subscribed to the Company’s
websites is recognized on a pro-rata basis, is calculated on a day-to-day basis
and invoiced at the end of each month of full service in accordance under the
relevant sections of the ASC, namely ASC Topic 605 “Revenue Recognition” (“ASC
605”). The Company does not currently charge a cancellation fee or penalty if
and when a customer decides to terminate their membership with our
websites.
Current
terms of the www.subaye.com membership agreement stipulate that the customer
pays a nonrefundable fee of approximately $120 per month for access to the
marketing and advertising capabilities in place at www.subaye.com. The Company
also provide SaaS software to its members, although, SaaS software contracts are
entered into separately and in addition to the regular membership
agreement.
Online
Membership Services - SaaS
The
Company derives its revenues from subscription fees paid by customers for access
to the Company’s computer software and computer hardware through the internet.
Because the Company provides its application as a service, the Company follows
the provisions of ASC 605. The Company recognizes revenue when all of the
following conditions are met: (1) there is persuasive evidence of an arrangement
with a customer; (2) the service has been provided to the customer; (3) license
agreement terms are deemed fixed or determinable and free of contingencies or
uncertainties that may alter the agreement such that it may not be complete and
final; and (4) collection is probable.
The
Company’s arrangements do not contain general rights of return.
Subscription
revenues are recognized ratably over the contract terms beginning on the
commencement date of each contract. Invoicing is recorded on a monthly
basis. As a result, the Company does not anticipate generating any
deferred revenue associated with its SaaS business segment.
The
Company has entered into various SaaS contracts with its customers whereby
payment is due from the customers within a 30 day term. Subsequent to
entering into the Company’s initial SaaS contracts with its customers, the
Company negotiated with its customers to allow flexibility with regard to
payment terms. The Company and its SaaS business customers have
orally agreed that payments are due from customers within a 90 day
term. The Company has limited collection history with these specific
customers and is new to the SaaS business. However, we have not had
any significant collection issues with these specific customers through
September 30, 2009.
Online
Membership Services - Software Sales
Revenue
from the sale of software is recognized pursuant to the requirements of ASC
985-605, Software Revenue
Recognition” The Company begins to recognize revenue from licensing and
supporting our software products when all of the following criteria are met: (1)
we have evidence of an arrangement with a customer; (2) we deliver the products;
(3) license agreement terms are deemed fixed or determinable and free of
contingencies or uncertainties that may alter the agreement such that it may not
be complete and final; and (4) collection is probable.
Our
software licenses generally do not include acceptance provisions. An acceptance
provision allows a customer to test the software for a defined period of time
before committing to license the software. If a license agreement includes an
acceptance provision, we do not record deferred subscription value or recognize
revenue until the earlier of the receipt of a written customer acceptance or, if
not notified by the customer to cancel the license agreement, the expiration of
the acceptance period.
Under our
traditional software sales business model, software license agreements for our
IBS version 5.0 software typically includes a lifetime right of use and do not
provide for any support or maintenance to be provided by the Company for the
term of the agreement. Software license fees are recognized
once all four criteria for revenue recognition criteria are met (as the
contracts do not include a right to unspecified software products.)
Software
license fees are recognized once all four criteria for revenue recognition
criteria are met (as the contracts do not include a right to unspecified
software products.)
Our
standard licensing agreements include a product warranty provision for all
products. Such warranties are accounted for in accordance with ASC 450 “Contingencies” (“ASC 450”)
The likelihood that we would be required to make refunds to customers under such
provisions is considered remote. As a result, the Company has not accrued for
potential liabilities associated with the performance of its software products
as no liabilities are specifically anticipated by the Company.
Under the
terms of substantially all of our license agreements, we have agreed to
indemnify customers for costs and damages arising from claims against such
customers based on, among other things, allegations that our software products
infringe the intellectual property rights of a third party. In most cases, in
the event of an infringement claim, we retain the right to (i) procure for the
customer the right to continue using the software product; (ii) replace or
modify the software product to eliminate the infringement while providing
substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be
reasonably achieved, we may terminate the license agreement and refund to the
customer a pro-rata portion of the fees paid. Such indemnification provisions
are accounted for in accordance with ASC 450. The likelihood that we would be
required to make refunds to customers under such provisions is considered
remote. In most cases and where legally enforceable, the indemnification is
limited to the amount paid by the customer.
Entertainment
Media - Licensing Agreements
Licensing
revenue derived from the Company’s copyrights is recognized in accordance with
ASC 926, Entertainment -
Films (“ASC 926”). ASC 926 specifies that revenue is to be recognized
when all of the following conditions are met:
|
|
1.
|
Persuasive
evidence of a sale or licensing arrangement with a customer
exists.
|
|
|
2.
|
The
film is complete and, in accordance with the terms of the arrangement, has
been delivered or is available for immediate and unconditional
delivery.
|
|
|
3.
|
The
license period of the arrangement has begun and the customer can begin its
exploitation, exhibition, or sale.
|
|
|
4.
|
The
arrangement fee is fixed or
determinable.
|
|
|
5.
|
Collection
of the arrangement fee is reasonably
assured.
|
When the
Company's licensing fee is based on a percentage or share of a customer's
revenue from the exploitation of the films, the Company recognizes revenue as
the customer exploits the films and the Company meets all of the other revenue
recognition conditions. In those circumstances, the Company receives reports
from the customers on a periodic basis and uses those reports as the basis for
recording revenue.
The
Company reviewed its business plan with regard to whether the Company will
continue to sell off assets it doesn’t consider having immediate benefit to the
Company. As a result, the Company believes the sale of these copyrights is in
the ordinary course of business and should not be reported as an extraordinary
event or as other income. Accordingly, the Company has reported the proceeds
from the sales in “licensing and royalty revenues” within the consolidated
statement of operations and the adjusted cost basis associated with the sale in
costs of sales on the consolidated statement of operations.
Trade
Services
The
Company recognizes revenue on import and export sales when products are
delivered and the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable. Net sales of products
represent the invoiced value of goods, net of value added taxes, sales returns,
trade discounts and allowances. The Company reviewed the considerations included
in ASC 405-45 with respect to sales of products within each of our business
segments but with particular attention to our importing and exporting business
segment. We determined that while ASC 405-45 outlines the variety of types of
business transactions which would require the Company to report its revenues and
costs of goods sold on a net basis, we do not believe our importing and
exporting business should be accounted for with net reporting of revenues and
costs of sales. The Company takes full ownership and assumes the risk of loss
for its imported goods while the goods are in transit. The Company does not
consider itself an agent for its customers, as described by ASC 405-45. After
reviewing ASC 405-45, management believes that the Company is correct in
continuing to present its revenues and costs of goods sold on a gross
basis.
Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of the Company’s products sold in China are subject to a Chinese
value-added tax at a rate of 6% of the gross sales price or at a rate approved
by the Chinese local government.
Fair
Value Measurements
Effective
January 1, 2008, we adopted ASC 820, Fair Value Measurements and
Disclosures
(“ASC 820”). ASC 820 clarifies the definition of fair value, prescribes methods
for measuring fair value, and establishes a fair value hierarchy to classify the
inputs used in measuring fair value as follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other than quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The
adoption of ASC 820 did not have a material impact on our fair value
measurements.
Amortization
of Copyrights
The
Company amortizes its copyrights using the individual-film-forecast-computation
method, in accordance with the ASC q26, which amortizes or accrues (expenses)
such costs in the same ratio that current period actual revenue (numerator)
bears to estimated remaining unrecognized ultimate revenue as of the beginning
of the current fiscal year (denominator). The Company began amortization of
certain movie copyrights in December 2006, when the Company began to recognize
revenue from motion picture films. Amortization related to the Company’s
copyrights was $1,042 thousand and $50 thousand for the years ended September
30, 2009 and 2008, respectively, and is included in cost of sales.
The
ultimate revenue to be included in the denominator of the
individual-film-forecast-computation method fraction is subject to certain
limitations as set forth in the ASC q26. If an event or change in circumstance
indicates that the Company should assess whether the fair value of the copyright
is less than its unamortized costs, the Company will determine the fair value of
the film and will write off the amount by which the unamortized capitalized
costs exceeds the episode's fair value. Accordingly, the Company cannot
subsequently restore any amounts written off in previous fiscal years to
income.
Concentrations
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within China and Hong Kong. Certain financial instruments,
which subject the Company to concentration of credit risk, consist of cash. The
Company maintains cash balances at financial institutions which, from time to
time, may exceed Federal Deposit Insurance Corporation insured limits for the
banks located in the United States. Balances at financial institutions or
state-owned banks within China are not covered by insurance. Total cash in
state-owned banks and cash on hand at September 30, 2009 and 2008, amounted to
$321 thousand and $303 thousand, respectively, of which no deposits are covered
by insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank
accounts.
The
Company’s operations are carried out in China. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in China, and by the general state of
the Chinese economy. The Company’s operations in China are subject to specific
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Stock-Based
Compensation
The
Company does not have a formal stock option plan. However, we offered to some of
our employees and consultants stock-based compensation in the form of shares of
our common stock. We account for these issuances of common stock to employees
and consultants in accordance with ASC 718, “Compensation – Stock
Compensation” (“ASC 718”).
Effective
July 1, 2005, we adopted ASC 718 using the modified prospective method. Under
this method, stock compensation expense includes: (1) compensation cost for all
share-based payments granted based on the grant date fair value estimated in
accordance with ASC 718 and amortized on a straight-line basis over the
share-based payments’ remaining vesting period.
Software
Development Costs
The
Company accounts for software development costs in accordance with ASC
350-40, Internal Use
Software. Under ASC 350-40, the Company expenses software development
costs as incurred until it is determined that the software is technologically
feasible. Once it is determined that the entertainment software is
technologically feasible and there is a basis for estimating the recoverability
of the development costs from future cash flows, the Company capitalizes the
remaining software development costs until the software product is released. For
the years ended September 30, 2009 and 2008, the Company purchased all of the
software from third parties.
Once the
Company releases software as entertainment content, amortizing the related
capitalized software development costs is commenced. The Company records
amortization expense as a component of cost of sales. The Company calculates the
amortization of software development costs using two different methods, and then
amortizes the greater of the two amounts. Under the first method, the Company
divides the current period gross revenue for the released software by the total
of current period gross revenue and anticipated future gross revenue for the
software and then multiplies the result by the total capitalized software
development costs. Under the second method, the Company divides the software’s
total capitalized costs by the number of periods in the software’s estimated
economic life up to a maximum of twelve months. Differences between the
Company’s actual gross revenues and what it projected may result in adjustments
in the timing of amortization. If management deems a title’s capitalized
software development costs unrecoverable based on expected future gross revenue
and corresponding cash flows, the Company will write off the costs and record
the charge to development expense or cost of revenue, as
appropriate.
Property,
Plant and Equipment
Property
and equipment is located in China and is recorded at cost less accumulated
depreciation. Depreciation and amortization is calculated using the
straight-line method over the expected useful life of the asset, after the asset
is placed in service. The Company generally uses the following depreciable lives
for its major classifications of property and equipment:
|
Description
|
|
Useful Lives
|
|
Computer
hardware
|
|
3
years
|
|
Computer
software
|
|
3
years
|
|
Web
site
|
|
3
years
|
|
Motor
Vehicles
|
|
3
years
|
|
Furniture
and fixtures
|
|
5-7
years
|
|
Leasehold
improvements
|
|
5
years
|
Valuation
of Long-Lived Assets
Long-lived
tangible assets and definite-lived intangible assets are reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The Company uses an
estimate of undiscounted future net cash flows of the assets over the remaining
useful lives in determining whether the carrying value of the assets is
recoverable. If the carrying values of the assets exceed the expected future
cash flows of the assets, the Company recognizes an impairment loss equal to the
difference between the carrying values of the assets and their estimated fair
values. Impairment of long-lived assets is assessed at the lowest levels for
which there are identifiable cash flows that are independent from other groups
of assets. The evaluation of long-lived assets requires the Company to use
estimates of future cash flows. However, actual cash flows may differ from the
estimated future cash flows used in these impairment tests. At September 30,
2009, based on management’s projected future cash flows, management has
determined there is no impairment of long-lived assets.
Goodwill
and Intangible Assets
The
Company accounts for certain transactions in accordance with ASC 805, “Business Combinations” (“ASC
805”), and ASC 350,
“Goodwill and Other Intangible Assets” (“ASC 350”). ASC 805 requires the
use of the purchase method of accounting for any business combinations initiated
after June 30, 2002, and further clarifies the criteria to recognize intangible
assets separately from goodwill. Under ASC 350, goodwill and indefinite−life
intangible assets are no longer amortized but are reviewed for impairment
annually. The results of MGI and the estimated fair market values of its assets
and liabilities have been included in our consolidated financial statements from
the date of acquisition, October 23, 2007.
Cash
and Cash Equivalents
For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at time of purchase
to be cash equivalents. All cash is held in large banks located in Hong Kong and
China or is cash in hand.
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents the Company’s best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. The Company determines the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions. The
Company reviews the adequacy of its allowance for doubtful accounts on a regular
basis. Receivable balances past due over 120 days, which exceed a specified
dollar amount, are reviewed individually for collectability. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
have off-balance sheet credit exposure related to its customers, due to a
concentration of customers accounting for more than 78% of the Company’s
accounts receivable.
Allowances
for doubtful accounts receivable balances are recorded when circumstances
indicate that collection is doubtful for particular accounts receivable or as a
general reserve for all accounts receivable. Management estimates such
allowances based on historical evidence such as amounts that are subject to
risk. Accounts receivable are written off if reasonable collection efforts are
not successful.
Concentrations
of Credit Risk
Cash
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the PRC and Hong Kong. Certain financial instruments,
which subject the Company to concentration of credit risk, consist of cash and
accounts receivable. Balances at financial institutions or state-owned banks
within the PRC are not covered by insurance. Total cash in PRC or Hong Kong
banks and cash on hand at September 30, 2009 and September 30, 2008, amounted to
$321 thousand and $303 thousand respectively, of which no deposits are covered
by insurance. The Company has not experienced any losses in such bank accounts
and believes it is not exposed to any specifically identifiable risks on its
cash in bank accounts. Cash on hand is susceptible to misappropriation. However,
the Company has not experienced any losses of this nature and believes
appropriate controls are in place to avoid a possible misappropriation of
funds.
Accounts
Receivable
We have a
concentration of customers in each of our business segments. We are diligent in
attempting to ensure that we issue credit to credit-worthy customers. However,
our customer base is small and our accounts receivable balances are usually over
90 days outstanding, and that exposes us to significant credit risk. Therefore,
a credit loss can be significant relative to our overall
profitability.
Geographic, Political,
Economic, Taxation and Legal
The
Company’s operations are carried out in China. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in China, and by the general state of
the Chinese economy. The Company’s operations in China are subject to specific
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Inventory
Inventory
is stated at the lower of cost or market. The cost is determined under the
first-in-first-out (FIFO) method valuation method. An allowance for excess or
obsolete inventory is maintained by the Company. The Company determines an
appropriate balance in this account based on historical data and specific
identification of certain inventory items. The Company’s subsidiary, Panyu
M&M, routinely ships and accepts deliveries of goods without insuring for
potential losses on the goods during the course of delivery from Panyu M&M’s
suppliers. Additionally, in certain cases, the Company may accept liability for
losses incurred on its goods as they are en route for delivery to Panyu
M&M’s customers. The Company has not historically encountered significant
losses during the delivery process (both to and from Panyu M&M) but there is
potential for significant losses to occur at any time.
Comprehensive
Income
Accumulated
other comprehensive income represents foreign currency translation adjustments
and is included in the consolidated statement of shareholders’
equity.
Income
Taxes
Income
taxes are accounted for under the asset and liability method in accordance
with ASC 740, “Income Taxes” (“ASC 740”). Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. 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 be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
In July,
2006, the FASB issued ASC 740, which clarifies the accounting for uncertainty in
tax positions taken or expected to be taken in a return. ASC 740 provides
guidance on the measurement, recognition, classification and disclosure of tax
positions, along with accounting for the related interest and penalties. The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current tax
assets and liabilities on a net basis.
Research
and Development
Research,
development, and engineering costs are expensed as incurred. Research,
development, and engineering expenses primarily include payroll and headcount
related costs, contractor fees, infrastructure costs, and administrative
expenses directly related to research and development support. Research and
development expenses for 2009 and 2008 were $118 thousand and $123 thousand,
respectively.
Net
Earnings Per Share
The Company utilizes ASC 260, “Earnings per Share” to
calculate gain per share. Basic gain per share is computed by dividing the gain
available to common stockholders (as the numerator) by the weighted-average
number of common shares outstanding (as the denominator). Diluted gain per share
is computed similar to basic gain per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if all potential common stock (including common stock equivalents)
had all been issued, and if such additional common shares were
dilutive.
As of
September 30, 2009 there were no common stock equivalents other than stock
warrants to purchase 220,000 shares of the Company’s common stock at a purchase
price of $12.00 per share. There were no common stock equivalents as of
September 30, 2008.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates and assumptions are periodically reviewed and the effects
of revisions are reflected in the consolidated financial statements in the
period they are determined to be necessary.
Segment
Reporting
ASC
280, “Segment
Reporting”, requires use of the "management approach" model for segment
reporting. Under this model, segment reporting is consistent with the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
Reclassifications
Certain
reclassifications to the Company’s balance sheet and income statement have been
made in 2009, in order for the 2008 financial statements to conform to the
presentation of these financial statements. These reclassifications
did not impact the Company’s assets, liabilities, net income (loss) or
stockholders equity for the years ended September 30, 2009 and 2008,
respectively.
NOTE
3 - ACCOUNTS RECEIVABLE
The
Company’s business operations are conducted in China. During the normal course
of business, the Company extends unsecured credit to its customers. Management
reviews its accounts receivable on a regular basis to determine if the allowance
for doubtful accounts is adequate. An estimate for doubtful accounts is made
when collection of the full amount is no longer probable. Trade accounts
receivable at September 30, 2009 and September 30, 2008 consisted of the
following:
|
|
|
September 30,
2009
(Thousands)
|
|
|
September 30,
2008
(Thousands)
|
|
|
Trade
Accounts Receivable
|
|
$ |
16,069 |
|
|
$ |
10,418 |
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(363
|
) |
|
|
(31
|
) |
|
Totals
|
|
$ |
15,706 |
|
|
$ |
10,387 |
|
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the years ended September 30, 2009 and 2008 is as follows:
|
|
|
September 30,
2009
(Thousands)
|
|
|
September 30,
2008
(Thousands)
|
|
|
Beginning
Allowance for Doubtful Accounts
|
|
$ |
31 |
|
|
$ |
413 |
|
|
Direct
Write-offs of Bad Debts
|
|
|
- |
|
|
|
(197
|
) |
|
Additional
Charge to Bad Debt Expense
|
|
|
332 |
|
|
|
- |
|
|
Recovery
of Accounts Charged to Bad Debt Expense in 2006 and 2005
|
|
|
- |
|
|
|
(185
|
) |
|
Ending
Allowance for Doubtful Accounts
|
|
$ |
363 |
|
|
$ |
31 |
|
The
Company has the following concentrations of business with customers constituting
greater than 5% of the Company’s gross accounts receivable as of September 30,
2009 and September 30, 2008. The nonpayment of these accounts receivables,
individually or in the aggregate, could have a material impact on our future
results of operations.
These
accounts receivable totaled $12,251 thousand and $10,314 thousand or 78% and 99%
of our gross total accounts receivable as of September 30, 2009 and September
30, 2008, respectively.
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
Customer
1
|
|
|
-
|
% |
|
|
18
|
% |
|
Customer
2
|
|
|
36
|
% |
|
|
46
|
% |
|
Customer
3
|
|
|
16
|
% |
|
|
-
|
% |
|
Customer
4
|
|
|
6
|
% |
|
|
-
|
% |
|
Customer
5
|
|
|
-
|
% |
|
|
9
|
% |
|
Customer
6
|
|
|
-
|
% |
|
|
19
|
% |
|
Customer
7
|
|
|
-
|
% |
|
|
7
|
% |
|
Customer
8
|
|
|
20
|
% |
|
|
-
|
% |
The
Company’s business operations are conducted in China. During the normal course
of business, the Company extends unsecured credit to its customers. Management
reviews its accounts receivable on a regular basis to determine if the allowance
for doubtful accounts is adequate. An estimate for doubtful accounts is made
when collection of the full amount is no longer probable.
The
Company has not experienced significant difficulty in collecting its accounts
receivable in the past and is has no reason to believe this may change in the
near future.
NOTE
4 - ADVERTISING PROMOTION
The
Company expenses advertising costs as the costs are incurred in accordance with
ASC 720-35 “Advertising
Costs”.
On
October 1, 2008, Subaye.com entered into a promotional event whereby a total of
16,000 members of www.subaye.com would receive a total of 1,600 DVDs which
included both a promotional video on behalf of the customer and the motion
picture “Big Movie: Subaye” free of charge. The customer would
receive the DVDs and participate in the promotion if they agreed to remain
customers of Subaye.com for the twelve month period from October 1, 2008 through
September 30, 2009 (the “12 Month Period”). If a customer does not
remain a customer for the full 12 Month Period then the customer will owe
Subaye.com approximately $0.72 per DVD for each month in which they did not
remain a customer during the 12 Month Period. Subaye.com then
delivered the DVDs to its participating customers December 2008 and January
2009. The total cost of the promotional event was $6,737
thousand. The Company recorded a prepaid expense for approximately
$6,800 thousand and expensed the full value of the advertising promotion in
December 2008 and January 2009. For the year ended September 30,
2009, the Company recorded $6,737 thousand and $0 in advertising costs for
the advertising promotion, respectively, which is included as advertising in the
accompanying consolidated statements of operations and comprehensive
income.
NOTE
5 – DEPOSIT FOR INVENTORIABLE ASSETS
On May 3,
16 and 26, 2009, the Company’s subsidiary, Subaye IIP Limited, entered into
three agreements with three consumer goods distributors in China. The products
will include clothes, footwear, bags and garniture, jewelry and electronics. The
consumer goods distributors committed to delivering goods ordered by Subaye IIP
Limited or the members of www.subaye.com “just in time.” If the consumer goods
distributors do not deliver the products ordered by the first day subsequent to
the order, the consumer goods distributors will pay Subaye IIP Limited a penalty
equal to 5% of the cost of the product ordered per day it is delivered
late. The contracts are valid from May 3, 16 and 26, 2009 through
November 2, 15 and 25, 2010, respectively. In accordance with the
contract, Subaye IIP Limited paid a deposit of $8,152 thousand. The
deposit will be used by the consumer goods distributor to ensure product is
available for ordering by Subaye IIP Limited or the members of www.subaye.com on
an as needed basis.
NOTE
6 - BUSINESS ACQUISITIONS
Acquisition of Media Group
International Limited
On
October 23, 2007, the Company’s subsidiary, Subaye.com, acquired 100% of the
outstanding ownership units of Media Group International Limited for 100,000
shares of Subaye.com’s common stock, valued at $200 thousand, which was the fair
market value of recent arms length transactions involving the Subaye.com’s
common stock, namely certain consulting contracts agreed to with third party
service providers in October, 2007. The net assets received by the Company from
the acquisition of MGI totaled $200 thousand. In accordance with the purchase
method of accounting, the results of MGI and the estimated fair market value of
the assets and liabilities assumed have been included in the consolidated
financial statements from the date of acquisition.
The
purchase price of MGI was allocated to the assets acquired and liabilities
assumed by Subaye.com less the goodwill of $202 thousand. Subaye.com recorded
$202 thousand of goodwill, which was the excess of acquisition cost over fair
value of net assets of MGI.
|
|
|
Purchase Price
Allocation
(Thousands)
|
|
|
|
|
|
|
|
Cash
|
|
$ |
3 |
|
|
Fixed
Assets, Net
|
|
$ |
1 |
|
|
Goodwill
|
|
$ |
202 |
|
|
Due
to Related Party
|
|
$ |
(6 |
) |
|
Net
Assets Acquired
|
|
$ |
200 |
|
|
|
|
|
|
|
|
Purchase
Consideration
|
|
$ |
200 |
|
|
|
|
|
|
|
|
Net
Assets Acquired
|
|
$ |
200 |
|
|
|
|
|
|
|
|
Net
Cash Inflow from Acquisition of MGI
|
|
$ |
3 |
|
Goodwill
is comprised of the residual amount of the purchase price over the fair value of
the acquired tangible and intangible assets. The operating results of MGI have
been included in the Company’s statement of operations since October 23, 2007.
If the operating results had been included since the beginning of the current
fiscal year, October 1, 2007, the Company’s pro-forma consolidated revenue and
the Company’s pro-forma net income for the year ended September 30, 2008 would
have been $29,172 thousand (unchanged) and $3,820 thousand,
respectively.
Acquisition of Additional
Ownership in Subaye.com
On July
8, 2008, for $920 thousand, the Company purchased 230,000 shares of Subaye.com’s
common stock and warrants to purchase an additional 1,150,000 shares of
Subaye.com's common stock at $4.00 a share with an expiration date of July 7,
2013.
NOTE
7 – PURCHASE AND SALE OF ASSETS
Sale of Copyrights to “113
Movies”
On
September 7, 2009, the Company sold all rights under its copyrights for the
portfolio of 113 internet broadcasts. The details of the sale are as follows.
All figures below are in thousands:
|
Gross
Proceeds From the Sale of Copyrights – 113 Movies
|
|
$
|
2,000
|
|
|
Adjusted
Cost Basis
|
|
|
(1,724
|
)
|
|
Net
Gain
|
|
$
|
276
|
|
Purchase of Copyrights to
Big Future
On August
1, 2009 the Company purchased the copyrights to Big Future, a PRC motion picture
scheduled for production in 2010. The purchase price was $4,500
thousand.
Purchase of Copyrights to
True?
On July
20, 2009 the Company purchased the remaining 50% of the copyrights to True? that
it did not already own. True? is a PRC motion picture currently in production.
The purchase price was approximately $2,500 thousand.
3D Animation Online Shopping
Mall
On April
3, 2009, the Company’s subsidiary, Subaye IIP Limited , entered into an
agreement with a PRC website developer for $2,100 thousand to develop a website,
a website infrastructure and web content under the direction of Subaye IIP
Limited. The website, website infrastructure and web content is scheduled to be
completed by April 2, 2010.
Sale of Copyrights to Motion
Picture “Stockbrokers”
On March
12, 2009, the Company sold all rights under its copyright for the programming
rights to the Chinese motion picture, “Stockbrokers.” Once the sale was
complete, the Company had no remaining assets or copyrights associated with the
Stockbrokers production. The details of the sale are as follows. All figures
below are in thousands:
|
Gross
Proceeds From the Sale of Copyright – Stockbrokers
|
|
$
|
4,123
|
|
|
Adjusted
Cost Basis
|
|
|
(3,681
|
)
|
|
Net
Gain
|
|
$
|
442
|
|
Purchase of Copyrights to
Qianfu
On
February 22, 2009 the Company purchased the copyrights to Qianfu, a PRC motion
picture, for approximately $3,872 thousand.
DaYouCun TV
Rights
On
September 20, 2008, the Company sold all television rights under its copyright
for the programming rights to DaYouCun, a motion picture developed for the PRC
entertainment market. Once the sale was complete, the Company still held the
internet, motion picture and DVD rights to this production. The details of the
sale are listed below. All figures below are in thousands:
|
Gross
Proceeds From the Sale of Copyrights – DaYouCun TV Rights
|
|
$
|
307
|
|
|
Adjusted
Cost Basis
|
|
|
(400
|
)
|
|
Net
Loss
|
|
$
|
(93
|
)
|
113
Movies
On
September 10, 2008, the Company’s subsidiary, 3G Dynasty, purchased a copyright
for 113 internet broadcasts for $2,600 thousand.
YeLangQuan a/k/a
Pye-Dog
On June
21, 2008, the Company sold all rights under its copyright for the programming
rights to Pye-Dog, a motion picture developed for the PRC entertainment market.
Once the sale was complete, the Company had no remaining assets or copyrights
associated with the Pye Dog production. The details of the sale are listed
below. All figures below are in thousands:
|
Gross
proceeds from the sale of copyrights - YeLangQuan a/k/a Pye
Dog
|
|
$
|
860
|
|
|
Adjusted
Cost Basis
|
|
|
(750
|
)
|
|
Net
Gain
|
|
$
|
110
|
|
True?
On May
27, 2008, the Company’s subsidiary, 3G Dynasty, purchased a copyright for 50%
ownership of “True?” a motion picture production developed by ZesTV, for $2,500
thousand.
Stockbrokers
On April
25, 2008, the Company’s subsidiary, 3G Dynasty, purchased a copyright for
“Stockbrokers,” a motion picture production developed by ZesTV, for $3,700
thousand.
Internet Broadcast
Copyrights
On
February 1, 2008, the Company sold all rights under its copyrights for the
internet programming rights for a total of 11 distinct productions, all of which
were motion pictures developed for the PRC entertainment market. These
copyrighted films had been acquired through the Company's contract with ZesTV.
All figures below are in thousands.
|
Gross
Proceeds From the Sale of Copyrights - ZesTV: Internet
Rights
|
|
$
|
1,457
|
|
|
Adjusted
Cost Basis
|
|
|
(1,375
|
)
|
|
Net
Gain
|
|
$
|
82
|
|
Once the
sale was complete, the Company had an additional $550 thousand on deposit with
ZesTV for additional internet programming rights which are expected to be
produced and delivered to the Company during 2010.
On
December 30, 2007, the Company sold all rights under its copyright for the
internet programming rights to First Open, a motion picture developed for the
Chinese entertainment market. Once the sale was
complete, the Company had no remaining assets or copyrights associated with the
First Open production. The details of the sale are listed below. All figures
below are in thousands:
|
Gross
Proceeds From the Sale of Copyright - First Open: Internet
Rights
|
|
$
|
280
|
|
|
Adjusted
Cost Basis
|
|
|
(332
|
)
|
|
Net
Loss
|
|
$
|
(52
|
)
|
The
copyright’s adjusted cost basis was net of an impairment loss write down in 2006
of $332 thousand and was not net of any amortization or
depreciation.
Pye-Dog
On
October 31, 2007, the Company’s subsidiary, 3G Dynasty, purchased a copyright
for 50% ownership of “YeLangQuan a/k/a Pye Dog,” a motion picture production
developed by ZesTV, for $750 thousand.
Big Movie
2
On
October 15, 2007, the Company’s subsidiary, 3G Dynasty, purchased a copyright
for the internet rights for “Big Movie 2,” a motion picture production developed
by ZesTV, for $200 thousand.
The
Company's plans are to continue to sell off assets it doesn’t consider having
immediate or significant future benefit to the Company. As a result, the Company
believes the sale of these copyrights is in the ordinary course of business and
should not be reported as an extraordinary event or as other income.
Accordingly, the Company has reported the proceeds from the sales in revenues
within the consolidated statement of operations and the adjusted cost basis
associated with the sale in costs of sales in the consolidated statement of
operations.
NOTE 8 - GOODWILL
& INTANGIBLE ASSETS
Intangible
assets are stated at cost (estimated fair value upon contribution or
acquisition), less accumulated amortization and impairment.
The
following table summarizes the carrying values of all the Company's goodwill and
intangible assets by category, as of September 30, 2009 and September, 30,
2008:
|
|
|
September 30,
2009
(Thousands)
|
|
|
September 30,
2008
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
Copyrights
- Motion Picture, Television, Internet and DVD Productions
|
|
$ |
19,297 |
|
|
$ |
14,669 |
|
|
Accumulated
Amortization
|
|
|
(1,674
|
) |
|
|
(1,550
|
) |
|
Copyrights,
Net
|
|
|
17,623 |
|
|
|
13,119 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
557 |
|
|
|
557 |
|
|
Total
|
|
$ |
18,180 |
|
|
$ |
13,676 |
|
The
following table summarizes the copyrights held by the Company as of September
30, 2009, all of which are or will be PRC productions or are being held for
investment purposes. All copyrights are wholly-owned by the Company unless noted
otherwise.
Copyrights for Movies, DVDs,
Television and Internet Broadcasting
Big
Movie: Subaye *
DaYouCun
PaoBu
True?
Big
Future
Qianfu
*The
copyright for “Big Movie: Subaye” do not include rights for television
broadcasting.
Copyrights for Internet
Broadcasting Only
Big Movie
2: Two Stupid Eggs
The
Company amortizes its copyrights using the individual-film-forecast-computation
method, in accordance with the ASC 926, which amortizes or accrues (expenses)
such costs in the same ratio that current period actual revenue (numerator)
bears to estimated remaining unrecognized ultimate revenue as of the beginning
of the current fiscal year (denominator). Total amortization of the copyrights
was $1,042 thousand and $50 thousand for the years ended September 30, 2009 and
2008, respectively, and was included in cost of sales.
The
ultimate revenue to be included in the denominator of the
individual-film-forecast-computation method fraction is subject to certain
limitations as set forth in ASC 926. If an event or change in circumstance
indicates that the Company should assess whether the fair value of the copyright
is less than its unamortized costs, the Company will determine the fair value of
the film and will write off the amount by which the unamortized capitalized
costs exceeds the episode's fair value. Accordingly, the Company cannot
subsequently restore any amounts written off in previous fiscal years to
income.
Given the
environment in which the Company currently operates, it is reasonably possible
that management’s estimate of the economic useful lives of these assets or the
assumption that they will recover their carrying amounts from future operations,
could change in the future.
Intangible
assets of the Company are reviewed annually or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of September 30, 2009 and 2008,
respectively, the Company expects these assets, at their current carrying value,
to be fully recoverable.
NOTE
9 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
|
At September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
Computer
Software & Equipment
|
|
$ |
14,504 |
|
|
$ |
14,467 |
|
|
Websites
|
|
|
16,175 |
|
|
|
9,339 |
|
|
Motor
Vehicle
|
|
|
84 |
|
|
|
84 |
|
|
Furniture
& Fixtures
|
|
|
61 |
|
|
|
56 |
|
|
|
|
|
30,824 |
|
|
|
23,946 |
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(20,198
|
) |
|
|
(13,645
|
) |
|
|
|
$ |
10,626 |
|
|
$ |
10,302 |
|
NOTE
10 - COSTS OF GOODS SOLD
The
Company’s costs of goods sold includes products sold by the Company’s import and
export business segment as well as depreciation and amortization related to
copyrights, websites and software. Below is a table outlining depreciation and
amortization for each asset class which is included in costs of goods sold for
each period presented within the financial statements.
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
|
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Included in Operating Expenses
|
|
$ |
57 |
|
|
$ |
382 |
|
|
Amortization
of Copyrights Included Within Cost of Sales
|
|
|
1,042 |
|
|
|
50 |
|
|
Amortization
of Websites Included Within Cost of Sales
|
|
|
3,368 |
|
|
|
2,186 |
|
|
Amortization
of Software Included Within Cost of Sales
|
|
|
3,128 |
|
|
|
965 |
|
|
Total
Depreciation and Amortization
|
|
$ |
7,595 |
|
|
$ |
4,728 |
|
NOTE
11 - SHORT TERM DEBT
Total
debt obligations as of September 30, 2009 and 2008 consisted of the
following:
|
|
|
September
30,
2009
(Thousands)
|
|
|
September
30,
2008
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
8.64%
Bank Loan, Due September 18, 2009
|
|
$
|
863
|
|
|
$
|
1,021
|
|
|
Short
Term Non-Interest Bearing Bank Advance
|
|
|
-
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Debt Obligations
|
|
|
863
|
|
|
|
1,043
|
|
|
Less:
Current Maturities
|
|
|
863
|
|
|
|
1.043
|
|
|
Total
Long-Term Debt
|
|
$
|
-
|
|
|
$
|
-
|
|
Bank
Loan
On
September 19, 2008, we entered into a bank loan with Panyu RuralCredit Union and
Cooperative Bank, a PRC-based bank, for a total of $1,021,138, (7,000,000 RMB).
The bank loan has an annualized interest rate of 8.64% with interest payable on
a monthly basis. We used the net proceeds from the bank loan to
invest in computer equipment and computer software and for other general
corporate purposes. The Company has been advanced approximately
$131,466 during the year ended September 30, 2009 and made payments on this debt
of approximately $224 thousand during the year ended September 30, 2009. As
of September 30, 2009, the outstanding borrowings related to this transaction
have been included in the Consolidated Balance Sheets within short term
debt. The bank loan and all unpaid interest was payable in full on
September 18, 2009.
During
the three months ended December 31, 2008, the Company entered into a second bank
loan for $145,896 (1,000,000 RMB). The bank loan has an annualized interest rate
of 7.92%. The Company paid this debt off during the three months
ended June 30, 2009.
Short Term Non-Interest
Bearing Bank Advance
In April
2008, the Company received an advance from ICBC, a PRC-based bank for $22,286
(152,779 RMB). This advance was repaid to ICBC during the three months ended
December 31, 2008.
Aggregate
scheduled maturities of our debt obligations for each of the five 12- month
periods subsequent to September 30, 2009, and thereafter are as follows, in
thousands:
|
12
Months Ended September 30,
|
|
|
|
|
2010
|
|
$
|
863
|
|
|
2011
|
|
|
-
|
|
|
2012
|
|
|
-
|
|
|
2013
|
|
|
-
|
|
|
2014
|
|
|
-
|
|
|
Subsequent
to 2014
|
|
|
-
|
|
|
Total
Scheduled Debt Payments
|
|
$
|
863
|
|
NOTE
12 - STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 350,000,000 shares, in aggregate, consisting of
300,000,000 shares of common stock, $0.001 par value, and 50,000,000 shares of
preferred stock, $0.001 par value. The Company's Certificate of Incorporation
authorizes the Board of Directors (the "Board") to determine the preferences,
limitations and relative rights of any class or series of Company preferred
stock prior to issuance and each such class or series must be designated with a
distinguishing designation prior to issuance. As of September 30, 2009, no
shares of the Company’s preferred stock and 2,478,243* shares of the Company’s
common stock were issued and outstanding.
*The
number of shares outstanding reflects a 100 to 1 reverse split of the
registrant’s common stock, effectuated on October 23, 2009. Figures
referring to shares of the registrant’s common stock in this Form 10-K for the
reporting period ending September 30, 2009 are provided on a post-reverse split
basis.
All
references within this footnote to dollar amounts within this section are
presented in thousands.
Stock-Based
Compensation
On
April 12, 2006, the Company issued 40,000 shares of common stock to five
consultants as part of their compensation at a market price of $52.00 for a
total of $2,080 thousand. The Company amortized the consultancy fee of $1,300
thousand over a 24 month period, the remaining $780 thousand is amortized over
services period of a 12 month period. It resulted in an expense of $119 thousand
for each month for 12 months and the remaining 12 months will have an expense of
$54 thousand. The stock-based compensation expense for the years ended
September, 30, 2009 and 2008, was $0 and $325 thousand,
respectively.
On
January 10, 2007, the Company issued 2,500 shares of common stock to Mary Kratka
for investor relations at a price of $45.00 per share for total consideration
equal to $113 thousand. The shares are being amortized over 12 months with a
stock-based compensation expense of $9 thousand each month. The total
stock-based compensation expense for years ended September 30, 2009 and 2008 was
$0 and $27 thousand, respectively.
On
January 31, 2007, the Company issued 7,500 shares of common stock to Bon Air
Group Limited for investor relations and promotion services at price of $30.00
per share for a total consideration equal to $225 thousand. The shares are being
amortized over 12 months with stock-based compensation expense of $19 thousand
each month. The total stock-based compensation expense for the years ended
September 30, 2009 and 2008 was $0 thousand and $150 thousand,
respectively.
On
July 16, 2007, the Company agreed to issue 3,650 shares of common stock to a
consultant for international business consulting services at price of $16.00 per
share for a total consideration equal to $58 thousand. The shares are being
amortized over 24 months with stock-based compensation expense of $2 thousand
each month. The total stock-based compensation expense for the years ended
September 30, 2009 and 2008 was $22 thousand and $28 thousand,
respectively.
On
October 3, 2007, the Company issued 7,350 shares of common stock to the
Company’s Chief Financial Officer for services to be provided over a two year
period at price of $13.00 per share for a total consideration equal to $96
thousand. The shares are being amortized over 24 months with stock-based
compensation expense of $4 thousand each month. The total stock-based
compensation expense for the years ended September 30, 2009 and 2008 was $48
thousand and $48 thousand, respectively.
n
October 3, 2007, the Company issued 10,000 shares of common stock to the
Company’s Chief Executive Officer for services to be provided over a two year
period at price of $13.00 per share for a total consideration equal to $130
thousand. The shares are being amortized over 24 months with stock-based
compensation expense of $5 thousand each month. The total stock-based
compensation expense for the years ended September 30, 2009 and 2008 was $65
thousand and $65 thousand, respectively.
On
October 3, 2007, the Company issued 4,000 shares of common stock to an investor
relations consultant, for services to be provided over a 24 month period at
price of $13.00 per share for a total consideration equal to $52 thousand. The
shares are being amortized over 24 months with stock-based compensation expense
of $2 thousand each month. The total stock-based compensation expense for the
years ended September 30, 2009 and 2008 was $26 thousand and $24 thousand,
respectively.
On
September 18, 2008, the Company agreed to issue 3,500 shares of common stock to
Mary Kratka for investor relations services at price of $8.00 per share for
total consideration equal to $28 thousand. The shares are being amortized over
approximately 3 months with a stock-based compensation expense of $9 thousand
each month. The total stock-based compensation expense for years ended September
30, 2009 and 2008 was $26 thousand and $2 thousand, respectively.
On October 10, 2008, the Company agreed
to issue 70,000 shares of common stock to Results Group International for
consulting services at a price of $5.00 per share for total consideration equal
to $350 thousand. The shares are being amortized over 36 months with a
stock-based compensation expense of $10 thousand each month. The total
stock-based compensation expense for the years ended September 30, 2009 and 2008
was $138 thousand and $0, respectively.
On January 6, 2009, the Company agreed
to issue 80,000 shares of common stock to Bloomen Limited for consulting
services over a 36-month contract at a price of $4.00 per share for total
consideration equal to $320 thousand. The shares are being amortized over 36
months with a stock-based compensation expense of $9 thousand each month. The
total stock-based compensation expense for the years ended September 30, 2009
and 2008 was $80 thousand and $0, respectively.
On March 30, 2009, the Company agreed
to issue 85,000 shares of common stock to Trueboon Limited for consulting
services over a 36 month contract at a price of $6.00 per share for total
consideration equal to $510 thousand. The shares are being amortized over 36
months with a stock-based compensation expense of $14 thousand each month,
commencing in April 2009. The total stock-based compensation expense for the
years ended September 30, 2009 and 2008 was $85 thousand and $0,
respectively.
On September 18, 2009, the Company
agreed to issue 20,000 shares of common stock to Virtrius Limited, an entity
wholly-owned by the Company’s Chief Financial Officer, for marketing and
investor relations services at price of $9.00 per share for total consideration
equal to $180 thousand. The shares are being amortized over approximately 6
months with a stock-based compensation expense of $30 thousand each month. The
total stock-based compensation expense for years ended September 30, 2009 and
2008 was $12 thousand and $0, respectively.
On September 24, 2009, the Company
agreed to issue 120,000 shares of common stock to China Industry Park Holdings
Limited, for consulting services related to the IPTV industry in China at a
price of $9.10 per share for total consideration equal to $1,092 thousand. The
shares will be amortized over the term of the agreement beginning on October 1,
2009 for approximately 36 months with a stock-based compensation expense of $30
thousand each month. The total stock-based compensation expense for years ended
September 30, 2009 and 2008 was $0 and $0, respectively.
On September 24, 2009, the Company
agreed to issue 20,000 shares of common stock to its President for a two year
employment agreement at a price of $9.10 per share for total consideration equal
to $182 thousand. The shares will be amortized over approximately 24 months with
a stock-based compensation expense of $8 thousand each month. The total
stock-based compensation expense for years ended September 30, 2009 and 2008 was
$2 thousand and $0, respectively.
On September 24, 2009, the Company
agreed to issue 10,000 shares of common stock to its Secretary for a one year
employment agreement at a price of $9.10 per share for total consideration equal
to $91 thousand. The shares were issued as a sign on bonus and were amortized in
full on in September 2009. The total stock-based compensation expense for years
ended September 30, 2009 and 2008 was $91 thousand and $0,
respectively.
On September 24, 2009, the Company
agreed to issue 30,000 shares of common stock to its Chief Executive Officer for
a two year employment agreement at a price of $9.10 per share for total
consideration equal to $273 thousand. The shares will be amortized over
approximately 24 months with a stock-based compensation expense of $11 thousand
each month. The total stock-based compensation expense for years ended September
30, 2009 and 2008 was $2 thousand and $0, respectively.
Subaye.com
Stock Based Compensation
On
October 1, 2007, Subaye.com issued 170,000 shares of common stock to
Subaye.com’s Chief Executive Officer for services to be provided over a two year
period from January 2, 2008 through December 31, 2009 at a price of $2.00 per
share for a total consideration equal to $340 thousand. The shares will be
amortized over 24 months with stock-based compensation expense of $14,167 each
month. The total stock-based compensation expense for the years ended September
30, 2009 and 2008 was $170 thousand and $127 thousand,
respectively.
On
October 1, 2007, Subaye.com issued 50,000 shares of common stock to an employee
of Subaye.com for services to be provided beginning January 1, 2008 at a price
of $2.00 per share for a total consideration equal to $100 thousand. The shares
will be amortized over 24 months with stock-based compensation expense of $4
thousand each month. The total stock-based compensation expense for the years
ended September 30, 2009 and 2008 was $50 thousand and $38 thousand,
respectively.
On January 2, 2008, Subaye.com agreed
to issue 450,000 shares of common stock to an investor relations consultant, for
services to be provided over a 24 month period from January 2, 2008 through
December 31, 2009 at price of $2.00 per share for a total consideration equal to
$900 thousand. The shares will be amortized over 24 months with stock-based
compensation expense of $38 thousand each month. The total stock-based
compensation expense for the years ended September 30, 2009 and 2008 was $450
thousand and $338 thousand, respectively.
On
January 2, 2008, Subaye.com issued 50,000 shares of common stock to an
executive, for services to be provided over a 24 month period at price of $2.00
per share for a total consideration equal to $100 thousand. The shares will be
amortized over 24 months with stock-based compensation expense of $4 thousand
each month. The total stock-based compensation expense for the years ended
September 30, 2009 and 2008 was $50 thousand and $38 thousand,
respectively.
On
January 2, 2008, Subaye.com issued 70,800 shares of common stock to an
executive, for services to be provided over a 24 month period at price of $2.00
per share for a total consideration equal to $142 thousand. The shares will be
amortized over 24 months with stock-based compensation expense of $6 thousand
each month. The total stock-based compensation expense for the years ended
September 30, 2009 and 2008 was $71 thousand and $53 thousand,
respectively.
On
February 26, 2008, Subaye.com issued 78,425 shares of common stock to its Chief
Financial Officer, for services to be provided over a 24 month period at price
of $2.00 per share for a total consideration equal to $157 thousand. The shares
will be amortized over 24 months with stock-based compensation expense of $7
thousand each month. The total stock-based compensation expense for the years
ended September 30, 2009 and 2008 was $78 thousand and $46 thousand,
respectively.
Total
stock compensation expense reported was $1,375 and $1,538 for the years ended
September 30, 2009 and 2008, respectively.
Sales of Common Stock
Securities
On March
8, 2008, pursuant to a stock purchase agreement, the Company issued 50,000
shares of its common stock for $600 thousand.
On July
8, 2008, for $400 thousand, Subaye.com issued an unaffiliated individual 100,000
shares of Subaye.com's common stock and warrants to purchase an additional
500,000 shares of Subaye’s common stock at $4.00 a share with an expiration date
of July 7, 2013.
On June
9, 2009, the Company sold 60,000 shares of common stock at $6.00 a share for
$360 thousand.
On June
9, 2009, the Company 5,600 shares of common stock at $6.00 a share for $34
thousand.
On August
3, 2009, the Company 500,000 shares of common stock at $6.00 a share for $3,000
thousand.
On August
17, 2009, the Company sold 60,000 shares of common stock at $7.00 a share for
$420 thousand.
On August
17, 2009, the Company sold 55,000 shares of common stock at $7.00 a share for
$385 thousand.
On
September 25, 2009, the Company sold 100,000 shares of common stock and warrants
to purchase an additional 220,000 shares of common stock at $12.00 per share for
$800 thousand.
NOTE
13 - INCOME TAX
United
States of America
Since the
Company had no operations within the United States, there is no provision for
United States taxes and there are no deferred tax amounts as of September 30,
2009 and 2008, respectively.
Delaware
The
Company and its subsidiary, Subaye.com, are incorporated in Delaware but do not
conduct business in Delaware. Therefore, the Company is not subject to corporate
income tax.
British
Virgin Islands
3G
Dynasty and Subaye IIP are incorporated in the British Virgin Islands and, under
the current laws of the British Virgin Islands, are not subject to income
taxes.
Hong
Kong
Media
Group International Ltd. and MyStarU Ltd. are incorporated in Hong Kong and are
subject to Hong Kong taxation on its activities conducted in Hong Kong and
income arising in or derived from Hong Kong. No provision for Hong Kong profits
tax has been made as the Company's Hong Kong subsidiaries incurred a loss during
years ended September 30, 2009 and 2008, respectively. The applicable Hong Kong
statutory tax rate for the years ended September 30, 2009 and 2008 was
17.5%.
People’s
Republic of China
Enterprise
income tax in PRC is generally charged at 25% of a company’s assessable profit,
of which 22% is a national tax and 3% is a local tax. The Company’s subsidiaries
incorporated in the PRC, namely Guangzhou Subaye and Panyu M&M, are subject
to PRC enterprises income tax at the applicable tax rates on the taxable income
as reported in their Chinese statutory accounts in accordance with the relevant
enterprises income tax laws applicable to foreign enterprises. Pursuant to the
same enterprises income tax laws, the Company’s subsidiaries are fully exempted
from PRC enterprises income tax for two years starting from the first
profit-making year, followed by a 50% tax exemption for the next three
years.
No
provision for enterprise income tax in the PRC had been made for September 30,
2009 and 2008 due to the fact that the Company was exempt from PRC tax based on
the statutory provisions granting a tax holiday for a two year period, as stated
above, for the years ended September 30, 2009 and 2008. The Company is currently
reviewing its financial forecast for 2010 and is considering the potential of
certain tax liabilities for 2010.
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (“the Income Tax Laws”). Under the Income Tax Laws,
foreign investment enterprises (“FIE”) generally are subject to an income tax at
an effective rate of 25% on income as reported in their statutory financial
statements after appropriate tax adjustments unless the enterprise is located in
specially designated regions of cities for which more favorable effective tax
rates apply. Upon approval by the PRC tax authorities, FIEs scheduled to operate
for a period of 10 years or more and engaged in manufacturing and production may
be exempt from income taxes for two years, commencing with their first
profitable year of operations, after taking into account any losses brought
forward from prior years, and thereafter with a 50% exemption for the next three
years.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law of the People’s
Republic of China replaced the existing laws for Domestic Enterprises (“DES”)
and FIEs.
The key
changes are:
|
a.
|
The new standard EIT rate of 25%
will replace the 33% rate currently applicable to both DES and FIEs,
except for “high tech companies” who pay a reduced rate of 15%. The
Company currently believes it will qualify as a high tech company under
the rule.
|
|
b.
|
Companies established before
March 16, 2007 will continue to enjoy tax holiday treatment approved by
local government for a grace period of the next five years or until the
tax holiday term is completed, whichever is
sooner.
|
The
Company and all of its subsidiaries, except for Subaye IIP, were established
before March 16, 2007. Subaye IIP is a British Virgin Islands entity and is 100%
owned by the Company. Subaye IIP is therefore treated as a pass-through entity
for PRC tax purposes and is therefore not subject to PRC taxes.
No
provision for enterprise income tax in the PRC had been made for the years ended
September 30, 2009 and 2008 due to the fact that certain subsidiaries of the
Company are exempt from PRC tax based on the statutory provisions granting a tax
holiday for a two year period, as stated above, specifically for the years ended
September 30, 2009 and 2008, respectively. The Company’s tax holiday
expired on October 1, 2009. The following table details the aggregate
effect of the tax holiday on the Company’s results of operations.
|
|
|
Year Ended
September
30, 2009
(Thousands)
|
|
|
Year Ended
September
30, 2008
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Tax Without Consideration of Tax Holiday
|
|
$
|
2,932
|
|
|
$
|
924
|
|
|
PRC
Tax Savings as a Result of Tax Holiday
|
|
$
|
(2,932
|
)
|
|
$
|
(924
|
)
|
|
Increase
in Basic and Diluted Earnings Per Share as a Result of Tax
Holiday
|
|
$
|
1.60
|
|
|
$ |
0.60
|
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended September 30, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
Statutory rates
|
|
|
35.0
|
% |
|
|
35.0
|
% |
|
Foreign
income
|
|
|
(35.0
|
)% |
|
|
(35.0
|
) |
|
China
tax rates
|
|
|
25.0
|
% |
|
|
33.0 |
|
|
China
income tax exemption
|
|
|
(25.0
|
)% |
|
|
(33.0
|
) |
|
Effective
income tax rates
|
|
|
0
|
% |
|
|
0
|
% |
Value Added
Tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax rate applicable to the Company is 6% of the
gross sales price. No credit is available for VAT paid on the
purchases.
NOTE
14 - MINORITY INTEREST
Minority
interest represents the minority stockholders’ proportionate share of 30.97% of
the equity of Subaye.com. The Company’s 69.03% controlling interest requires
that Subaye.com’s operations be included in the Consolidated Financial
Statements. The 30.97% equity interest of Subaye.com that is not owned by the
Company is shown as “Minority interests in consolidated subsidiaries” in the
financial statements as $10,180 thousand and $7,138 thousand,
respectively.
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest of Shareholders
|
|
$ |
10,180 |
|
|
$ |
7,138 |
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Consolidated Subsidiaries
|
|
$ |
10,180 |
|
|
$ |
7,138 |
|
NOTE
15 - COMMITMENTS & CONTINGENCIES
Operating
Leases
In the
normal course of business, the Company leases office space under operating lease
agreements. The Company rents office space, primarily for regional sales
administration offices, in commercial office complexes that are conducive to
administrative operations. The operating lease agreements generally contain
renewal options that may be exercised at the Company's discretion after the
completion of the base rental terms. In addition, many of the rental agreements
provide for regular increases to the base rental rate at specified intervals,
which usually occur on an annual basis.
On July
1, 2008, the Company entered into a lease for new office space in Foshan City,
Guangdong, China for approximately $5 thousand per month through June 30,
2011.
On
February 1, 2009, the Company entered into a lease agreement to utilize
approximately 22,000 square feet of office space at 349 Dabei Road, Shiqiao
Street, Panyu District, Guangzhou City, Guangdong, China 511400 for
approximately $9 thousand per month through January 31, 2011.
The
following table summarizes the Company’s future minimum lease payments under
operating lease agreements for the five years subsequent to September 30, 2009,
in thousands:
|
Twelve
Months Ended September 30,
|
|
|
|
|
|
2010
|
|
$
|
164
|
|
|
2011
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
$
|
243
|
|
The
Company recognizes lease expense on a straight-line basis over the life of the
lease agreement. Contingent rent expense is recognized as it is incurred. Total
rent expense in continuing operations from operating lease agreements was $125
thousand and $306 thousand for the years ended September 30, 2009 and 2008,
respectively.
Contingent
Stock Issuance
On September 18, 2009, the Company
entered into a six month consulting agreement with an entity wholly-owned by the
Company’s Chief Financial Officer. In accordance with the terms of the
consulting agreement, if during the term of the consulting agreement, the
Company successfully obtains a listing on a stock exchange such as the NASDAQ
Global Market, NASDAQ Capital Market, NASDAQ Global Select or NYSE Amex, the
entity will be awarded a stock issuance of 10,000 shares of common stock. As of
December 29, 2009, the Company has applied for a listing on the NASDAQ Global
Market but has not yet received approval for the listing.
Litigation
We may be
involved from time to time in ordinary litigation that will not have a material
effect on our operations or finances. We are not aware of any pending or
threatened litigation against the Company or our officers and directors in their
capacity as such that could have a material impact on our operations or
finances.
NOTE
16 - OPERATING RISK
Credit risk
The
Company is exposed to credit risk from its cash at bank and fixed deposits and
bills and accounts receivable. The credit risk on cash at bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. Bills and accounts receivable are subjected to credit evaluations.
An allowance has been made for estimated irrecoverable amounts which has been
determined by reference to past default experience and the current economic
environment.
Foreign currency
risk
Most of
the transactions of the Company were settled in Renminbi and U.S. dollars. In
the opinion of the directors, the Company does not have significant foreign
currency risk exposure.
Company’s operations are
substantially in foreign countries
Substantially
all of the Company’s products are manufactured in China. The Company’s
operations are subject to various political, economic, and other risks and
uncertainties inherent in China. Among other risks, the Company’s operations are
subject to the risks of restrictions on transfer of funds; export duties,
quotas, and embargoes; domestic and international customs and tariffs; changing
taxation policies; foreign exchange restrictions; and political conditions and
governmental regulations.
NOTE
17 - SEGMENT REPORTING
The
Company operates in three distinct business segments:
1. Online
Membership Services - The Company provides online content and member services
for commercial use.
2.
Entertainment Media - The Company produces and places advertising solutions on
behalf of its customers and routinely invests in entertainment arts productions
in the PRC
3. Trade
Services – The Company operates a domestic and international importing and
exporting services operation to acquire and distribute goods within the PRC or
internationally.
|
Year Ended
September 30, 2009
(All Figures in
Thousands)
|
|
Online
Membership
Services
|
|
|
Trade
Services
|
|
|
Entertainment
Media
|
|
|
Consolidated
Total
|
|
|
Net
Sales
|
|
$ |
26,651 |
|
|
$ |
11,061 |
|
|
$ |
10,275 |
|
|
$ |
47,987 |
|
|
Cost
of Sales
|
|
|
5,957 |
|
|
|
10,792 |
|
|
|
7,893 |
|
|
|
24,642 |
|
|
Segment
Income Before Minority Interest
|
|
|
11,727 |
|
|
|
17 |
|
|
|
1,079 |
|
|
|
12,823 |
|
|
Segment
Assets
|
|
|
27,442 |
|
|
|
4,060 |
|
|
|
25,228 |
|
|
|
56,730 |
|
|
Expenditures
for Segment Assets
|
|
|
6,877 |
|
|
|
- |
|
|
|
17,230 |
|
|
|
24,107 |
|
|
Year Ended
September 30, 2008
(All Figures in
Thousands)
|
|
Online
Membership
Services
|
|
|
Trade
Services
|
|
|
Entertainment
Media
|
|
|
Consolidated
Total
|
|
|
Net
Sales
|
|
$ |
9,507 |
|
|
$ |
12,486 |
|
|
$ |
7,179 |
|
|
|
29,172 |
|
|
Cost
of Sales
|
|
|
3,974 |
|
|
|
12,211 |
|
|
|
4,034 |
|
|
|
20,220 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Income Before Minority Interest
|
|
|
3,423 |
|
|
|
15 |
|
|
|
1,542 |
|
|
|
4,980 |
|
|
Segment
Assets
|
|
|
15,366 |
|
|
|
3,732 |
|
|
|
16,552 |
|
|
|
37,682 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for Segment Assets
|
|
|
6,942 |
|
|
|
- |
|
|
|
10,056 |
|
|
|
- |
|
NOTE
18 - SUBSEQUENT EVENTS
Reverse Stock
Split
On
October 23, 2009, the Company effectuated a reverse stock split on a 100 to 1
(100:1) basis. Figures referring to shares of the registrant’s common
stock in this Form 10-K for the reporting period ending September 30, 2009 are
provided on a post-reverse split basis.
Share
Exchange
On
November 6, 2009, the Company entered into a Share Exchange Agreement with
certain shareholders of its subsidiary, Subaye.com, Inc. Pursuant to the terms
of the Share Exchange, the Company issued 3,408,852 shares of its common stock
in exchange for all outstanding shares of common stock of Subaye.com, Inc. the
Company did not already own (the “Share Exchange”). As a result of the Share
Exchange, Subaye.com, Inc. became a wholly-owned subsidiary of the
Company.
Execution of Employment
Agreement with Officer
On
October 11, 2009, Subaye entered into a Consulting Agreement with James T.
Crane, the Company’s Chief Financial Officer. The Agreement provides
for compensation to Mr. Crane and the employees of Mr. Crane’s company, J. Crane
& Company, Limited, for providing certain financial services to the
Company. The term of the Agreement is 36 months, after which the Agreement shall
automatically terminate. In exchange for providing these services,
Mr. Crane and his employees will receive hourly cash compensation, the total of
which shall not exceed 700,000 RMB ($103 thousand) during each of the Company’s
fiscal years ending September 30, 2010, 2011, and 2012. Additionally, Mr. Crane
will receive a stock award of 22,500 shares of the Company’s common stock, which
shall vest on a pro rata basis over the term of the Agreement.
Resignations and
Appointments of Members of the Board of Directors
On
October 19, 2009, the Company appointed Jinliu Deng to serve as a member of the
Board of Directors. In connection with Mr. Deng’s appointment, the Company has
orally agreed to pay $30 thousand to Mr. Deng for services rendered as a member
of the Board of Directors.
On
November 2, 2009, Mr. Yaofu Su resigned from his position as a member of the
Board of Directors of Subaye, effective immediately. Mr. Su’s
resignation is not in connection with any known disagreement with the Company on
any matter. Mr. Su will continue to serve as the Company’s Vice
President.
On
November 11, 2009, Ms. He Yao resigned from her position as a director of
Subaye, effective immediately. Ms. Yao’s resignation is not in
connection with any known disagreement with the Company on any
matter. Ms. Yao will continue to serve as the Company’s
Secretary.
On
November 12, 2009, the Company appointed Qimei Liu to serve as a member of the
Board of Directors.
On
November 17, 2009, the Company appointed Larry G. Schafran to serve as a member
of the Board of Directors.
On
November 17, 2009, the Company has adopted a compensation arrangement for
independent directors. Under this agreement, Mr. Schafran will
receive $1 thousand for each meeting of the Board of Directors he attends in
person and $1 thousand for each two meetings of the Board of
Directors in which he participates by telephone or video
conference. Additionally, he will receive an annual payment of either
(i) 10,000 shares of the Company’s common stock, par value $0.001, which shall
be paid in quarterly grants of 2,500 shares, or (ii) an option to purchase
20,000 shares of the Company’s common stock, ¼ of which shall vest each
quarter.
On
November 19, 2009, the Board of Directors of the Company adopted a Code of
Business Ethics and Controls (the “Code of Ethics”) for the Company, approved
and authorized the establishment of the Audit, Compensation and Corporate
Governance and Nominating Committees, and approved and authorized the adoption
of the charter documents for each committee. All three committees are comprised
solely of the Company’s independent directors.
NOTE
19 - RECENTLY ISSUED ACCOUNTING STANDARDS
In
October 2009, the Financial Accounting Standards Board (FASB) issued
amended revenue recognition guidance for arrangements with multiple
deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of management’s best estimate of selling price
for individual elements of an arrangement when vendor specific objective
evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE)
is unavailable. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. The company is
currently assessing its implementation of this new guidance, but does not expect
a material impact on the consolidated financial statements.
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be
adopted in the same period that the company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
The company is currently assessing its implementation of this new guidance, but
does not expect a material impact on the consolidated financial
statements.
On
October 1, 2009, the company adopted the revised FASB guidance regarding
business combinations which was required to be applied to business combinations
on a prospective basis. The revised guidance requires that the acquisition
method of accounting be applied to a broader set of business combinations,
amends the definition of a business combination, provides a definition of a
business, requires an acquirer to recognize an acquired business at its fair
value at the acquisition date and requires the assets and liabilities assumed in
a business combination to be measured and recognized at their fair values as of
the acquisition date (with limited exceptions). There was no impact upon
adoption and the effects of this guidance will depend on the nature and
significance of business combinations occurring after the effective
date.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The company adopted this guidance in the quarter ended
September 30, 2009 and there was no material impact on the consolidated
financial statements.
On July 1, 2009, the FASB
issued the FASB Accounting Standards Codification (the Codification). The
Codification became the single source of authoritative nongovernmental U.S.
GAAP, superseding existing FASB, American Institute of Certified Public
Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.
The Codification eliminates the previous US GAAP hierarchy and establishes one
level of authoritative GAAP. All other literature is considered
non-authoritative. The Codification was effective for interim and annual periods
ending after September 15, 2009. The company adopted the Codification
for the year ending September 30, 2009. There was no impact to the
consolidated financial results as this change is disclosure-only in
nature.
In
June 2009, the FASB issued amendments to the accounting rules for
variable interest entities (VIEs) and for transfers of financial assets. The new
guidance for VIEs eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity and requires
ongoing qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QSPEs) are no
longer exempt from consolidation under the amended guidance. The amendments also
limit the circumstances in which a financial asset, or a portion of a financial
asset, should be derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented, and/or when the
transferor has continuing involvement with the transferred financial asset. The
company will adopt these amendments for interim and annual reporting periods
beginning on October 1, 2010. The company does not expect the adoption of these
amendments to have a material impact on the consolidated financial
statements.
In
May 2009, the FASB issued guidelines on subsequent event accounting which
sets forth: 1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; 2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. These guidelines were effective for
interim and annual periods ending after June 15, 2009, and the company
adopted them in the quarter ended June 30, 2009. There was no impact on the
consolidated financial statements.
In
April 2009, the FASB issued guidance on determining fair value when the
volume and level of activity for an asset or liability has significantly
decreased, and in identifying transactions that are not orderly. Based on the
guidance, if an entity determines that the level of activity for an asset or
liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate fair
value. The guidance was effective on a prospective basis for interim and annual
periods ending after June 15, 2009. The company adopted this guidance in
the quarter ended June 30, 2009, and there was no material impact on the
consolidated financial statements.
In
April 2009, the FASB issued guidance on the recognition and presentation of
other-than-temporary impairments on investments in debt securities. If an
entity’s management asserts that it does not have the intent to sell a debt
security and it is more likely than not that it will not have to sell the
security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This guidance was effective on a prospective basis
for interim and annual periods ending after June 15, 2009. The company
adopted this guidance for the quarter ended June 30, 2009, and there was no
material impact on the consolidated financial statements.
In
April 2009, the FASB issued additional requirements regarding interim
disclosures about the fair value of financial instruments which were previously
only disclosed on an annual basis. Entities are now required to disclose the
fair value of financial instruments which are not recorded at fair value in the
financial statements in both their interim and annual financial statements. The
new requirements were effective for interim and annual periods ending after
June 15, 2009 on a prospective basis. The company adopted these
requirements in the quarter ended June 30, 2009. There was no impact on the
consolidated financial results as this relates only to additional
disclosures.
In
April 2009, the FASB issued an amendment to the revised business
combination guidance regarding the accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies. The
requirements of this amended guidance carry forward without significant revision
the guidance on contingencies which existed prior to January 1, 2009.
Assets acquired and liabilities assumed in a business combination that arise
from contingencies are recognized at fair value if fair value can be reasonably
estimated. If fair value cannot be reasonably estimated, the asset or liability
would generally be recognized in accordance with the Accounting Standards
Codification (ASC) Topic 450 on contingencies. There was no impact upon
adoption.
In
April 2008, the FASB issued new requirements regarding the determination of
the useful lives of intangible assets. In developing assumptions about renewal
or extension options used to determine the useful life of an intangible asset,
an entity needs to consider its own historical experience adjusted for
entity-specific factors. In the absence of that experience, an entity shall
consider the assumptions that market participants would use about renewal or
extension options. The new requirements apply to intangible assets acquired
after October 1, 2009. The adoption of these new rules did not have a
material impact on the Consolidated Financial Statements.
In
December 2007, the FASB issued new guidance on noncontrolling interests in
consolidated financial statements. This guidance requires that the
noncontrolling interest in the equity of a subsidiary be accounted for and
reported as equity, provides revised guidance on the treatment of net income and
losses attributable to the noncontrolling interest and changes in ownership
interests in a subsidiary and requires additional disclosures that identify and
distinguish between the interests of the controlling and noncontrolling owners.
Pursuant to the transition provisions, the company adopted this new guidance on
October 1, 2009 via retrospective application of the presentation and
disclosure requirements.
In
March 2008, the FASB issued new disclosure requirements regarding
derivative instruments and hedging activities. Entities must now provide
enhanced disclosures on an interim and annual basis regarding how and why the
entity uses derivatives; how derivatives and related hedged items are accounted
for, and how derivatives and related hedged items affect the entity’s financial
position, financial results and cash flow. Pursuant to the transition
provisions, the company adopted these new requirements on October 1, 2009.
These new requirements do not impact the consolidated financial results as they
are disclosure-only in nature.
The FASB
guidance on fair value measurements and disclosures became effective
January 1, 2008. However, in February 2008, the FASB delayed the
effective date regarding fair value measurements and disclosures of nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to October 1, 2009. The adoption of these provisions
related to nonfinancial assets and nonfinancial liabilities on October 1,
2009 did not have a material impact on the consolidated financial
statements.
In
June 2008, the FASB issued guidance in determining whether instruments
granted in share-based payment transactions are participating securities. The
guidance became effective on October 1, 2009 via retrospective application.
According to the new guidance, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating
securities and, therefore, are included in computing earnings per share (EPS)
pursuant to the two-class method. The two-class method determines earnings per
share for each class of common stock and participating securities according to
dividends or dividend equivalents and their respective participation rights in
undistributed earnings. The adoption of these provisions is not expected to have
a material impact on the consolidated financial statements.
Item 9A(T). Controls and
Procedures.
Our Chief
Executive Officer and Chief Financial Officer (collectively, the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures for us. Based upon such officers' evaluation of these controls
and procedures as of a date within 90 days of the filing of this annual report,
and subject to the limitations noted hereinafter, the Certifying Officers have
concluded that our disclosure controls and procedures were not effective to
ensure that information required to be disclosed by us in this annual report is
accumulated and communicated to management, including our principal executive
officers as appropriate, to allow timely decisions regarding required
disclosure.
The
Certifying Officers have also indicated that, except as set forth above, there
were no significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Management’s
annual report on internal control over financial reporting
Management
is responsible for establishing and maintaining internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our
management evaluated, under the supervision and with the participation of our
Chief Executive Officer, the effectiveness of our internal control over
financial reporting as of the most recent fiscal year ended September 30,
2009.
Based on
its evaluation under the framework in Internal Control—Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
our management concluded that our internal control over financial reporting was
not effective as of September 30, 2009, due to the existence of significant
deficiencies constituting material weaknesses, as described in greater detail
below. A material weakness is a control deficiency, or combination of control
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.
During
the course of the preparation of our September 30, 2009 financial statements, we
identified certain material weaknesses relating to our internal controls and
procedures within the areas of accounting for equity transactions, document
control, account analysis and reconciliation. Some of these internal control
deficiencies may also constitute deficiencies in our disclosure
controls.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
PART
III.
Item
10. Directors, Executive Officers and Corporate
Governance.
The
following table sets forth the name, age, positions and offices or employments
for the past five years as of the date of this filing, of our executive officers
and directors*. Members of the board are elected and serve for one year terms or
until their successors are elected and qualify. All of the officers serve at the
pleasure of the Board of Directors of the Company.
|
NAME
|
|
AGE
|
|
POSITION
|
|
Zhiguang
Cai
|
|
36
|
|
Chief
Executive Officer, Director
|
|
Alan
R. Lun
|
|
43
|
|
President
and Director
|
|
James
T. Crane
|
|
33
|
|
Chief
Financial Officer
|
|
Larry
Schafran
|
|
71
|
|
Director
|
|
Jinliu
Deng
|
|
44
|
|
Director
|
|
Qimei
Liu
|
|
35
|
|
Director
|
Zhiguang
Cai, Chief Executive Officer and Director
On
September 5, 2009, the Company appointed Zhiguang Cai to serve as a Director and
Chief Executive Officer, effective immediately. Mr. Cai is 38 years old. He
joined the Company in 2000 and is currently the CEO of Subaye.com, Inc., a
majority owned subsidiary of the Company. He was the Vice President of Guangzhou
Subaye Computer Tech Ltd. (“Subaye Computer Tech”), a majority owned subsidiary
of the Company from June 2006 to July 2009, where he was responsible for the
development of Subaye Computer Tech's network and systems integration business
and for the planning analysis of software products, as well as technical
training and research and development. From October 2003 through June 2006, Mr.
Cai was the Director of Subaye Computer Tech's software research and development
center. From October 2000 to September 2003, Mr. Cai was the webmaster of
Mystaru Limited (formerly known as IC Star MMS Limited), a wholly owned
subsidiary of the Company. Prior to October 2000, Mr. Cai worked for five years
as a teacher of Xishui Computer Normal School in Hubei province. Mr. Cai
graduated in 1995 from the Central China Normal University Department of
Computer Science.
Alan
R. Lun, President and Director
On April
30, 2007, the Board appointed Alan R. Lun as the Company’s Chief Executive
Officer, President and as a member of the Board of Directors. Mr. Lun is also
the Chief Executive Officer of MyStarU Ltd., a wholly-owned subsidiary of the
Company, a position he has held since March 2006. From March 2001 through
February 2006, Mr. Lun was the division manager of Guangdong Country Garden
Property Management Co. Ltd., a property management company in
China. On September 5, 2009, Mr. Lun resigned as the Company’s Chief
Executive Officer, but remains the Company’s President and a
director.
James
T. Crane, Chief Financial Officer
Mr. Crane
joined the Company on October 29, 2007. In 2001, Mr. Crane founded J. Crane
& Company, P.C., a professional services firm. Prior to founding J. Crane
& Company, P.C., Mr. Crane worked as an external auditor and business
consultant for an international public accounting firm. Mr. Crane has worked
with numerous public companies in the United States of America, Asia and Europe,
where he focuses his time and efforts on emerging businesses, assisting them
with SEC compliance and communication matters, accounting and accounting-related
functions and debt and equity financing actions. Mr. Crane is a Certified Public
Accountant. Mr. Crane received his Bachelor of Science in Accountancy from
Bentley College in Waltham, Massachusetts. Mr. Crane also currently serves as
Chief Financial Officer of Longwei Petroleum Investment Holding Limited an
issuer trading on the Over-the-counter Bulletin Board. Mr. Crane has also
previously served as an officer or director of several other public and private
companies.
Larry
Schafran, Director
On
November 17, 2009, the Company appointed Larry G. Schafran to serve as a member
of the Board of Directors. The Company currently has no committees of
the Board of Directors. Mr. Schafran has served as the managing
principal of Providence Capital, Inc., a private investment and advisory firm
based in New York City, since 2003. Mr. Schafran currently serves as a director
and chairman of the Audit Committee for SulphCo, Inc., RemoteMDx, Inc., National
Patent Development Corp., and Tarragon Realty Investors, Inc., and is a director
and serves on the Audit Committee for ElectroEnergry, Inc.
Jinliu
Deng, Director
On
October 19, 2009, the Company appointed Jinliu Deng to serve as a member of the
Board of Directors. Mr. Deng, 44, provided consulting services to the
Company between July 2007 and July 2009 and was not compensated $60,000 or more
in fees from the Company in the three years prior to October 19,
2009. From June 2000 to the present, Mr. Deng has served as the
general manager of Guangzhou Free Stage Studios Limited, a leading entertainment
stage company in the People’s Republic of China.
Qimei
Liu, Director
On
November 12, 2009, the Company appointed Qimei Liu to serve as a member of the
Board of Directors. Ms. Liu, age 35, has served as the general
manager of Hongjian Hotel, a business travel services hotel in Guangzhou, the
People’s Republic of China, from July 2006 through the present. From
May 2005 to June 2006, Ms. Liu was the assistant to the Chief Information
Officer of HRDQ Group, Inc. Prior to May 2005, Ms. Liu was the assistant to the
Chief Operations Officer of Blogolb.com, a video sharing website in the People’s
Republic of China.
Board of
Directors
We
currently have three members on our Board of Directors, who are elected to
annual terms and until their successors are elected and qualified. Executive
officers are appointed by the Board of Directors on an annual basis and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of our directors, officers or key employees. There have
been no material changes to the procedures by which security holders may
recommend nominees to the Board of Directors since the date of the Company's
most recent quarterly report on Form 10-QSB.
Audit
Committee
The Audit
Committee is currently comprised of the following directors of the Company:
Lawrence G. Schafran (Chair), Jinliu Deng and Qimei Liu, each of whom is
independent, as independence is currently defined in applicable SEC and NASDAQ
rules. The Audit Committee was established by the board of directors
November 19, 2009. The Board has determined that Mr. Schafran
qualifies as an “audit committee financial expert,” as defined in applicable SEC
rules. The Board made a qualitative assessment of Mr. Schafran’s level of
knowledge and experience based on a number of factors, including his formal
education and experience.
The Audit
Committee is responsible for overseeing the Company’s corporate accounting,
financial reporting practices, audits of financial statements and the quality
and integrity of the Company’s financial statements and reports. In addition,
the Audit Committee oversees the qualifications, independence and performance of
the Company’s independent auditors. In furtherance of these responsibilities,
the Audit Committee’s duties include the following: evaluating the performance
of and assessing the qualifications of the independent auditors; determining and
approving the engagement of the independent auditors to perform audit, review
and attest services and performing any proposed permissible non-audit services;
evaluating employment by the Company of individuals formerly employed by the
independent auditors and engaged on the Company’s account and any conflicts or
disagreements between the independent auditors and management regarding
financial reporting, accounting practices or policies; discussing with
management and the independent auditors the results of the annual audit;
reviewing the financial statements proposed to be included in the Company’s
annual report on Form 10-K; discussing with management and the independent
auditors the results of the auditors’ review of the Company’s quarterly
financial statements; conferring with management and the independent auditors
regarding the scope, adequacy and effectiveness of internal auditing and
financial reporting controls and procedures; and establishing procedures for the
receipt, retention and treatment of complaints regarding accounting, internal
accounting control and auditing matters and the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. The Audit Committee operates under the written Audit Committee
Charter adopted by the Board in 2009, a copy of which may be obtained by writing
the Secretary of the Company at 349 Dabeilu, Shiqiao, Panyu, Guangzhou,
Guangdong, China, 511400. A current copy of the Audit Committee
Charter is also available on the SEC website at http://www.sec.gov, as an
exhibit to the Form 8-K filed by the Company on November 20, 2009.
Director
Independence
In
determining the independence of its Directors, the Company uses the definition
of independence adopted by the NASDAQ Stock Market. Based on the
NASDAQ standards, the Board of Directors has determined that three of the five
members of our board of directors are independent.
Compliance With Section
16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934 requires that the Company’s
directors and executive officers and persons who beneficially own more than ten
percent (10%) of a registered class of its equity securities, file with the SEC
reports of ownership and changes in ownership of its common stock and other
equity securities. Executive officers, directors, and greater than ten percent
(10%) beneficial owners are required by SEC regulation to furnish the Company
with copies of all Section 16(a) reports that they file. Based solely upon a
review of the copies of such reports furnished to us or written representations
that no other reports were required, the Company believes that, during that past
fiscal year, all filing requirements applicable to its executive officers,
directors, and greater than ten percent (10%) beneficial owners were met except
as follows:
|
|
|
Number of Late Reports
|
|
|
Zhiguang Cai
|
|
2
|
|
|
Alan
Lun
|
|
2
|
|
|
James
T. Crane
|
|
2
|
|
|
Yaofu
Su
|
|
1
|
|
|
He Yao
|
|
2
|
|
|
Wukuang IE Ltd.
|
|
1
|
|
Code of
Ethics
We have
adopted a Code of Ethics for our Senior Financial Officers and for all of our
employees. We shall, without charge, provide to any person, upon request, a copy
of our Code of Ethics for our Senior Financial Officers. All such requests
should be mailed to: Subaye, Inc., 349 Dabeilu, Shiqiao, Panyu, Guangzhou,
Guangdong, China 511400, attention: Zhiguang Cai, CEO.
As
required by SEC rules, we will report within five business days the nature of
any change or waiver of our Code of Ethics for our Senior Financial
Officers.
Item
11. Executive Compensation.
The
following table presents a summary of the compensation paid to our executive
officers during the fiscal years ended September 30, 2009 and 2008. Except as
listed below, there were no bonuses, other annual compensation, restricted stock
awards or stock options/SARs or any other compensation paid to the named
executive officers.
Summary
Compensation Table
|
Name and
Principal
Position
|
|
Year
Ended
September 30,
|
|
Salary
$
|
|
|
Bonus
$
|
|
|
Stock
awards
$
|
|
|
Option
awards
$
|
|
|
Nonequity
incentive plan
compensation
$
|
|
|
Nonqualified
deferred
compensation
earnings
$
|
|
|
All other
compensation
$
|
|
|
Total
$
|
|
|
Zhiguang
Cai
|
|
2009
|
|
|
28,000 |
|
|
|
0 |
|
|
|
2,275 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
30,275 |
|
|
Chief
Executive Officer, Director
|
|
2008
|
|
|
24,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
24,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
T. Crane
|
|
2009
|
|
|
0 |
|
|
|
0 |
|
|
|
12,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
179,163 |
|
|
|
191,163 |
|
|
Chief
Financial Officer ***
|
|
2008
|
|
|
0 |
|
|
|
0 |
|
|
|
252,400 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
99,049 |
|
|
|
351,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
R. Lun
|
|
2009
|
|
|
40,000 |
|
|
|
0 |
|
|
|
1,517 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
41,517 |
|
|
Chief
Executive Officer, President, Director
|
|
2008
|
|
|
40,000 |
|
|
|
0 |
|
|
|
130,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
170,000 |
|
*** Mr.
Crane is compensated through his professional services firm J. Crane &
Company, P.C. The figures included herein represent compensation paid to Mr.
Crane personally or J. Crane & Company, P.C.
Outstanding
Equity Awards at Fiscal Year-End
|
|
|
Option awards
|
|
|
Stock awards
|
|
|
Name
|
|
Number of
securities
underlying
unexercised
options (#)
exercisable
|
|
|
Number of
securities
underlying
unexercised
options (#)
unexercisable
|
|
|
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
|
|
Number
of shares
or units
of stock
that have
not
vested
(#)
|
|
|
Market
value of
shares or
units of
stock
that have
not
vested
($)
|
|
|
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights that
have not
vested
($)
|
|
|
Zhiguang
Cai
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
- |
|
|
|
29,750 |
|
|
$ |
270,725 |
|
|
|
0 |
|
|
|
0 |
|
|
James
T. Crane
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
- |
|
|
|
18,667 |
|
|
$ |
168,000 |
|
|
|
0 |
|
|
|
0 |
|
|
Alan
R. Lun
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
- |
|
|
|
19,833 |
|
|
$ |
180,483 |
|
|
|
0 |
|
|
|
0 |
|
Director
Compensation
The
following table presents a summary of the compensation paid to the members of
our Board of Directors during the fiscal year ended September 30, 2009. Except
as listed below, no other compensation was paid to our Directors.
|
|
|
Fees
earned or
paid in
cash
|
|
|
Stock
awards
|
|
|
Option
awards
|
|
|
Non-equity
incentive
plan
compensation
|
|
|
Non-
qualified
deferred
compensation
earnings
|
|
|
All other
compensation
|
|
|
Total
|
|
|
Name
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Zhiguang
Cai
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Yaofu
Su
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Alan
Lun
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Yulong
Zhu
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Director Compensation
Agreements
The
Company’s members of the board of directors were not compensated for board
services rendered to the Company during the reporting period.
Employment
Agreements
The
Company has entered into employment agreements with its officers. The terms of
the employment have been disclosed above.
Termination of Employment
and Change of Control Arrangement
There are
no compensatory plans or arrangements, including payments to be received from
the Company, with respect to any person named in the Summary Compensation Table
set forth above which would in any way result in payments to any such person
because of his or her resignation, retirement or other termination of such
person's employment with the Company or its subsidiaries, or any change in
control of the Company, or a change in the person's responsibilities following a
change in control of the Company.
Indemnification of Officers
And Directors
We
indemnify to the fullest extent permitted by, and in the manner permissible
under the laws of the State of Delaware, any person made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he/she is or was a
director or officer of our Company, or served any other enterprise as director,
officer or employee at our request. Our board of directors, in its discretion,
shall have the power on behalf of the Company to indemnify any person, other
than a director or officer, made a party to any action, suit or proceeding by
reason of the fact that he/she is or was our employee.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
(a) Security
Ownership of Certain Beneficial Owners
The
following tables set forth, as of December 29, 2009, information known to us
relating to the beneficial ownership of shares of common stock by: each person
who is the beneficial owner of more than 5 percent of the outstanding shares of
common stock, each director, each executive officer, and all executive officers
and directors as a group.
We
believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them
except as stated therein.
Under the
securities laws, a person is considered to be the beneficial owner of securities
that can be acquired by him or her within 60 days from the date of this filing
upon the exercise of options, warrants or convertible securities. We determine
beneficial owner's percentage ownership by assuming that options, warrants or
convertible securities that are held by him or her, but not those held by any
other person and which are exercisable within 60 days of the date of this
filing, have been exercised or converted. As of December 29, 2009 there were
6,664,131 shares of our common stock issued and outstanding.
|
Name and Address of Beneficial Owner*
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Percentage of
Shares
Beneficially
Owned
|
|
Position
|
|
Wukuang
IE Limited
7/F.,
HaiYiGe, Biguiyuan Shunde, Fushan GD China
|
|
|
600,000 |
|
|
|
9.00 |
% |
5%
owner
|
|
|
|
|
|
|
|
|
|
|
|
|
Insequor
Capital, Inc. 61 Rosena Lane Uxbridge, Ontario L9P 1X6
|
|
|
450,000 |
|
|
|
6.75 |
% |
5%
owner
|
|
Zhiguang
Cai
|
|
|
30,000 |
|
|
|
0.00 |
|
Chief
Executive Officer, Director
|
|
James
T. Crane
|
|
|
106,550 |
|
|
|
1.60 |
% |
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
Lun
|
|
|
30,000 |
|
|
|
0.00 |
% |
President,
Director and Former Chief Executive Officer
|
|
Yaofu
Su
|
|
|
6,000 |
|
|
|
0.00 |
% |
Vice
President, Former Director
|
|
He
Yao
|
|
|
10,000 |
|
|
|
0.00 |
% |
Secretary,
Former Director
|
|
Larry
Schafran
|
|
|
0 |
|
|
|
0.00 |
% |
Director
|
|
Jinliu
Deng
|
|
|
0 |
|
|
|
0.00 |
% |
Director
|
|
Qimei
Liu
|
|
|
0 |
|
|
|
0.00 |
% |
Director
|
|
Directors
and Executive Officers as a Group
|
|
|
182,550 |
|
|
|
2.74 |
% |
|
* Except
where otherwise indicated, the address of the beneficial owner is deemed to be
the same address of the Company.
(b) Changes
in Control
We know
of no contractual arrangements which may at a subsequent date result in a change
of control in the Company.
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
None
Item 14. Principal Accounting Fees and
Services.
AUDIT
FEES
The
aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2009 and 2008 and quarterly reviews of the
consolidated financial statements included in the Company's Forms 10-K and 10-Q
for fiscal 2009 and 2008, and for the review of the Company’s Forms S-1 were
$200,084 and $184,155, respectively.
AUDIT-RELATED
FEES
The
Company's auditors did not bill any additional fees for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's financial statements.
TAX
FEES
The
aggregate fees billed by the Company's auditors for professional services for
tax compliance, tax advice, and tax planning were $0 for fiscal 2009 and
2008.
ALL
OTHER FEES
The
aggregate fees billed by the Company's auditors for all other non-audit services
rendered to the Company, such as attending meetings and other miscellaneous
financial consulting in fiscal 2009 and 2008 were $0.
PART
IV
Item
15. Exhibits.
|
3.1
|
Certificate
of Incorporation.*
|
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation, as filed on July 10, 2007
with the Secretary of State of the State of
Delaware.**
|
|
21.1
|
List
of Subsidiaries +
|
|
23.1
|
Consent
of DNTW Chartered Accountants LLP
++
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification (CEO)
++
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification (CFO)
++
|
|
32.1
|
Section
1350 Certification (CEO) ++
|
|
32.2
|
Section
1350 Certification (CFO) ++
|
|
*
|
Incorporated
by reference to exhibits filed with the registrant’s definitive proxy
statement on Form 14A as filed with the SEC on January 27,
2005.
|
|
**
|
Incorporated
by reference from the registrant’s Form 8-K as filed with the SEC on July
31, 2007.
|
|
***
|
Incorporated
by reference from the registrant’s Form 10-QSB as filed with the SEC on
February 1, 2005.
|
|
+
|
Incorporated
by reference from the registrant’s Form 10-QSB as filed with the SEC on
February 16, 2008.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
SUBAYE,
INC.
|
|
|
|
|
|
|
|
|
|
Date:
December 29, 2009
|
By:
|
/s/ Zhiguang Cai
|
|
|
|
Zhiguang
Cai
|
|
|
|
Chief
Executive Officer and President
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
December 29, 2009
|
By:
|
/s/ James T. Crane
|
|
|
|
James
T. Crane
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial and Accounting
Officer)
|