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, Inc.
(“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 and is in the process of developing an online shopping
mall.
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 and Hong Kong, use their local
currency, Renminbi (RMB), and Hong Kong Dollar (HKD), 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 stockholders’ equity in the balance
sheets. 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 stockholders' equity on the balance sheets and amounted
to $53,941 and $30,251 as of June 30, 2009 and September 30, 2008,
respectively.
Revenue
Recognition
Licensing
Agreements
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.
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.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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 customers, 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.
Subaye.com
has an ongoing agreement with China Netcom (“CN”). CN is an internet and
webhosting provider 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 Subaye.com’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 Subaye.com’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.
Subaye.com
has an ongoing agreement with SSTH Limited (“SSTH”). SSTH is a merchant service
provider contracted to complete two tasks: (i) to assist the members of
www.subaye.com in preparing each member's corporate branding video, which is to
be uploaded to www.subaye.com and (ii) to assist Subaye.com with the daily
operations of www.subaye.com and more specifically, to collect the monthly
member fees, which are currently paid in cash, from the members of
www.subaye.com. Collecting these cash receipts, tracking which customers have
paid and which have not, and remitting the cash to Subaye.com, is a time
intensive project each month. In October 2006, Suaye.com and SSTH Limited orally
agreed to allow SSTH Limited as much as 90 days in order to collect all cash
receipts from any particular month. Subaye.com determined it would provide the
merchant services provider flexibility with regard to remitting cash to
Subaye.com so that the merchant services provider could focus its efforts on
collecting fees from the members of www.subaye.com. Subaye.com has never
experienced collection issues with regard to the merchant services provider and
does not expect any collection issues to occur in the future. SSTH is
compensated such that SSTH receives ten percent (10%) of Subaye.com's gross
membership fees, payable on a monthly basis at the end of each month. The
Company records its revenues net of the fees paid to SSTH, 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 SSTH with regard to its membership contracts with its customers.
The Company also does not believe it has the ability to replace SSTH with
another comparable internet and webhosting provider. Lastly, the allocation of
fees to SSTH 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.
SAAS
The
Company derives its application services 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 the Securities and Exchange Commission’s,
or SEC, Staff Accounting Bulletin No. 104, Revenue
Recognition and Emerging Issues Task Force Issue No.
00-21, Revenue
Arrangements with Multiple Deliverables. 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 thirty 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 verbally agreed that payments are due from customers
within a ninety day term. The Company has limited collection history
with these specific customers and is new to the SAAS
business. However, in recent months the Company’s collections from
its SAAS customers have been encouraging. The Company does not
currently anticipate collection issues with regard to its SAAS business
customers.
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.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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.)
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.
Importing
and Exporting Sales
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.
Media
& Marketing Management
In
accordance with SAB 104, the Company recognizes revenue 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.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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 the 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 one of its copyrighted titles, “Big Movie:
Subaye.” Amortization related to the Company's copyrights 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 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.
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. The
concentration of customers owing at least 5% of the Company’s outstanding
accounts receivable as of June 30, 2009 and September 30, 2008 was 84% and
99% of the company’s accounts receivable, respectively.
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.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP 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,
collectability of accounts receivable, and valuation of stock based
compensation.
Reclassifications
Certain
reclassifications to the Company’s balance sheet and income statement have been
made in 2008, in order for the 2009 financial statements to conform to the
presentation of these financial statements. These reclassifications did not
impact the Company’s assets, liabilities, net income or stockholders equity for
the nine months ended June 30, 2009 and 2008, 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 June 30, 2009 and September 30, 2008 consisted of the
following:
|
|
June 30,
2009
|
|
|
September 30,
2008
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Trade
accounts receivable
|
|
$ |
13,165,525 |
|
|
$ |
10,417,803 |
|
Less:
allowance for doubtful accounts
|
|
|
(362,773
|
) |
|
|
(30,767
|
) |
Totals
|
|
$ |
12,802,752 |
|
|
$ |
10,387,036 |
|
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the nine months ended June 30, 2009 and the year ended September 30, 2008 is
as follows:
|
|
June 30,
2009
|
|
|
September 30,
2008
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Beginning
Allowance for Doubtful Accounts
|
|
$ |
30,767 |
|
|
$ |
413,036 |
|
Additional
Charges to Bad Debt for Estimated Uncollectible Accounts
|
|
|
331,928 |
|
|
|
- |
|
Direct
Write-offs of Bad Debts
|
|
|
- |
|
|
|
(196,829
|
) |
Recovery
of Accounts Charged to Bad Debt Expense in 2006 and 2005
|
|
|
- |
|
|
|
(185,440
|
) |
Foreign
Currency Translation Adjustment
|
|
|
78 |
|
|
|
- |
|
Ending
Allowance for Doubtful Accounts
|
|
$ |
362,773 |
|
|
$ |
30,767 |
|
The
Company has the following concentrations of business with customers constituting
greater than 5% of the Company’s accounts receivable as of June 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.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
|
|
June 30,
2009
|
|
|
September 30,
2008
|
|
|
|
Unaudited
|
|
|
Audited
|
|
SSTH
|
|
|
33
|
% |
|
|
46
|
% |
Anyone
Pictures
|
|
|
22
|
% |
|
|
-
|
% |
Gold
Swallow
|
|
|
9
|
% |
|
|
-
|
% |
China
Donguan Networks
|
|
|
8
|
% |
|
|
-
|
% |
Li
Jin
|
|
|
5
|
% |
|
|
-
|
% |
Guangzhou
PanYu HuiQiang JingMao
|
|
|
7
|
% |
|
|
-
|
% |
QXS
Enterprise
|
|
|
-
|
% |
|
|
18
|
% |
Fenglin
Qimao
|
|
|
-
|
% |
|
|
9
|
% |
Fengcun
Electric
|
|
|
-
|
% |
|
|
19
|
% |
PanYu
HuiQiang Economic and Trade
|
|
|
-
|
% |
|
|
7
|
% |
NOTE
4 - ADVERTISING PROMOTION
The
Company expenses advertising costs as the costs are incurred in accordance with
Statement of Position 93-7 “Reporting on Advertising
Costs” (“SOP 93-7”), issued by the American Institute of Certified
Public Accountants.
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 approximately $6.8
million. The Company recorded a prepaid expense for approximately
$6.8 million and expensed the full value of the advertising promotion in
December 2008 and January 2009. For the nine and three months ended
June 30, 2009, the Company recorded $6.8 million 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 the PRC. The products
will include clothes, footwear, bags and garniture, jewellery 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. In accordance with the contract,
Subaye IIP Limited paid a deposit of approximately $8.2 million. 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 - PURCHASE AND SALE OF ASSETS
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 $2.1 million 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:
Gross
Proceeds From the Sale of Copyright – Stockbrokers
|
|
$
|
4,123,206
|
|
Adjusted
Cost Basis
|
|
|
(3,680,716
|
)
|
Net
Gain
|
|
$
|
442,490
|
|
Purchase of Copyrights to
Qianfu
On
February 22, 2009 the Company purchased the copyrights to Qianfu, a PRC motion
picture, for approximately $3,872,490.
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. These
copyrighted films had been acquired through the Company's contract with ZesTV.
Below is the list of the 11 movies included in the sale:
ZuiAiZongDongYuan
ShiFenAi
HongMeiLi
Xin
Xiang
TianDiGaoBai
FengKuangFenShiWong
TuYaDeKunShi
YongShi
GongBu
NianCaiNuMo
DaTangFengYun
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
Gross
proceeds from the sale of copyrights - ZesTV: internet
rights
|
|
$
|
1,457,481
|
|
Adjusted
cost basis
|
|
|
(1,374,982
|
)
|
Net
gain
|
|
$
|
82,499
|
|
First
Open
On
December 30, 2007, the Company sold all rights under its copyright for the
internet programming rights to First Open. 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 as follows:
Gross
proceeds from the sale of Copyright - First Open: internet
rights
|
|
$
|
279,824
|
|
Adjusted
cost basis
|
|
|
(332,291
|
)
|
Net
loss
|
|
$
|
(52,467
|
)
|
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.
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 (“MGI”) for
100,000 shares of common stock of Subaye.com, valued at $200,000 which was the
fair market value of recent arms length transactions involving the common stock
of Subaye.com, Inc. The net assets received by Subaye.com from the acquisition
of MGI totaled $197,166. 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, which was
recorded upon Subaye.com’s acquisition of MGI. The Company recorded $202,453 of
goodwill, which was the excess of acquisition cost over fair value of net assets
of MGI.
Cash
|
|
$
|
2,834
|
|
Fixed
assets, net
|
|
|
653
|
|
Goodwill
|
|
|
202,453
|
|
Due
to related party
|
|
|
(5,940
|
)
|
Net
assets acquired
|
|
$
|
200,000
|
|
|
|
|
|
|
Purchase
consideration
|
|
$
|
200,000
|
|
Net
assets acquired
|
|
|
200,000
|
|
Net
cash inflow from acquisition of MGI
|
|
$
|
2,834
|
|
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 our subsidiary, Subaye.com’s statement of operations from
October 23, 2007 and within the Company’s statement of operations since October
23, 2007. If the operating results had been included since the beginning of the
prior fiscal year, October 1, 2007, the Company’s pro-forma consolidated revenue
and the Company’s pro-forma net income would have been $21,708,427 (unchanged)
and $2,340,202, respectively.
NOTE 7 - COPYRIGHTS
Copyrights
are stated at cost (estimated fair value upon contribution or acquisition), less
accumulated amortization and impairment. Amortization expense is recognized on
the straight-line basis over the estimated useful lives of the assets as
follows:
|
Estimated
useful lives of copyrights
|
|
Variable
|
The
following table summarizes the lives and the carrying values of all the
Company's copyrights by category, as of June 30, 2009 and September, 30,
2008:
|
|
2009
|
|
|
2008
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Copyrights
- Motion Picture, Television, Internet and DVD Productions
|
|
$
|
14,897,812
|
|
|
$
|
14,669,309
|
|
Accumulated
Amortization
|
|
|
(2,496,237
|
)
|
|
|
(1,550,443
|
)
|
Total
|
|
$
|
12,401,575
|
|
|
$
|
13,118,866
|
|
The
following table summarizes the copyrights held by the Company as of June 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.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
Copyrights for Movies, DVDs,
Television and Internet Broadcasting
Big
Movie: Subaye *
Qianfu
PaoBu
True?
**
*The
copyright for “Big Movie: Subaye” does not include rights for television
programming.
** The
copyright for True? is 50% owned by ZesTV and 50% owned by MyStarU.com,
Inc.
Copyrights for Internet
Broadcasting Only
Big Movie
2: Two Stupid Eggs
The 113
Movies
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 the
Big Movie: Subaye movie copyrights in December 2006, when the Company began to
recognize revenue from the film. Amortization related to the Company's
copyrights was $956,559 and $0 and $246,074 and $0 for the nine and three
months ended June 30, 2009 and 2008, respectively, and is included in cost of
sales in the accompanying statements of operations and comprehensive
income.
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 SOP 00-2. 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 reevaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2009 and September 30,
2008, respectively, the Company expects these assets, at their current carrying
value, to be fully recoverable.
NOTE
8 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Computer
Software & Equipment
|
|
$
|
14,499,830
|
|
|
$
|
14,467,374
|
|
Websites
|
|
|
9,356,264
|
|
|
|
9,338,719
|
|
Motor
Vehicle
|
|
|
84,225
|
|
|
|
84,012
|
|
Furniture
& Fixtures
|
|
|
61,041
|
|
|
|
56,205
|
|
|
|
|
24,001,360
|
|
|
|
23,946,310
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(18,385,168
|
)
|
|
|
(13,644,708
|
)
|
|
|
$
|
5,616,192
|
|
|
$
|
10,301,602
|
|
NOTE
9 - 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 and the net carrying amount of copyrights that
are sold. 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.
|
|
Nine months Ended
|
|
|
|
June 30,
2009
|
|
|
June 30,
2008
|
|
Depreciation
Included in Operating Expenses
|
|
$
|
36,801
|
|
|
$
|
77,709
|
|
Amortization
of Copyrights Included Within Cost of Sales
|
|
|
956,559
|
|
|
|
-
|
|
Amortization
of Websites Included Within Cost of Sales
|
|
|
2,308,131
|
|
|
|
2,186,484
|
|
Amortization
of Software Included Within Cost of Sales
|
|
|
2,345,553
|
|
|
|
964,753
|
|
Total
Depreciation and Amortization
|
|
$
|
5,647,044
|
|
|
$
|
3,228,946
|
|
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
NOTE
10 - STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 350,000,000 shares of capital stock, 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 the date of the report, no shares of the Company’s preferred stock and
186,424,316 shares of the Company’s common stock were issued or
outstanding.
Stock-Based
Compensation
On April
12, 2006, the Company issued 4,000,000 shares of common stock to five
consultants as part of their compensation at a market price of $.52 for a total
consideration of $2,080,000. The Company amortized the consultancy fee of
$1,300,000 over a 24 month service period, the remaining $780,000 is amortized
over a 12 month service period. It resulted in an expense of $119,167 for each
month for the first 12 months and the remaining 12 months will have an expense
of $54,167. The stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $0 and $325,000 and $0 and $0,
respectively.
On
January 10, 2007, the Company issued 250,000 shares of common stock to Mary
Kratka for investor relations and promotions services at a price of $.45 per
share for total consideration equal to $112,500. The shares are being amortized
over 12 months with a stock-based compensation expense of $9,375 each month. The
total stock-based compensation expense for the nine and three months ended June
30, 2009 and 2008 was $0 and $28,125 and $0 and $0, respectively.
On
January 31, 2007, the Company issued 750,000 shares of common stock to Bon Air
Group Limited for investor relations and promotion services at a price of $.30
per share for a total consideration equal to $225,000. The shares are being
amortized over 12 months with stock-based compensation expense of $18,700 each
month. The total stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $0 and $75,000 and $0 and $0,
respectively.
On July
16, 2007, the Company agreed to issue 365,000 shares of common stock to a
consultant for international business consulting services at a price of $.16 per
share for a total consideration equal to $58,400. The shares are being amortized
over 24 months with stock-based compensation expense of $2,433 each month. The
total stock-based compensation expense for the nine and three months ended June
30, 2009 and 2008 was $21,900 and $21,900 and $7,300 and $7,300,
respectively.
On
October 3, 2007, the Company issued 735,000 shares of common stock to the
Company’s Chief Financial Officer for services to be provided over a two year
period at a price of $.13 per share for a total consideration equal to $95,550.
The shares are being amortized over 24 months with stock-based compensation
expense of $3,981 each month. The total stock-based compensation expense for the
nine and three months ended June 30, 2009 and 2008 was $35,832 and $35,831 and
$11,944 and $11,944, respectively.
On
October 3, 2007, the Company issued 1,000,000 shares of common stock to the
Company’s Chief Executive Officer for services to be provided over a two year
period at a price of $.13 per share for a total consideration equal to $130,000.
The shares are being amortized over 24 months with stock-based compensation
expense of $5,417 each month. The total stock-based compensation expense for the
nine and three months ended June 30, 2009 and 2008 was $48,750 and $48,750 and
$16,250 and $16,250, respectively.
On
October 3, 2007, the Company issued 400,000 shares of common stock to an
investor relations consultant, for services to be provided over a 24 month
period at a price of $.13 per share for a total consideration equal to $52,000.
The shares are being amortized over 24 months with stock-based compensation
expense of $2,167 each month. The total stock-based compensation expense for the
nine and three months ended June 30, 2009 and 2008 was $19,500 and $19,500 and
$6,500 and $6,500, respectively.
On
October 3, 2007, the Company issued 526,316 shares of common stock for investor
relations purposes, for services to be provided over a 12 month period at a
price of $.57 per share for a total consideration equal to $300,000. The shares
are being amortized over 12 months with stock-based compensation expense of
$25,000 each month. The total stock-based compensation expense for the nine and
three months ended June 30, 2009 and 2008 was $0 and $225,000 and $0 and
$75,000, respectively.
On
September 18, 2008, the Company agreed to issue 350,000 shares of common stock
to Mary Kratka for investor relations and promotions services at a price of
$0.08 per share for total consideration equal to $28,000. The shares are being
amortized over approximately 3 months with a stock-based compensation expense of
$9,333 each month. The total stock-based compensation expense for the nine and
three months ended June 30, 2009 and 2008 was $25,760 and $0 and $0 and $0,
respectively.
On
October 10, 2008, the Company agreed to issue 7,000,000 shares of common stock
to Results Group International for consulting services at a price of $0.05 per
share for total consideration equal to $350,000. The shares are being amortized
over 36 months with a stock-based compensation expense of $9,722 each month. The
total stock-based compensation expense for the nine and three months ended June
30, 2009 and 2008 was $78,092 and $0 and $26,030 and $0,
respectively.
On
January 6, 2009, the Company agreed to issue 8,000,000 shares of common stock to
Bloomen Limited for consulting services over a 36-month contract at a price of
$0.04 per share for total consideration equal to $320,000. The shares are being
amortized over 36 months with a stock-based compensation expense of $8,888 each
month. The total stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $53,334 and $0 and $26,667 and $0,
respectively.
On March
30, 2009, the Company agreed to issue 8,500,000 shares of common stock to
Trueboon Limited for consulting services over a 36 month contract at a price of
$0.06 per share for total consideration equal to $510,000. The shares are being
amortized over 36 months with a stock-based compensation expense of $14,167 each
month, commencing in April 2009. The total stock-based compensation expense for
the nine and three months ended June 30, 2009 and 2008 was $14,167 and $0 and
$14,167 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 $340,000. 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 nine and three months ended June
30, 2009 and 2008 was $127,500 and $85,000 and $42,500 and $42,500,
respectively.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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 February 1, 2008 at a price
of $2.00 per share for a total consideration equal to $100,000. The total
stock-based compensation expense for the nine and three months ended June 30,
2009 and 2008 was $37,500 and $25,000 and $12,500 and $12,500,
respectively.
On
October 1, 2007 and then additionally on January 2, 2008, Subaye.com issued
450,000 shares of common stock to an investor relations consultant, for services
to be provided over a 24 month period at a price of $2.00 per share for a total
consideration equal to $900,000. The shares will be amortized over 24 months
with stock-based compensation expense of $37,500 each month. The total
stock-based compensation expense for the nine and three months ended June 30,
2009 and 2008 was $337,500 and $225,000 and $112,500 and $112,500
respectively.
On
January 2, 2008, Subaye.com issued 50,000 shares of common stock to a company
executive, for services to be provided over a 24 month period at a price of
$2.00 per share for a total consideration equal to $100,000. The shares will be
amortized over 24 months with stock-based compensation expense of $4,167 each
month. The total stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $37,500 and $25,000 and $12,500 and $12,500,
respectively.
On
January 2, 2008, Subaye.com issued 70,800 shares of common stock to a company
executive, for services to be provided over a 24 month period at a price of
$2.00 per share for a total consideration equal to $141,600. The shares will be
amortized over 24 months with stock-based compensation expense of $5,900 each
month. The total stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $53,100 and $35,400 and $17,700 and $17,700,
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 a price
of $2.00 per share for a total consideration equal to $156,850. The shares will
be amortized over 24 months with stock-based compensation expense of $6,535 each
month. The total stock-based compensation expense for the nine and three months
ended June 30, 2009 and 2008 was $58,816 and $26,818 and $19,606 and $19,606,
respectively.
Total
stock compensation expense reported was $949,251 and $1,201,324 and $300,404 and
$334,300 for the nine and three months ended June 30, 2009 and 2008,
respectively.
Sales of Common Stock
Securities
On March
8, 2008, pursuant to a stock purchase agreement, the Company issued 5,000,000
shares of its common stock for $600,000.
On June
9, 2009, pursuant to two stock purchase agreements, the Company issued 6,560,000
shares of its common stock for $393,600.
NOTE
11 - TAXES
United
States of America
Since the
Company had no operations within the United States, there is no provision for US
taxes and there are no deferred tax amounts as of June 30, 2009 and September
30, 2008, respectively.
Delaware
The
Company is incorporated in Delaware but does 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
the nine and three months ended June 30, 2009 and 2008, respectively. The
applicable Hong Kong statutory tax rate for the nine and three months ended June
30, 2009 and 2008 is 17.5%, respectively.
People’s
Republic of China
Enterprise
income tax in PRC is generally charged at 33% of a company’s assessable profit,
of which 30% is a national tax and 3% is a local tax. The Company’s subsidiaries
incorporated in the PRC 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 PRC subsidiaries are fully exempted from PRC enterprises
income tax for two years subsequent from the first profit-making year, followed
by a 50% tax exemption for the next three years.
As of
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 Foreign Invested Enterprises (“FIEs”).
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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.
|
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 were established before March 16, 2007 and
therefore the Company is qualified to continue enjoying the reduced tax rate as
described above.
No
provision for enterprise income tax in the PRC had been made for the nine and
three months ended June 30, 2009 and 2008 due to the fact that the Company is
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 anticipates its tax
holiday will expire on October 1, 2009. The following table details
the aggregate effect of the tax holiday on the Company’s results of
operations.
|
|
Nine Months
Ended
June
30, 2009
|
|
|
Nine Months
Ended
June
30, 2008
|
|
PRC
Tax Without Consideration of Tax Holiday
|
|
$
|
1,949,459
|
|
|
$
|
898,907
|
|
PRC
Tax Savings as a Result of Tax Holiday
|
|
$
|
(1,949,459
|
)
|
|
$
|
(898,907
|
)
|
Increase
in Basic and Diluted Earnings Per Share as a Result of Tax
Holiday
|
|
$
|
0.01
|
|
|
|
0.00
|
|
Prior to
January 1, 2008, income would have been taxed in the PRC at a rate of
33%. As of January 1, 2008 and going forward, income would have been
taxed at a rate of 25%.
|
|
Three
Months
Ended
June
30, 2009
|
|
|
Three
Months
Ended
June
30, 2008
|
|
PRC
Tax Without Consideration of Tax Holiday
|
|
$
|
1,066,353
|
|
|
$
|
279,469
|
|
PRC
Tax Savings as a Result of Tax Holiday
|
|
$
|
(1,066,353
|
)
|
|
$
|
(279,469
|
)
|
Increase
in Basic and Diluted Earnings Per Share as a Result of Tax
Holiday
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended June 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
12 - MINORITY INTEREST
Minority
interest represents the minority stockholders’ proportionate share of 30.97%
(2008 - 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% (2008 - 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 is shown as $8,524,585 and $7,138,608,
respectively.
|
|
June 30,
2009
|
|
|
September 30,
2008
|
|
Minority
interest of shareholders
|
|
$
|
8,524,585
|
|
|
$
|
7,138,608
|
|
NOTE
13 - 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 $4,812 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 $8,824 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 June 30, 2009:
Twelve
Months Ended June 30,
|
|
|
|
|
2010
|
|
$
|
163,632
|
|
2011
|
|
|
119,512
|
|
|
|
$
|
283,144
|
|
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
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
$99,759 and $289,672 and $60,151 and $128,034 for the nine and three months
ended June 30, 2009 and 2008, respectively.
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 14 - SHORT
TERM DEBT
Total
debt obligations as of June 30, 2009 consist of the following:
|
|
June 30,
2009
|
|
|
September 30,
2008
|
|
8.64%
Bank Loan, Due September 18, 2009
|
|
$
|
1,154,161
|
|
|
$
|
1,021,138
|
|
Short
Term Non-Interest Bearing Bank Advance
|
|
|
-
|
|
|
|
22,286
|
|
|
|
|
|
|
|
|
|
|
Total
Debt Obligations
|
|
|
1,154,161
|
|
|
|
1,043,424
|
|
Less:
Current Maturities
|
|
|
1,154,161
|
|
|
|
1,043,424
|
|
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 nine months ended June 30, 2009 and made payments on this
debt of approximately $87,500 during the nine months ended June 30, 2009. As of
June 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 is 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 June 30, 2009, and thereafter are as follows:
12
Months Ended June 30,
|
|
|
|
2010
|
|
$ |
1,154,161 |
|
2011
|
|
|
- |
|
2012
|
|
|
- |
|
2013
|
|
|
- |
|
2014
|
|
|
- |
|
Subsequent
to 2014
|
|
|
- |
|
Total
scheduled debt payments
|
|
$ |
1,154,161 |
|
NOTE
15 - SEGMENT REPORTING
The
Company operates under the following business segments:
|
1.
|
Entertainment
Arts Licensing and Investments - 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.
|
Application
Services – The Company provides “software as a service” business
solutions, including data storage, access and specific software on servers
which are available through remote access by users on a 24 hour
basis.
|
|
|
|
|
4.
|
Online
Marketplace - The Company is in the process of developing an online
shopping mall using 3D imaging and animation.
|
|
|
|
|
5.
|
Software
Sales - The Company provides web-based and mobile software
platforms.
|
|
6.
|
Importing
and Exporting of Goods - The Company conducts international trade using
the PRC as its base of operations.
|
|
|
|
|
7.
|
Media
and Marketing - The Company coordinates and produces marketing and
advertising solutions for filmmakers and advertisers within the
entertainment arts industry of the
PRC.
|
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
Nine
Months Ended
June
30, 2009
|
|
Entertainment
Arts Licensing and Investing
|
|
|
Online
Membership
Services
|
|
Application
Services
|
|
Online
Marketplace
|
|
Software
Sales
|
|
Importing and
Exporting
|
|
Media &
Marketing
|
|
|
Consolidated
Total
|
|
Net
sales
|
|
$
|
7,354,120
|
|
|
$
|
16,369,907
|
|
$ 2,856,336
|
|
$
|
-
|
|
$ -
|
|
$
|
7,105,734
|
|
|
-
|
|
|
$
|
33,686,097
|
|
Cost
of sales
|
|
|
5,064,922
|
|
|
|
1,912,726
|
|
1,320,111
|
|
|
-
|
|
1,025,436
|
|
|
6,922,587
|
|
|
-
|
|
|
|
16,245,782
|
|
Segment
income (loss) before minority interest
|
|
|
1,033,969
|
|
|
|
5,882,002
|
|
1,515,796
|
|
|
-
|
|
(1,025,436
|
)
|
|
12,046
|
|
|
(24,100
|
)
|
|
|
7,394,277
|
|
Segment
assets
|
|
|
18,678,642
|
|
|
|
7,124,257
|
|
3,665,194
|
|
|
10,265,277
|
|
683,731
|
|
|
3,746,180
|
|
|
1,330,712
|
|
|
|
45,493,993
|
|
Expenditures
for segment assets
|
|
|
4,797
|
|
|
|
-
|
|
-
|
|
|
10,265,277
|
|
|
|
|
-
|
|
|
-
|
|
|
|
10,270,074
|
|
Nine
Months
Ended
June
30, 2008
|
|
Investments
in
Entertainment
Arts
Productions
|
|
|
Online
Membership
Services
|
|
|
Media &
Marketing
Management
|
|
|
Importing
and
Exporting
of
Goods
|
|
|
Corporate/
Others
|
|
|
Consolidated
Total
|
|
Net
sales
|
|
$
|
5,177,983
|
|
|
$
|
6,574,869
|
|
|
$
|
641,486
|
|
|
$
|
9,314,089
|
|
|
|
-
|
|
|
$
|
21,708,427
|
|
Cost
of sales
|
|
|
3,022,384
|
|
|
|
2,630,229
|
|
|
|
706,782
|
|
|
|
9,121,360
|
|
|
|
-
|
|
|
|
15,480,755
|
|
Segment
income (loss) before minority interest
|
|
|
2,110,917
|
|
|
|
3,063,364
|
|
|
|
(128,229
|
)
|
|
|
8,219
|
|
|
|
(2,689,919
|
)
|
|
|
2,364,352
|
|
Segment
assets
|
|
|
16,953,871
|
|
|
|
11,265,153
|
|
|
|
66,601
|
|
|
|
3,226,774
|
|
|
|
1,762,566
|
|
|
|
33,274,965
|
|
Expenditures
for segment assets
|
|
|
7,112,588
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,112,588
|
|
NOTE
16 - SUBSEQUENT EVENTS
On August
3, 2008, pursuant to a stock purchase agreement, the Company issued 50,000,000
shares of its common stock for $3,000,000 to a Hong Kong entity.
NOTE
17 - RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”),
which replaces FASB SFAS 141, Business Combinations. This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. SFAS 141R defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. SFAS 141R will require an entity to record
separately from the business combination the direct costs, where previously
these costs were included in the total allocated cost of the
acquisition. SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date. This
compares to the cost allocation method previously required by SFAS No.
141. SFAS 141R will require an entity to recognize as an asset or
liability at fair value for certain contingencies, either contractual or
non-contractual, if certain criteria are met. Finally, SFAS 141R will
require an entity to recognize contingent consideration at the date of
acquisition, based on the fair value at that date. This Statement
will be effective for business combinations completed on or after the first
annual reporting period beginning on or after December 15,
2008. Early adoption of this standard is not permitted and the
standards are to be applied prospectively only. Upon adoption of this
standard, there would be no impact to the Company’s results of operations and
financial condition for acquisitions previously completed. The
adoption of SFAS No. 141R is not expected to have a material effect on its
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent’s ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent’s ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have a material effect on its
financial position, results of operations or cash flows.
In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133.”
(“SFAS 161”). SFAS 161 establishes the disclosure requirements for derivative
instruments and for hedging activities with the intent to provide financial
statement users with an enhanced understanding of the entity’s use of derivative
instruments, the accounting of derivative instruments and related hedged items
under Statement 133 and its related interpretations, and the effects of these
instruments on the entity’s financial position, financial performance, and cash
flows. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2008. The Company does not expect
its adoption of SFAS 161 to have a material impact on its financial position,
results of operations or cash flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination
of the Useful Life of Intangible Assets.” This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company does not expect the adoption of SFAS FSP
142-3, to have a material impact on its financial position, results of
operations or cash flows.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not expect the adoption of FSP APB 14-1, to have a
material impact on its financial position, results of operations or cash
flows.
MYSTARU.COM,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE AND THREE MONTHS ENDED JUNE
30, 2009 AND 2008
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market For That Asset Is Not Active” (“FSP FAS
157-3”), with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to
clarify the application of fair value in inactive markets and allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of FAS 157 has not changed and continues to be the
determination of the price that would be received in an orderly transaction that
is not a forced liquidation or distressed sale at the measurement date.
The adoption of FSP FAS 157-3 is not expected to have a material effect on the
Company’s financial position, results of operations or cash flows.
In April
2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,” which further clarifies the
principles established by SFAS No. 157. The guidance is effective for the
periods ending after June 15, 2009 with early adoption permitted for the periods
ending after March 15, 2009. The adoption of FSP FAS 157-4 is not expected to
have a material effect on the Company’s financial position, results of
operations, or cash flows.
Other
accounting standards have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
Item 2. Management's Discussion and Analysis
of Financial Conditions and Results of Operations .
Special
Note Regarding Forward-Looking Statements
This
periodic report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations, business strategies, operating
efficiencies or synergies, competitive positions, growth opportunities for
existing products, plans and objectives of management. Statements in this
periodic report that are not historical facts are hereby identified as
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities
Act.
Prospective
shareholders should understand that several factors govern whether any
forward-looking statement contained herein will be or can be achieved. Any one
of those factors could cause actual results to differ materially from those
projected herein. These forward-looking statements include plans and objectives
of management for future operations, including plans and objectives relating to
the products and the future economic performance of the Company. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, future business decisions,
and the time and money required to successfully complete development projects,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
contained herein will be realized. Based on actual experience and business
development, the Company may alter its marketing, capital expenditure plans or
other budgets, which may in turn affect our results of operations. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
The
following analysis of the results of operations and financial condition of the
Company should be read in conjunction with the financial statements of the
Company for the year ended September 30, 2008 and notes thereto contained in the
report on Form 10-K as filed with the Securities and Exchange
Commission.
OVERVIEW
Company
Background
MyStarU.com,
Inc., a Delaware corporation, together with its consolidated subsidiaries, 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 over-the-counter bulletin board (“OTCBB”) in the United States of America.
As used in this report, the words “MYST”, “the
Company”, ”we”, ”us” and ”our” refer to MyStarU.com,
Inc. and its subsidiaries.
The
consolidated financial statements presented are those of MyStarU.com, Inc.,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The results of operations are for the
nine and three months ended June 30, 2009 and 2008, respectively. The Company’s
accounting policies and certain other disclosures are set forth in the notes to
the consolidated financial statements contained herein.
The
consolidated financial statements of the Company reflect the activities of the
parent and the following subsidiaries.
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,
Inc.
|
|
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
|
%
|
General
Business Discussion
The
Company operates under the following business segments:
|
1.
|
Entertainment
Arts Licensing and Investments - 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.
|
Application
Services – The Company provides “software as a service” business
solutions, including data storage, access and specific software on servers
which are available through remote access by users on a 24 hour
basis.
|
|
|
|
|
4.
|
Online
Marketplace - The Company is in the process of developing an online
shopping mall using 3D imaging and animation.
|
|
|
|
|
5.
|
Software
Sales - The Company provides web-based and mobile software
platforms.
|
|
6.
|
Importing
and Exporting of Goods - The Company conducts international trade using
the PRC as its base of operations.
|
|
|
|
|
7.
|
Media
and Marketing - The Company coordinates and produces marketing and
advertising solutions for filmmakers and advertisers within the
entertainment arts industry of the
PRC.
|
Investments
in Entertainment Arts Productions
We
generate income from the purchase and subsequent licensing or resale of
copyrights for motion pictures, internet broadcasting, television broadcasting,
DVD and other possible forms of reproductions of our copyrighted
assets.
Motion
Pictures
3G
Dynasty began the theatrical screening of the film BIG MOVIE (http://ent.sina.com.cn/f/m/bigmovie/index.shtml)
in 400 theaters throughout the PRC beginning on December 29, 2006 and running
through January 20, 2007. The “Investments in Entertainment Arts” business
segment is committed to bringing a variety of unique titles to the Chinese
market. Our first release, BIG MOVIE, a joint venture with Hua Xia Films
Distributions Limited Beijing, is a template for the future distribution of film
in the PRC by MYST.
We
currently hold copyrights for an additional four motion pictures which are
currently in production with our production partners. However, the governmental
approval process for release of these additional motion pictures is not yet
complete. The following table is an outline of projected release dates for each
of our motion pictures:
|
|
Projected
Release Date
|
|
|
|
DaYouCun
|
|
October,
2009
|
True?
|
|
April,
2010
|
Qianfu
|
|
July,
2010
|
Paobu
|
|
October,
2010
|
Internet
Broadcasts
During
the nine months ended June 30, 2009, we generated revenues from our internet
broadcasts being viewed on our websites and affiliated websites. The
revenues generated by each copyrighted broadcast(s) and certain revenue-sharing
arrangements are detailed in the chart below.
|
|
Nine Months
Ended
June 30,
2009
|
|
Big
Movie: Subaye
|
|
$
|
461,010
|
|
Big
Movie 2
|
|
|
374,889
|
|
The
11 Movies
|
|
|
460,850
|
|
The
113 Movies
|
|
|
1,346,249
|
|
|
|
|
|
|
Total
|
|
$
|
2,642,998
|
|
We may
also license or resell these copyrights and any of our other copyrights for
motion pictures, internet broadcasting, television broadcasting, DVD rights and
any overseas rights.
One of
our business partners, ZesTV, Inc. (“ZesTV”) is a leading Chinese media and
entertainment company. ZesTV is involved with the development, production, and
marketing of entertainment, news and information to a global audience. ZesTV
owns and operates a valuable portfolio of news and entertainment networks, a
premier motion picture company, significant television production operations, a
leading internet entertainment website group, and plans the development of
studio-branded theme parks. We have a deposit on account of approximately
$550,000 with ZesTV which will be used in the future to secure additional
internet broadcast movies as they are developed by ZesTV. These purchases are
subject to the approval of 3G Dynasty once the final edited copy of the internet
broadcast movies are submitted to 3G Dynasty for review.
As of
June 30, 2009, MYST held copyrights to 114 internet broadcasts.
Online
Membership Services
Subaye
We own a
majority interest in our subsidiary, Subaye.com, Inc. We have established a
website, www.subaye.com, a provider of corporate online video in China and a
destination for business to business e-commerce in the PRC for customers who
utilize the website to enhance the marketing and promotion of their business
products and services. We continue to experience a strong demand for our
services through www.subaye.com and believe the market it serves is one of the
fastest growing in the PRC. These customers are demanding easily accessible
methods to market and promote their products or services. We have also committed
to maintaining a minimal monthly fee for our members with the hope that the
demand and low cost of utilizing www.subaye.com will result in stable, if not
dramatic membership growth in the coming years.
The
online membership services business segment generated member growth of 67%
for the twelve months ended April 30, 2009. We expect continued
growth in membership, revenues and net income for this business segment during
the fiscal year ending September 30, 2009.
Subaye.com’s
platform consists of its websites, www.goongreen.org, www.x381.com,
www.goongood.com, www.subaye.com and the Subaye Alliance network, which is its
network of third-party websites. As of April 30, 2009, Subaye.com had 39,822
members and the Company’s video database consisting of 80,025 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.
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 in October of
2006. We charge our members a monthly membership fee of approximately
$100. The table below details our membership growth and the growth of
corporate profiles of small to medium sized enterprises, which make up the
majority of our membership.
|
|
Subaye.com Members
|
|
|
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
|
% |
June
30,2007
|
|
|
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
|
)% |
June
30,2008
|
|
|
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
28, 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
|
% |
From July
1, 2007 through December 31, 2007, Subaye.com offered a special promotion to
allow potential member users and current member users use of our website free of
charge. As a result, no revenue was generated by the Company during this time
period.
We
believe that Subaye.com is poised for growth due to the following
strengths:
|
·
|
largest user base of users
seeking videos produced by
SMEs;
|
|
·
|
first video uploading service
provider in the PRC with an extensive customer base across
industries;
|
|
·
|
local market experience and
expertise in introducing and expanding our services across the PRC and
operating in the PRC’s rapidly evolving internet
industry;
|
|
·
|
leading technology with a proven
platform, providing users with relevant video showcase and customers with
a cost-effective way to reach potential consumers;
and
|
|
·
|
extensive and effective
nationwide network of over 100 regional distributors, providing
high-quality and consistent customer
services.
|
Our goal
is to become a platform that provides internet users with the best way to find
information and allows businesses to reach a broad base of potential customers.
We intend to achieve our goal by implementing the following
strategies:
|
·
|
growing our online video
marketing business by attracting potential customers and increasing
per-customer spending on our services, enhancing user
experience;
|
|
·
|
increasing traffic through the
development and introduction of new video-related features and
functions;
|
|
·
|
expanding Subaye Alliance by
leveraging our brand and offering competitive economic arrangements to
Subaye Alliance members; and
|
|
·
|
pursuing selective strategic
acquisitions and alliances that will allow us to increase user traffic,
enlarge our customer base, expand our product offerings and reduce
customer acquisition costs.
|
The
successful execution of our strategies is subject to certain risks and
uncertainties, including our ability to:
|
·
|
offer new and innovative products
and services to attract and retain a larger user
base;
|
|
·
|
attract additional customers and
increase per-customer
spending;
|
|
·
|
increase awareness of our brand
and continue to develop user and customer
loyalty;
|
|
·
|
respond to competitive market
conditions;
|
|
·
|
respond to changes in our
regulatory environment;
|
|
·
|
manage risks associated with
intellectual property
rights;
|
|
·
|
maintain effective control of our
costs and expenses;
|
|
·
|
raise sufficient capital to
sustain and expand our
business;
|
|
·
|
attract, retain and motivate
qualified personnel; and
|
|
·
|
upgrade our technology to support
increased traffic and expanded
services.
|
Subaye.com
achieved profitability as of the quarter ended December 31, 2006. We have
experienced growth in recent periods, in part, due to the growth in the PRC’s
online marketing industry, which may not be representative of future growth or
be sustainable. We cannot assure that our historical financial information is
indicative of our future operating results or financial performance, or that our
profitability will be sustained.
X381
The
Company's www.x381.com website is focused on selling goods and services to the
PRC marketplace. The chart below details the growth of this business
since the website was acquired by the Company in February, 2008.
|
|
Webshops
|
|
|
|
As of the
End of
Month
|
|
|
Month Over
Month
Growth
|
|
February 29, 2008
|
|
|
14,301
|
|
|
|
|
June
30,2008
|
|
|
16,213
|
|
|
|
13
|
%
|
April
30, 2008
|
|
|
19,205
|
|
|
|
18
|
%
|
May
31, 2008
|
|
|
19,986
|
|
|
|
4
|
%
|
June
30, 2008
|
|
|
20,641
|
|
|
|
3
|
%
|
July
31, 2008
|
|
|
25,690
|
|
|
|
24
|
%
|
August
31, 2008
|
|
|
27,108
|
|
|
|
6
|
%
|
September
30, 2008
|
|
|
31,887
|
|
|
|
18
|
%
|
October
31, 2008
|
|
|
32,981
|
|
|
|
3
|
%
|
November
30, 2008
|
|
|
33,785
|
|
|
|
2
|
%
|
December
31, 2008
|
|
|
34,359
|
|
|
|
2
|
%
|
January
31, 2009
|
|
|
35,590
|
|
|
|
4
|
%
|
February
28, 2009
|
|
|
35,850
|
|
|
|
1
|
%
|
March
31, 2009
|
|
|
36,550
|
|
|
|
2
|
%
|
April
30, 2009
|
|
|
37,331
|
|
|
|
2
|
%
|
The
Company has provided its services on the www.x381.com website to its members
free of charge since the website was acquired in February
2008. In July 2009 the Company expects to begin charging annual
membership fees of approximately $100 which we currently estimate will generate
revenues of approximately $1,000,000 for the year ended September 30,
2009.
Other
Websites
We also
plan to launch the www.goongood.com and www.goongreen.org websites during the
summer of 2009. We currently estimate an additional $1.2 million in
revenues could be generated by these two websites during the year ended
September 30, 2009.
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 2009 to continue to
develop the Company’s offerings in the arts education market. From October 1,
2006 and through the date of this report, the Company sold approximately $1.8
million in “master franchise licenses” and approximately $1.7 million in “end
user licenses” to unrelated parties in the PRC. The third party purchasers are
intent on utilizing the Company’s education-related web-based offerings in
certain sectors of the PRC and across potential large portions of the PRC
population within each sector.
The
system is a prototype for state-of-the-art delivery of streaming video
performing education courses in the music and movie industries in the PRC. The
new courseware was developed using the Guangzhou Subaye's EDU v5.0 Education
Management System and is delivered to viewers via the MYST platform. The
multimedia content is produced using Adobe Flash(r) video synchronized
presentations and demonstrative video clips. Users can view multimedia 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.
MYST 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. MYST’s goal is to deliver education content online without
meaningful limitations or restrictions.
In a
country with significant mobile phone usage, the growth opportunities remain
tremendous. The PRC has more than 1.33 billion people, and mobile services will
remain a strong area of growth. Entertainment content for these mobile devices
is in high demand and MYST is intent on becoming a dominant player within this
space.
SAAS
In
September, 2008, the Company committed to the Software as a Service business
model (“SAAS”) and the Company's subsidiary, Subaye IIP Limited, completed
several significant investments in computer hardware and computer software in
order to serve the emerging SAAS marketplace in the PRC. For the nine
and three months ended June 30, 2009, the Company had revenues of $2,856,336 and
$1,238,270 from its SAAS business. The SAAS business is focused on
developing significant recurring revenues from a variety of
customers. Management is continuing to focus on the SAAS market in
the PRC and expects continued success within the market.
Online
3D Animation Shopping Mall
On April
3, 2009, Subaye IIP, Limited entered into a $2.1 million agreement with a
PRC-based web developer with extensive experience within the website design and
website infrastructure fields. A new website and associated infrastructure is to
be designed and is scheduled to begin operating on or before April 3, 2010.
Subaye IIP, Limited’s personnel will supervise the development effort and ensure
the vision for the website is fulfilled. The website will feature 3D imaging and
animation. We anticipate it will function with and become integrated with the
www.subaye.com and www.x381.com websites already operated by the Company. The
members of these two websites will also be invited to utilize the new online
shopping mall. The Company will sell its own inventory of consumer goods through
the online shopping mall and will also earn commissions for allowing its
www.x381.com and www.subaye.com members to utilize the shopping mall. The
Company believes the vision behind this website is unique and expects
significant interest in the website to build as the website nears completion on
or before April 3, 2010.
On May 3,
16 and 26, 2009, the Company’s subsidiary, Subaye IIP Limited, entered into
three agreements with three consumer goods distributors in the PRC. The products
will include clothes, footwear, bags and garniture, jewellery 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. In accordance with the contract,
Subaye IIP Limited paid a deposit of approximately $8.2 million. 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.
Software
Sales
We offer
software-based products through our subsidiaries, Subaye IIP and Guangzhou
Subaye.
IBS
v4.1 and v5.0 Enterprise Suite
The IBS
v4.1 and v5.0 software suites include a built-in MoDirect, an innovative suite
of technologies that enables wireless and web publishers to target SEO4Mobile
users more effectively and allows advertisers to obtain targeted leads with rich
demographic data. Corporate users can leverage all available information
resource management on the intranet/extranet over the internet, including
wireless applications, and advertisers can use the IBS v4.1 and v5.0 to publish
SMS and MMS by searches on mobile phones. The system enables manufacturers and
service providers to use the internet to establish and manage continuous
connections with automated e-services, operations monitoring and e-commerce
offerings. The system’s customers include end-user clients in many industries
throughout the PRC. The IBS v4.1 and v5.0 standard package includes three
servers and software, as well as system integration.
Guangzhou
Subaye has continued to develop relationships established in the past with some
of the Company’s contacts in the internet and business industries such as
Baidu.com (Nasdaq: BIDU), Shanghai Linktone Information Limited (Nasdaq: LTON),
the wireless business division of Beijing eLong Information Technology Limited,
a subsidiary of eLong Inc. (Nasdaq: LONG), 3721 Inter China Network Software Co.
Ltd (www.3721.com), a Yahoo!, Inc. Company (Nasdaq: YHOO), Tencent Company
Limited (www.qq.com), Kongzhong Corporation (Nasdaq: KONG), Guangdong Mobile
Communication Co., Limited, a China Mobile Communications Corporation and China
Mobile (Hong Kong) Ltd. (NYSE: CHL) to develop entertainment, SMS, MMS, WAP
portal and other wireless content such as artist profiles, gaming and an
SEO4Mobile SMS search engine.
Import
and Export Trading
Our
subsidiary, Guangzhou Panyu Metals and Minerals Import & Export Co., Ltd
(“Panyu M&M”) holds the licenses and approvals necessary to operate our
international trading and provide e-commerce logistic agent services. Panyu
M&M operates in today’s global economy and continually delivers quality
services for our importing and exporting clientele. As in the other three
business segments, we believe the import/export businesses of the PRC are
well-positioned.
During
the year ended September 30, 2009, management expects significant growth in
revenues for Panyu M&M. Panyu M&M has been in the process of
negotiating significant distribution contracts with large PRC importers in
recent months and anticipates revenues from these potential new contracts will
be significant if and once finalized.
Results
of Operations
Income
Statement Items
The
following table summarizes the results of our operations during the three
months ended June 30, 2009 and 2008 and provides information regarding the
dollar and percentage increase or (decrease) from the current fiscal period to
the prior fiscal period:
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
AND
COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
|
|
June 30,
2009
|
|
|
June 30,
2008
|
|
|
$ Increase
(Decrease)
|
|
|
% Increase
(Decrease)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
Revenues
|
|
$
|
9,936,403
|
|
|
$
|
5,899,508
|
|
|
$
|
4,036,895
|
|
|
|
68
|
%
|
Cost
of Sales
|
|
|
4,436,480
|
|
|
|
3,972,121
|
|
|
|
464,359
|
|
|
|
12
|
%
|
Gross
Profit
|
|
|
5,499,923
|
|
|
|
1,927,387
|
|
|
|
3,572,536
|
|
|
|
185
|
%
|
Operating
Expenses
|
|
|
1,234,533
|
|
|
|
817,578
|
|
|
|
416,955
|
|
|
|
51
|
%
|
Income
From Operations
|
|
|
4,265,390
|
|
|
|
1,109,809
|
|
|
|
3,155,581
|
|
|
|
284
|
%
|
Other
Income and Expenses
|
|
|
21
|
|
|
|
8,066
|
|
|
|
(8,045
|
)
|
|
|
(100
|
) %
|
Income
From Operations Before Taxes
|
|
|
4,265,411
|
|
|
|
1,117,875
|
|
|
|
3,147,536
|
|
|
|
282
|
%
|
Provision
For Income Taxes
|
|
|
-
|
|
|
|
(683
|
)
|
|
|
683
|
|
|
|
(100
|
)
%
|
Minority
Interest in Income of Subsidiaries
|
|
|
(1,524,474
|
)
|
|
|
(347,696
|
)
|
|
|
(1,176,778
|
)
|
|
|
338
|
%
|
Net
Income From Operations
|
|
|
2,740,937
|
|
|
|
769,496
|
|
|
|
1,971,441
|
|
|
|
256
|
%
|
Foreign
Currency Translation Adjustment
|
|
|
1,822
|
|
|
|
(68,006
|
)
|
|
|
69,828
|
|
|
|
(103
|
)
%
|
Comprehensive
Income
|
|
|
2,742,759
|
|
|
|
701,490
|
|
|
|
2,041,269
|
|
|
|
291
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
and Diluted
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
and Diluted
|
|
|
178,108,931
|
|
|
|
156,014,316
|
|
|
|
|
|
|
|
|
|
Revenues
increased by $4,036,895 due primarily to:
Revenues
were approximately $9.9 million for the three months ended June 30, 2009
compared to approximately $5.9 million for the three months ended June 30,
2008. The increase of approximately $4.0 million was due primarily to
the Company’s growth in revenues for its online membership services business
segment of approximately $3.0 million, growth in the new SAAS business segment
of approximately $1.2 million and growth in the import and export sales business
segment of approximately $600,000. The investments in entertainment arts
business segment had a reduction in revenues of approximately
$800,000. The Company's investments in entertainment arts productions
business segment licenses, provides internet broadcasts and completes outright
sales of its entertainment assets, namely copyrights. During the three months
ended June 30, 2009 and 2008, the Company's investments in entertainment arts
business segment sold copyrights to motion pictures for approximately $0 and
$800,000, respectively, and recorded approximately $400,000 and
$400,000 in revenues, respectively, for the Company's online video playing
fees. For the three months ended June 30, 2009 and 2008, the Company
recorded net revenues of approximately $5.6 million and $2.6 million,
respectively, for its online membership services segment. The
Company had approximately 40,000 and 26,000 members of its www.subaye.com
website throughout the three months ended June 30, 2009 and 2008, respectively,
each of which paid approximately $100 per month for the services and content
available at www.subaye.com. Under an agreement with China Netcom,
the Company's internet provider, and SSTH Limited, the Company's third party
merchant services provider, the Company retains 50% of the gross revenues
generated by the www.subaye.com website. China Netcom and SSTH retain
the remaining 50% of gross revenues. The Company continues to see
increased interest in SAAS solutions within the Chinese marketplace and is
working to obtain marketshare as this business expands in popularity and
acceptance within China. The Company now has three SAAS contracts which
generate total monthly revenues of over $450,000. The importing and
exporting business segment suffered as a result of the general downturn in the
economy in the last few months of 2008 and first three months of
2009. The economy appeared to be strengthening at the end of June
2009. The media and marketing management business segment generated
approximately $0 and $0, respectively, during the three months ended June 30,
2009 and 2008, respectively. The Company expects to release the DaYouCun motion
picture by October 31, 2009.
Costs
of Sales increased by $464,359 due primarily to:
Costs of
sales were approximately $4.4 million for the three months ended June 30, 2009
compared to $4.0 million for the three months ended June 30,
2008. During the three months ended June 30, 2009 and 2008, the
Company's investments in entertainment arts productions business segment had
costs of sales which included approximately $0 and $750,000 for the cost basis
of copyrights sold, respectively. Amortization of copyrights totaled
approximately $231,000 and $0 for the three months ended June 30, 2009 and 2008.
Amortization and depreciation of the Company’s websites and computer software
totaled approximately $1.6 million and $1.2 million for the three months ended
June 30, 2009 and 2008. The cost of goods sold for the importing and exporting
business segment totaled approximately $2.6 million and $2.1 million for
the three months ended June 30 2009 and 2008, respectively. The Company's media
and marketing management business segment did not generate any revenues and
therefore did not generate any costs of sales during the three months ended June
30, 2009 and 2008, respectively.
Operating
Expenses increased by $416,955 due primarily to:
For the
three months ended June 30, 2009, we incurred operating expenses of $1.2
million, as compared to approximately $800,000 for the three months ended June
30, 2008. The increase in operating expenses for the three months ended June 30,
2009 is comprised of an increase in advertising costs of approximately $200,000
and other general and administrative expenses of approximately
$200,000.
Other
income and expenses decreased by $8,045 due primarily to:
Other
income and expenses were $21 for three months ended June 30, 2009 compared to
$8,066 for the three months ended June 30, 2008. For the three months ended June
30, 2009, the Company recorded interest income on its bank balances of $21.
For the three months ended June 30, 2008, the Company had other income, which
included interest income and other income earned through the importing and
exporting business segment for non-operating activities,
respectively.
Net
income increased by $1,971,441:
The
Company generated net income of approximately $2.7 million and approximately
$800,000 for the three months ended June 30, 2009 and 2008,
respectively. The increase in net income is a result of the
substantial growth of the online membership services business
segment.
Results
of Operations
Income
Statement Items
The
following table summarizes the results of our operations during the nine months
ended June 30, 2009 and 2008 and provides information regarding the dollar and
percentage increase or (decrease) from the current fiscal period to the prior
fiscal period:
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME
AND
COMPREHENSIVE INCOME
FOR
THE NINE MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
|
|
June 30,
2009
|
|
|
June 30,
2008
|
|
|
$ Increase
(Decrease)
|
|
|
% Increase
(Decrease)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
Revenues
|
|
$
|
33,686,097
|
|
|
$
|
21,708,427
|
|
|
$
|
11,977,670
|
|
|
|
55
|
%
|
Cost
of Sales
|
|
|
16,245,782
|
|
|
|
15,480,755
|
|
|
|
765,027
|
|
|
|
5
|
%
|
Gross
Profit
|
|
|
17,440,315
|
|
|
|
6,227,672
|
|
|
|
11,212,643
|
|
|
|
180
|
%
|
Operating
Expenses
|
|
|
10,046,076
|
|
|
|
2,985,634
|
|
|
|
7,060,442
|
|
|
|
236
|
%
|
Income
From Operations
|
|
|
7,394,239
|
|
|
|
3,242,038
|
|
|
|
4,152,201
|
|
|
|
128
|
%
|
Other
Income
|
|
|
37
|
|
|
|
22,317
|
|
|
|
(22,280
|
)
|
|
|
(100
|
) %
|
Income
From Operations Before Taxes
|
|
|
7,394,276
|
|
|
|
3,264,355
|
|
|
|
4,129,921
|
|
|
|
127
|
%
|
Provision
For Income Taxes
|
|
|
-
|
|
|
|
(1,735
|
)
|
|
|
1,735
|
|
|
|
(100
|
)
%
|
Minority
Interest in Losses (Income) of Subsidiaries
|
|
|
(1,387,687
|
)
|
|
|
(898,268
|
)
|
|
|
(489,419
|
)
|
|
|
54
|
%
|
Net
Income From Operations
|
|
|
6,006,589
|
|
|
|
2,364,352
|
|
|
|
3,642,237
|
|
|
|
154
|
%
|
Foreign
Currency Translation Adjustment
|
|
|
23,690
|
|
|
|
(132,726
|
)
|
|
|
156,416
|
|
|
|
(118
|
)
%
|
Comprehensive
Income
|
|
|
6,030,279
|
|
|
|
2,231,626
|
|
|
|
3,798,653
|
|
|
|
170
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
and Diluted
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Basic
and Diluted
|
|
|
170,200,983
|
|
|
|
152,309,187
|
|
|
|
|
|
|
|
|
|
Revenues
increased by $11,977,670 due primarily to:
Revenues
were approximately $33.7 million for the nine months ended June 30, 2009
compared to $21.7 million for the nine months ended June 30, 2008. The increase
of $12.0 million is due primarily to the Company’s growth in revenues for its
online membership services business segment of approximately $9.8 million,
growth in the investments in entertainment arts business segment of
approximately $2.2 million, growth in the SAAS business of approximately $2.9
million, a reduction in the importing and exporting and media and marketing
business segments of approximately $2.2 million and $600,000,
respectively. For the nine months ended June 30, 2009 and 2008, the
Company recorded net revenues of approximately $16.4 million and $6.6 million,
respectively, for its online membership services business
segment. The Company had approximately 40,000 members of its
www.subaye.com website, each of which paid approximately $100 per month for the
services and content available at www.subaye.com. Under an agreement
with China Netcom, the Company's internet provider, and SSTH Limited, the
Company's third party merchant services provider, the Company retains 50% of the
gross revenues generated by the www.subaye.com website. China Netcom
and SSTH retain the remaining 50% of gross revenues. The Company's
www.subaye.com website only recorded membership-based revenues of $6.6 million
in the nine months ended June 30, 2008. The Company had provided
its members free access to the www.subaye.com website from July 1, 2007 through
December 31, 2007. For the nine months ended June 30, 2009 and 2008,
the Company recorded approximately $7.1 million and $9.3 million in revenues,
respectively, for the Company's importing and exporting business
segment. The importing and exporting business segment suffered as a
result of the general downturn in the economy in the last few months of 2008 and
first three months of 2009. The Company's investments in
entertainment arts productions business segment licenses, provides internet
broadcasts and completes outright sales of its entertainment assets, namely
copyrights. During the nine months ended June 30, 2009 and 2008, the
Company generated approximately $2.6 million and approximately $365,000 from the
viewing of internet broadcast movies, respectively. During the nine
months ended June 30, 2009 and 2008, the Company's investments in entertainment
arts business segment sold master franchise licenses for approximately $602,000
and $2.1 million, respectively. Additionally, during the nine months ended June
30, 2009 and 2008, the Company’s investments in entertainment arts business
segment sold copyrights to a motion picture for approximately $4.1 million
and $2.8 million, respectively. The Company’s SAAS business segment
generated approximately $2.9 million and $0 during the nine months ended June
30, 2009 and 2008, respectively. The media and marketing management
business segment generated approximately $0 and $640,000 during the nine months
ended June 30, 2009 and 2008, respectively. The Company expects continued
strong growth in its online membership services business segment and believes
the increased spending by the Chinese government in recent months will slowly
reinvigorate the Chinese economy and eventually lead many new small to medium
sized businesses to the www.subaye.com website. The Company expects
to release the DaYouCun motion picture by October 31, 2009 and is beginning to
generate significant revenues through its internet broadcasting and
co-advertising programs. The Company continues to see increased
interest in SAAS solutions within the Chinese marketplace and is working to
obtain market share as this business expands in popularity and acceptance within
China. The importing and exporting business segment is suffering from
the economic downturn but the Company is attempting to reposition itself to
ensure the Company is ready to generate new business when economic conditions
improve.
Costs
of Sales increased by $765,027 due primarily to:
Costs of
sales were approximately $16.2 million for the nine months ended June 30, 2009
compared to $15.5 million for the nine months ended June 30,
2008. During the nine months ended June 30, 2009 and 2008, the
Company's investments in entertainment arts productions business segment had
costs of sales which included approximately $3.7 million and $2.5 million for
the cost basis of copyrights sold, respectively. Amortization of copyrights
totaled $956,559 and $0 for the nine months ended June 30, 2009 and 2008,
respectively. Depreciation and amortization of websites and computer
software totaled approximately $4.7 million in 2009 and $3.2 million in 2008.
The costs of goods sold through the importing and exporting business segment
totaled approximately $6.9 million and $9.1 million in 2009 and 2008,
respectively. The Company's media and marketing management business segment did
not generate any revenues and therefore did not generate any costs of sales
during the nine months ended June 30, 2009. During the nine months
ended June 30, 2008, costs of sales for the media and marketing management
business segment included $702,935 in production costs associated with
completing advertising plans and ordering advertising on behalf of one
customer.
Operating
Expenses increased by $7,060,442 due primarily to:
For the
nine months ended June 30, 2009, we incurred operating expenses of approximately
$10.0 million as compared to $3.0 million for the nine months ended June 30,
2008. The increase in operating expenses in 2008 is comprised almost entirely of
a significant increase in advertising costs, which were inclusive of a $6.8
million advertising promotion which was expensed in the nine months ended June
30, 2009. In total, advertising expense was approximately $7.5
million and $1.3 million for the nine months ended June 30, 2009 and 2008,
respectively.
Other
income and expenses decreased by $22,280 due primarily to:
Other
income was $38 for the nine months ended June 30, 2009 compared to $22,317 for
the nine months ended June 30, 2008. For the nine months ended June 30, 2009,
the Company only had minimal interest income on its savings accounts. For the
three months ended June 30, 2008, the Company had other income, which included
interest income and other income earned through the importing and exporting
business segment for non-operating activities.
Net
income increased by $3,642,237:
The
Company generated net income of $6,006,589 and $2,364,352 for the nine months
ended June 30, 2009 and 2008, respectively. The increase in net
income is a result of the substantial growth of the online membership services
and continued growth in the SAAS business.
Liquidity
and Capital Resources
We
believe that our currently-available working capital, consistent cashflow from
our online membership services business segment and the collection of our
accounts receivable, should be adequate to sustain our operations through
September 30, 2009.
As of
June 30, 2009, we had a cash balance of $770,228, consisting of cash held in PRC
and Hong Kong banks and cash in hand. We currently have no cash positions in the
United States of America.
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 nine months ended June 30, 2009
was $2,106,649. Net income for the nine months ended June 30, 2009 was
$6,006,589. Noncash charges totaled $6,928,223 for the three months ended June
30, 2009. Changes in assets and liabilities for the nine months ended June 30,
2009 utilized $10,828,163. In the future, we may use cash in our operations due
to our continuing efforts to rapidly expand our operations.
Our
future growth is dependent on our ability to continue to generate significant
and consistent cashflow through the online membership services business segment,
raise capital for expansion as necessary, and to continually 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.
Item 4T. 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 Quarterly
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
Quarterly Report is accumulated and communicated to management, including our
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.
We have
taken several actions in order to remedy the shortcomings in our disclosure
controls and procedures, including the appointment of a new CFO with more
experience in U.S. public company reporting. We are also in the process of
migrating our financial data into accounting software that we believe will
better facilitate the control and review process. We will continue to identify
and correct any deficiencies in order for our Certifying Officers to be able to
conclude that our controls and procedures are effective.
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.
PART
II. OTHER INFORMATION
Item 1. Legal
Proceedings.
None.
Item 1A. Risk Factors.
As of the
date of this filing, there have been no material changes from the risk factors
previously disclosed in our “Risk Factors” in the Form 10-K for the period ended
September 30, 2008. An investment in our common stock involves various risks.
When considering an investment in our company, you should consider carefully all
of the risk factors described in our most recent Form 10-K. These risks and
uncertainties are not the only ones facing us and there may be additional
matters that we are unaware of or that we currently consider immaterial. All of
these could adversely affect our business, financial condition, results of
operations and cash flows and, thus, the value of an investment in our
company.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
None.
Item 3. Defaults Under Senior
Securities.
None.
Item 4. Submission of Matters to a Vote of
Security Holders.
None.
Item 5. Other
Information.
None.
Item 6. Exhibits.
Exhibit
|
|
Number
|
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)*
|
*Filed
herewith.
SIGNATURES
In
accordance with the requirements 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.
|
MYSTARU.COM,
INC.
|
|
|
|
|
|
Date:
August 14, 2009
|
By:
|
/s/ Alan R. Lun
|
|
|
|
Alan
R. Lun
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
Date:
August 14, 2009
|
By:
|
/s/ James T. Crane
|
|
|
|
James
T. Crane
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Accounting and Financial Officer)
|
|