|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Return to the SEC filings menu | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For the
quarterly period ended December 31, 2008
For the
transition period from ________ to ________
Commission
File Number 333-62236
MYSTARU.COM,
INC.
(Exact
name of registrant as specified in its charter)
(Former
name, former address and former fiscal year, if changed since last
report)
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. Yes x
No o
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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: As of February 22,
2009, 171,364,316 shares of common stock, par value $.001 per share were
outstanding. TABLE OF
CONTENTS
PART
I—FINANCIAL INFORMATION
Item
1. Financial Statements.
MYSTARU.COM,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an
integral part of the condensed consolidated financial
statements. 3
MYSTARU.COM, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
The
accompanying notes are an integral part of the condensed consolidated financial
statements. 4
MYSTARU.COM,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASHFLOWS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
The
accompanying notes are an integral part of the condensed consolidated financial
statements. 5
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007
NOTE
1 - BUSINESS DESCRIPTION AND ORGANIZATION
MyStarU.com,
Inc., a Delaware corporation (together with its consolidated subsidiaries,
“MYST” or the “Company”) is a fully integrated information and entertainment
service provider to the business, internet, and consumer markets in the People’s
Republic of China (the “PRC”). 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. The Company's common stock continues to be quoted under the
symbol, “MYST.OB,” on the FINRA over-the-counter bulletin board (“OTCBB”) in the
United States of America.
The
Company operates in five distinct business segments:
1. Investments
in Entertainment Arts Productions - The Company purchases and licenses or
resells copyrights of entertainment-related assets.
2. Online
Membership Services - The Company provides online content and member services
for commercial use.
3. Software
sales - The Company provides web-based and mobile software
platforms.
4. Importing
and exporting of goods - The Company conducts international trade using the PRC
as its base of operations.
5. Media
and Marketing Management - The Company coordinates product placement activities
for filmmakers and advertisers within the entertainment arts industry of the
PRC.
CONTROL
BY PRINCIPAL STOCKHOLDERS
The
directors, executive officers and their affiliates or related parties, own
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the common stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company's assets or
business.
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 the PRC (“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 United States 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.
6
MyStarU
Ltd.
MyStarU
Ltd. operates the Company’s online educational platforms, and manages the
MyStarU franchise programs.
3G
Dynasty
3G
Dynasty operates the Company’s investments in entertainment arts business
segment and 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
Guangzhou Subaye Computer Technology Limited, Subaye IIP Limited and Media Group
International, Inc.
Subaye IIP
Limited
Subaye
IIP Limited is an operating company utilized by the Company to manage the
Company’s websites, www.subaye.com, www.goongreen.org, www.x381.com,
www.goongood.com. Subaye IIP Limited is also in the business of
marketing and delivering software generally referred to as SAAS, or Software as
a Service.
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.
General
Statement
The
Securities and Exchange Commission ("SEC") has issued Financial Reporting
Release No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies (“FRR 60”), suggesting
companies provide additional disclosure and commentary on their most critical
accounting policies. In FRR 60, the SEC defined the most critical accounting
policies as the ones that are most important to the portrayal of a company’s
financial condition and operating results, and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. The methods, estimates and
judgments the Company uses in applying these most critical accounting policies
have a significant impact on the results the Company reports in its consolidated
financial statements.
We
believe the following critical accounting policies and procedures, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:
·
Revenue recognition;
·
Valuation of stock based compensation; and
·
Valuation of intangible assets and long lived assets, review for impairment
losses.
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 balance sheets and amounted to $48,993
and $30,251 as of December 31, 2008 and September 30, 2008,
respectively. 7
Revenue
Recognition
The
Company negotiates contracts with its customers, which may include revenue
arrangements with multiple deliverables, as outlined by Emerging Issues Task
Force No. 00-21 ("EITF 00-21"). The Company’s accounting policies are defined
such that each deliverable under a contract is accounted for separately.
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:
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 with SEC
Staff Accounting Bulletin No. 104, Revenue
Recognition ("SAB 104"). 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 $100 per month for access to the
marketing and advertising capabilities in place at www.subaye.com. The Company
does not currently provide any specific software to its www.subaye.com members,
although, much of the website is driven by complex software which controls the
video and voice streaming, among other things, which is prevalent throughout the
website.
The
Company has an ongoing agreement with China Netcom ("CN"). CN is an internet
provider and webhosting in the PRC and manages the internet connection and
webhosting of the Company's www.subaye.com website. Under the agreement, CN is
required to ensure that the Company's internet connection and namely its
webhosting, is operating correctly at all times such that all users of the
websites, including Subaye.com members and anyone else who attempts to access
the website can do so without interruption as long as the individual has a
reliable internet connection. CN is compensated such that CN receives forty
percent (40%) of the Company's gross membership fees, payable on a monthly basis
within approximately fifteen (15) days of the end of each month. The Company
records its revenues net of the fees paid to CN, in accordance with Emerging
Issues Task Force Issue No. 99-19 ("EITF 99-19"). The Company believes net
revenue presentation is reasonable given that it shares the obligation to
perform with CN with regard to its membership contracts with its customers. The
Company also does not believe it has the ability to replace CN with another
comparable internet and webhosting provider. Lastly, the allocation of fees to
CN is based on a fixed percentage portion of the membership revenues earned from
membership fee transactions.
The
Company also has an ongoing agreement with FRT whereby FRT is to ensure the
telephone lines and mechanical equipment associated with the Company's internet
connection is operating correctly. The Company has a fixed arrangement with FRT
such that the monthly fees payable to FRT for its services are approximately
$6,200.
Media
& Marketing Management
In
accordance with SAB104, the Company recognizes revenues from media, advertising
and marketing services, product placement services within the PRC and
overseas entertainment markets generated by its MGI subsidiary when the
following fundamental criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been rendered,
(iii) the price to the customer is fixed or determinable and (iv) collection of
the resulting receivable is reasonably assured. In
general, revenues are typically earned throughout the life of MGI
contracts, normally on a monthly basis.
Software
Sales
Revenue
from the sale of software is recognized pursuant to the requirements of
Statement of Position 97-2 Software Revenue Recognition
(SOP 97-2), issued by the American Institute of Certified Public Accountants, as
amended by SOP 98-9 Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. In accordance
with SOP 97-2, we begin 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
business model, software license agreements typically include 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). 8
Our
standard licensing agreements include a product warranty provision for all
products. Such warranties are accounted for in accordance with SFAS No. 5, Accounting for Contingencies.
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 SFAS No. 5. 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.
Copyright
Licensing and Sales
Licensing
revenue derived from the Company’s copyrights is recognized in accordance
with Statement of Position 00-2, Accounting by Producers or
Distributors of Films (“SOP 00-2”). SOP 00-2 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.
Import
and Export Revenues
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. In December 1999, the Securities Exchange
Commission issued Staff Accounting Bulletin ("SAB) No. 101, "Revenue
Recognition" and in July 2000, the Emerging Issues Task Force ("EITF") issued
EITF Abstract No. 99-19 Reporting Revenue Gross
as a Principal versus Net as an Agent ("EITF 99-19") which provided
further guidance to SAB 101 on revenue recognition in certain circumstances.
Prior to the introduction of EITF 99-19, the manner in which the Company
recognized revenues depended on the goods and services sold. We reviewed the
considerations included in EITF 99-19 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 EITF 99-19 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 EITF 99-19.
After reviewing EITF 99-19, 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 the PRC 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.
Amortization of
Copyrights
The
Company amortizes its copyrights using the individual-film-forecast-computation
method, in accordance with the SOP 00-2, 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 the films. Amortization related to the movies was $115,388 and $0
for the three months ended December 31, 2008 and 2007, respectively, and is
included in cost of sales. 9
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 SOP. 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.
Stock-Based
Compensation
The
Company does not have a formal stock option plan. However, we offered to some of
our employees stock-based compensation in the form of stock warrants and shares
of our common stock. Prior to July 1, 2005, we accounted for those stock-based
compensation awards using the recognition and measurement principles of the
intrinsic value method of Accounting Principles Board (“APB”) Opinion No.
25, Accounting for Stock
Issued to Employees, and its related interpretations, and applied
the disclosure-only provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Under the intrinsic value method, we recognized
compensation expense on the date of grant only if the current market price of
the underlying stock on the grant date exceeded the exercise price of the
stock-based award.
In
December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), Share-Based Payment, which
revises FASB Statement No. 123 and supersedes APB Opinion No. 25. FASB Statement
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values beginning with the first interim or annual period after June
15, 2005. Subsequent to the effective date, the pro forma disclosures previously
permitted under FASB Statement No. 123 are no longer an alternative to financial
statement recognition.
In March
2005, the Staff of the SEC issued Staff Accounting Bulletin (“SAB”) No.
107, Share-Based
Payment. SAB No. 107 expresses the view of the SEC Staff regarding the
interaction between FASB Statement No. 123(R) and certain SEC rules and
regulations and provides the SEC Staff’s views regarding the valuation of
share-based payment arrangements for public companies. The SEC Staff believes
the guidance in SAB No. 107 will assist public companies in their initial
implementation of FASB Statement No. 123(R) beginning with the first interim or
annual period of the first fiscal year that begins after June 15,
2005.
Effective
July 1, 2005, we adopted FASB Statement No. 123(R) using the modified
prospective method. Under this method, compensation cost recognized during 2006
includes: (1) compensation cost for the portions of all share-based payments
granted prior to, but not yet vested as of July 1, 2005, based on the grant date
fair value estimated in accordance with the original provisions of FASB
Statement No. 123 amortized on a straight-line basis over the options’ remaining
vesting period beginning July 1, 2005, and (2) compensation cost for all
share-based payments granted subsequent to July 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of FASB Statement No.
123(R) amortized on a straight-line basis over the options’ requisite service
period.
Software
Development Costs
The
Company accounts for software development costs in accordance with SFAS No.
86, Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed.
Under SFAS No. 86, 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. The Company has not developed its
own software. The Company has purchased all of its software from
third parties.
Once the
Company releases software as entertainment content, amortization of 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 thirty six 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
and Equipment
Property
and equipment is located in the PRC 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:
10
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,
2008, based on management’s projected future cash flows, management has
determined that there is no impairment of long-lived assets at September 30,
2008. See Notes 5, 7 and 8 to the financial
statements.
Goodwill
and Intangible Assets
The
Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, effective June 2001. SFAS No. 141 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 SFAS No. 142, 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. See Note 5 to the financial
statements.
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
the PRC 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 89% 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 December 31, 2008 and September 30, 2008, amounted to
$794,452 and $302,632 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 prevent 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. 11
Geographic, Political,
Economic, Taxation and Legal
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC economy. The Company’s operations in the PRC 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.
Customer
Sales Incentives
Customer
sales incentives are classified and valued in the consolidated statement
of operations and comprehensive income in cost of sales in accordance
with Emerging Issues Task Force Issue No. 01-9 Accounting for Consideration Given
by a Vendor to a Customer.
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
SFAS No. 109 Accounting
for Income Taxes . 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 FASB Interpretations No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”),
which clarifies the accounting for uncertainty in tax positions taken or
expected to be taken in a return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. FIN 48 became effective as of
January 1, 2007 and had no impact on the Company’s consolidated financial
statements.
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, in accordance with
SFAS No. 2, Accounting
for Research and Development Costs. 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 the three months ended December 31, 2008 and 2007 were $96,188 and
approximately $62,187, respectively. 12
Net
Earnings (Loss) Per Share
The
Company utilizes SFAS No. 128, Earnings per
Share to calculate gain or loss per share. Basic gain or loss per
share is computed by dividing the gain or loss available to common stockholders
(as the numerator) by the weighted-average number of common shares outstanding
(as the denominator). Diluted gain or loss per share is computed similar to
basic gain or loss 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. Under SFAS No. 128, if the
additional common shares are dilutive, they are not added to the denominator in
the calculation. Where there is a loss, the inclusion of additional common
shares is anti-dilutive (since the increased number of shares reduces the per
share loss available to common stock holders).
There
were no common stock equivalents as of December 31, 2008 or 2007,
respectively.
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. Significant
estimates include estimates of the useful life of property and equipment,
copyrights, collectibility of accounts receivable and valuation of stock based
compensation.
Segment
Reporting
SFAS No.
131, Disclosure About
Segments of an Enterprise and Related Information, 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 sheets and statements of operations
have been made in 2007, in order for the 2007 financial statements to conform to
the presentation of the 2008 financial statements. These reclassifications
did not impact the Company’s consolidated total assets, consolidated total
liabilities, consolidated net income or consolidated stockholders equity for the
year ended September 30, 2008 and three months ended December 31, 2007,
respectively.
NOTE
3 - ACCOUNTS RECEIVABLE
The
Company’s business operations are conducted in the PRC. 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 December 31, 2008 and September 30, 2008 consisted of the
following:
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the three months ended December 31, 2008 and the year ended September 30,
2008 is as follows:
The
Company has the following concentrations of business with customers constituting
greater than 5% of the Company’s gross accounts receivable as of December 31,
2008 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 $10,336,513 and $10,313,625 or 89% and 99% of our
gross total accounts receivable as of December 31, 2008 and September 30, 2008,
respectively. 13
The
Company’s business operations are conducted in the PRC. 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 will change in
the near future.
NOTE
4 - PREPAID SALES INCENTIVES
On
October 1, 2008, the Company offered the members of www.subaye.com a sales
promotion whereby each member would receive 1,600 Digital Video Discs ("DVDs")
from the Company if the member agreed to commit to the Company's current
membership terms for being a member of www.subaye.com for the twelve month
period ending September 30, 2009. The DVDs included a promotional
advertisement for each member's business in the introduction section of the
DVDs. The remaining programming on the DVDs consisted of the Big
Movie: Subaye motion picture, which the Company's subsidiary 3G
Dynasty holds the copyright to. The members of Subaye are expected to
use the DVDs for their own promotional and marketing
purposes. Additionally, if a current member does decide to cancel
their membership with www.subaye.com, they have agreed to reimburse the Company
for approximately two and a half times the cost of the DVDs, which is
approximately $1,152 per member. A total of 16,000 members of
www.subaye.com accepted the sales promotion and therefore have agreed to remain
members of www.subaye.com for the twelve month period ending September 30,
2009. In December 2008 and January 2009, a total of 25,600,000 DVDs
were delivered to the members of www.subaye.com. The Company is
amortizing the total cost of the sales promotion, which was approximately $6.7
million, evenly over the twelve month period ending September 30, 2009, in
accordance with Emerging Issues Task Force ("EITF") Issue No.
01-9. The unamortized portion of the sales incentive, approximately
$5.1 million, is classified as prepaid sales incentives in the Company's balance
sheets.
NOTE
5 - 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 $200,000, 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 $200,000. 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 $202,453. Subaye.com recorded
$202,453 of goodwill, which was the excess of acquisition cost over fair value
of net assets of MGI.
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 three months ended December 31, 2007
would have been $7,711,953 (unchanged) and $718,756,
respectively. 14
NOTE
6 - SALE OF ASSETS
First
Open
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
PRC 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:
The
copyright’s adjusted cost basis was net of an impairment loss write down in 2006
of $332,291 and was not net of any amortization or depreciation.
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 “licensing
and royalty 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 7
- 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 lives and the carrying values of all the
Company's goodwill and intangible assets by category, as of December 31, 2008
and September, 30, 2008:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
