Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Quarterly Period Ending March 31, 2010
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 333-62236
SUBAYE,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
35-2089848
|
(State
or other jurisdiction
|
|
(I.R.S.
Employer
|
of
incorporation or organization)
|
|
Identification
No.)
|
9/F.,
Beijing Business World, 56 East Xinglong Street,
Chongwen
District,
Beijing,
China 100062
(Address
of principal executive offices) (Zip Code)
|
(020)
3999 0266 (Registrant’s telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No x
Large
accelerated filer
|
o
|
|
Accelerated
filer
|
o
|
|
|
|
|
|
Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
o
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|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No x
As of May
17, 2010, the registrant had 7,444,931 shares of its common stock issued and
outstanding.
TABLE
OF CONTENTS
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PAGE
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PART
I
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ITEM
1.
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Condensed
Consolidated Financial Statements
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3 |
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Condensed
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and September
30, 2009
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3 |
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Unaudited
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended March 31, 2010
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4 |
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Unaudited
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 2010
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5 |
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Notes
to the Condensed Consolidated Financial Statements
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6 |
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ITEM
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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16 |
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ITEM
4.
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Controls
and Procedures
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23 |
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PART
II
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ITEM
1.
|
Legal
Proceedings
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23 |
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ITEM
1A.
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Risk
Factors
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23 |
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ITEM
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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24 |
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ITEM
3.
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Defaults
Upon Senior Securities
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25 |
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ITEM
4.
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Submission
of Matters to a Vote of Security Holders
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25 |
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ITEM
5.
|
Other
Information
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25 |
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ITEM
6
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Exhibits
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25 |
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SIGNATURES
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|
26 |
|
SUBAYE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2010
|
|
|
September
30,
2009
|
|
|
|
(In Thousands)
|
|
Assets
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
207
|
|
|
$
|
2
|
|
Accounts
Receivable, Net of Allowance for Doubtful Accounts of $363 as of March 31,
2010 and September 30, 2009, Respectively
|
|
|
7,898
|
|
|
|
8,266
|
|
Prepaid
Expenses
|
|
|
2,141
|
|
|
|
370
|
|
Deposit
for Purchase of Inventoriable Assets
|
|
|
8,136
|
|
|
|
8,152
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|
Assets
Held for Sale
|
|
|
30,961
|
|
|
|
29,360
|
|
Total
Current Assets
|
|
|
49,343
|
|
|
|
46,150
|
|
|
|
|
|
|
|
|
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|
Property
and Equipment, Net of Accumulated Depreciation of $15,943 and $12,863 as
of March 31, 2010 and September 30, 2009
|
|
|
20,961
|
|
|
|
10,580
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
70,304
|
|
|
$
|
56,730
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
1,127
|
|
|
$
|
566
|
|
Taxes
Payable
|
|
|
1,449
|
|
|
|
-
|
|
Liabilities
Held for Sale
|
|
|
6,078
|
|
|
|
5,275
|
|
Total
Current Liabilities
|
|
|
8,654
|
|
|
|
5,841
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
8,654
|
|
|
|
5,841
|
|
|
|
|
|
|
|
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|
Commitments
and Contingencies
|
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|
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Shareholders'
Equity
|
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|
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Preferred
Stock, $0.001 Par Value, 50,000,000 Shares Authorized, 0 Shares Issued and
Outstanding as of March 31, 2010 and September 30, 2009
|
|
|
—
|
|
|
|
—
|
|
Common
Stock, $0.001 Par Value; 150,000,000 Shares Authorized; 7,444,931 and
2,479,243 Shares Issued and Outstanding as of March 31, 2010 and September
30, 2009
|
|
|
7
|
|
|
|
3
|
|
Additional
Paid in Capital
|
|
|
58,949
|
|
|
|
32,452
|
|
Deferred
Stock Based Compensation
|
|
|
(10,468
|
)
|
|
|
(2,908
|
)
|
Accumulated
Other Comprehensive Income
|
|
|
(61
|
)
|
|
|
54
|
|
Retained
Earnings
|
|
|
13,223
|
|
|
|
11,108
|
|
Total
Shareholders' Equity
|
|
|
61,650
|
|
|
|
40,709
|
|
Noncontrolling
Interest in Subsidiaries
|
|
|
-
|
|
|
|
10,180
|
|
Total
Equity
|
|
|
61,650
|
|
|
|
50,889
|
|
Total
Liabilities and Equity
|
|
$
|
70,304
|
|
|
$
|
56,730
|
|
The
accompanying notes to these consolidated financial statements are an integral
part of these balance sheets.
SUBAYE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
AND
OTHER COMPREHENSIVE INCOME
|
|
For
the Three Months Ended
March
31,
|
|
|
For
the Six Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
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|
2010
|
|
|
2009
|
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|
|
In
Thousands, Except per Share Amounts
|
|
Net
Sales
|
|
$ |
7,388 |
|
|
$ |
6,707 |
|
|
$ |
14,300 |
|
|
$ |
12,397 |
|
Cost
of Sales
|
|
|
1,799 |
|
|
|
1,434 |
|
|
|
3,226 |
|
|
|
2,843 |
|
Gross
Profit
|
|
|
5,589 |
|
|
|
5,273 |
|
|
|
11,074 |
|
|
|
9,554 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
934 |
|
|
|
3,544 |
|
|
|
1,028 |
|
|
|
7,013 |
|
Other
Selling, General and Administrative
|
|
|
1,118 |
|
|
|
930 |
|
|
|
2,383 |
|
|
|
1,545 |
|
Total
Operating Expenses
|
|
|
2,052 |
|
|
|
4,474 |
|
|
|
3,411 |
|
|
|
8,558 |
|
Income
From Continuing Operations Before Income Tax Expense
|
|
|
3,537 |
|
|
|
799 |
|
|
|
7,663 |
|
|
|
996 |
|
Income
Tax Expense
|
|
|
(572 |
) |
|
|
- |
|
|
|
(1,449 |
) |
|
|
- |
|
Income
From Continuing Operations
|
|
|
2,965 |
|
|
|
799 |
|
|
|
6,214 |
|
|
|
996 |
|
(Loss)
Income From Discontinued Operations
|
|
|
(3,323 |
) |
|
|
1,534 |
|
|
|
(3,627 |
) |
|
|
2,133 |
|
Net
(Loss) Income
|
|
|
(358 |
) |
|
|
2,333 |
|
|
|
2,587 |
|
|
|
3,129 |
|
Net
Loss (Income) Attributable to the Noncontrolling Interest
|
|
|
- |
|
|
|
608 |
|
|
|
(472 |
) |
|
|
137 |
|
Net
(Loss) Income Attributable to Subaye
|
|
$ |
(358 |
) |
|
$ |
2,941 |
|
|
$ |
2,115 |
|
|
$ |
3,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income From Continuing Operations Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.42 |
|
|
$ |
0.47 |
|
|
$ |
1.02 |
|
|
$ |
0.60
|
|
Diluted
|
|
$ |
0.42 |
|
|
$ |
0.47 |
|
|
$ |
1.01 |
|
|
$ |
0.60
|
|
Net
(Loss) Income From Discontinued Operations Per Common
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.47 |
) |
|
$ |
0.90 |
|
|
$ |
(0.59 |
) |
|
$ |
1.28 |
|
Diluted
*
|
|
$ |
(0.47 |
) |
|
$ |
0.90 |
|
|
$ |
(0.59 |
) |
|
$ |
1.28 |
|
Net
(Loss) Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.05 |
) |
|
$ |
1.37 |
|
|
$ |
0.42 |
|
|
$ |
1.88 |
|
Diluted
*
|
|
$ |
(0.05 |
) |
|
$ |
1.37 |
|
|
$ |
0.42 |
|
|
$ |
1.88 |
|
Weighted
Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,046,875 |
|
|
|
1,708,310 |
|
|
|
6,119,216 |
|
|
|
1,662,470 |
|
Diluted
|
|
|
7,119,853 |
|
|
|
1,708,310 |
|
|
|
6,161,454 |
|
|
|
1,662,470 |
|
Comprehensive
(Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$ |
(358 |
) |
|
$ |
2,333 |
|
|
$ |
2,587 |
|
|
$ |
3,129 |
|
Foreign
Currency Translation Adjustment, Net of Tax
|
|
|
(34 |
) |
|
|
4 |
|
|
|
(115 |
) |
|
|
22 |
|
Comprehensive
(Loss) Income
|
|
|
(392 |
) |
|
|
2,337 |
|
|
|
2,472 |
|
|
|
3,151 |
|
Comprehensive
Loss (Income) Attributable to the Noncontrolling Interest
|
|
|
- |
|
|
|
607 |
|
|
|
(436 |
) |
|
|
130 |
|
Comprehensive
(Loss) Income Attributable to Subaye
|
|
$ |
(392 |
) |
|
$ |
2,944 |
|
|
|
2,036
|
|
|
$ |
3,281 |
|
*
|
Diluted
loss per share calculated utilizing basic weighted average shares
outstanding whenever a loss is presented per reporting
period.
|
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
SUBAYE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED UNAUDITED STATEMENTS OF CASHFLOWS
|
|
For
the Six Months Ended March 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In
Thousands)
|
|
Cash
Flows From Operating Activities of Continuing Operations:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,587
|
|
|
$
|
3,129
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities—
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
2,194
|
|
|
|
2,831
|
|
Amortization
of Stock Based Compensation
|
|
|
2,530
|
|
|
|
649
|
|
Bad
Debt Expense
|
|
|
-
|
|
|
|
332
|
|
(Increase)
Decrease in Assets—
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
368
|
|
|
|
(3,918
|
)
|
Prepaid
Expenses
|
|
|
(1,771
|
)
|
|
|
360
|
|
Increase
in Liabilities —
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
|
566
|
|
|
|
27
|
|
Income
Taxes Payable
|
|
|
1,449
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By Operating Activities
|
|
|
7,923
|
|
|
|
3,410
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities of Continuing Operations:
|
|
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
|
(6,850
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(6,850
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Discontinued Operations:
|
|
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities
|
|
|
(763
|
)
|
|
|
(3,171
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Discontinued Operations
|
|
|
(763
|
)
|
|
|
(3,171
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes in Cash
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
(18
|
)
|
Increase
in Cash
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
216
|
|
Cash,
Beginning of Period
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
49
|
|
Cash,
End of Period
|
|
$
|
207
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period for
|
|
|
|
|
|
|
|
|
Interest,
Net of Amounts Capitalized
|
|
$
|
—
|
|
|
$
|
—
|
|
Income
Taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental
Schedule of Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance
of Stock for Services, Deferred Compensation
|
|
$
|
10,115
|
|
|
$
|
1,180
|
|
Issuance
of Stock for Acquisition of Websites and Related Assets
|
|
$
|
5,760
|
|
|
$
|
-
|
|
Adjustment
of additional paid-in-capital and non-controlling interests from
investment in Subaye Inc, by non-controlling interests
|
|
$
|
10,652
|
|
|
$
|
-
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these statements.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED MARCH 31, 2010 AND 2009
NOTE
1 - BUSINESS DESCRIPTION AND ORGANIZATION
Subaye,
Inc., a Delaware corporation (together with its consolidated subsidiaries,
“Subaye” or the “Company”) is a leading outsourced services provider in
China offering on-line video marketing (the “Video Showcase Product”) and
cloud computing solutions (the “Cloud Product”). Subaye's on-line video
marketing network operates as follows:
Video
Showcase Product
1.
|
Subaye
salespersons conduct business development activities in their territory to
secure video showcase business with small to medium sized businesses
(“SMEs”) who have revenues of less than $1 million, are closely held
enterprises, do not maintain their own websites and whose management does
not regularly have the time or the necessary skills to develop a basic or
comprehensive marketing plan, though business development is a primary
concern of SMEs the Company works
with.
|
|
|
2.
|
Subaye’s
salespersons and videographers work with SMEs to develop a video showcase,
or a short informercial, approximately 5 to 30 minutes in length. Multiple
video showcases and revisions to previous video showcases are offered to
paying SMEs.
|
|
|
3.
|
Subaye
hosts the video showcase at www.subaye.com and places the video showcases
at various other websites either controlled by Subaye or websites managed
by business partners of Subaye. Paying SMEs are able to rotate the
specific video showcase available at www.subaye.com, using Subaye’s online
video management system.
|
|
|
4.
|
SMEs
utilitize the video showcase as their primary sales tool
by:
|
|
a.
|
Notifying
potential customers of the link to their video showcase at www.subaye.com,
allowing their potential customers to view and understand the products or
services being offered to the potential customer.
|
|
|
|
|
b.
|
SMEs
are also able to hire large out-sourced salesforces that are common in
China, provide the sales people with minimal training, and then
successfully rely on a downloaded copy of the SME’s video showcase, which
is used by each salesperson during their business development activities,
rather than fully relying on the salespersons to develop and provide a
consistent face to face sales pitch regarding the customer’s business and
products. The lack of time devoted to training salespeople is also
important due to high turnover of employees the SMEs generally
encounter.
|
Cloud
Product
Subaye
charges an additional fee for access to its cloud computing solutions, which
include enhanced online tools for video management, content management and
customer relationship management software, all of which are accessed through
www.subaye.com. The Cloud Product was formerly referred to as the Company’s SaaS
business solution in previous reporting periods.
Other
Events
On March
16, 2010, the Company discontinued two of its operating segments, the trading
services business segment and the entertainment media business segment. The
Company disposed of the trading services business segment as of April 29, 2010
and is seeking buyers for the assets of the entertainment media business on an
asset by asset basis.
On
October 26, 2009, the Company changed its name to Subaye, Inc.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
condensed consolidated financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”), include the assets, liabilities, revenues, expenses and cash flows of
the Company and all its subsidiaries. This basis of accounting differs in
certain material respects from that used for the preparation of the books and
records of the Company’s principal subsidiaries, which are prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to enterprises with limited liabilities established in China the
accounting standards used in the place of their domicile. The
accompanying consolidated financial statements reflect necessary adjustments not
recorded in the books and records of the Company’s subsidiaries to present them
in conformity with GAAP.
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
|
%
|
Guangzhou
Panyu Metals & Materials Limited
|
|
The
People’s Republic of China
|
|
100.00
|
%
|
Subaye.com
|
|
United
States of America, Delaware
|
|
100.00
|
%
|
Subaye
IIP Limited
|
|
British
Virgin Islands
|
|
100.00
|
%
|
Guangzhou
Subaye Computer Tech Limited
|
|
The
People’s Republic of China
|
|
100.00
|
%
|
Media
Group International Limited
|
|
Hong
Kong, The People’s Republic of China
|
|
100.00
|
%
|
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with GAAP for interim financial information and with the instructions
to Form 10-Q. They do not include all of the information and footnotes
required by GAAP for a complete financial presentation. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation, have been included in the
accompanying unaudited condensed consolidated financial statements.
Operating results for the periods presented are not necessarily indicative
of the results that may be expected for the full year. The Company’s
accounting policies and certain other disclosures are set forth in the notes to
the consolidated financial statements contained in the Company’s Annual Report
on Form 10-K for the year ended September 30, 2009 as filed with the United
States Securities and Exchange Commission on December 29, 2009. These condensed
consolidated financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and notes thereto. The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The
Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”)
became the sole source of GAAP as of September 15, 2009. References to the ASC
are made throughout this Form 10-Q and refer to specific sections of the ASC in
relation to the topics referenced within this Form 10-Q.
Adoption
of ASC 810-10-65, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51 (“ASC
810-10-65”)
The
adoption of ASC 810-10-65 did not have a material effect on the Company’s
financial condition, results of operations or cash flows for the three and six
months ended March 31, 2010 and 2009, respectively, or as of March 31, 2010 and
September 30, 2009, respectively. However, as a result of the retrospective
presentation and disclosure requirements of ASC 810-10-65, the adoption of ASC
810-10-65 did affect the presentation and disclosure of noncontrolling interests
and basic and diluted earnings per common share in the Company’s condensed
consolidated financial statements for the three and six months ended March
31, 2009 and as of September 30, 2009, respectively.
ASC
810-10-65 establishes new standards that govern the accounting for and reporting
of (1) noncontrolling interest in partially owned consolidated subsidiaries and
(2) the loss of control of subsidiaries. Significant changes to the
accounting for noncontrolling interests include (a) the inclusion of
noncontrolling interests in the equity section of the controlling entity’s
condensed consolidated balance sheet rather than in the mezzanine section and
(b) the requirement that changes in the controlling entity’s interest in
the noncontrolling interest, without a change in control, be recognized in the
controlling entity’s equity rather than being accounted for by the purchase
method, which accounting under the purchase method would have given rise to
goodwill.
The
Company has owned a majority interest of its subsidiary, Subaye.com, Inc., since
June 2006. The principal effect of the adoption of ASC 810-10-65 on the
September 30, 2009 condensed consolidated balance sheet was to reclassify the
noncontrolling interest of $10,180 thousand from the mezzanine section of the
balance sheet to stockholders’ equity attributable to noncontrolling interest,
thus increasing the total of the condensed consolidated stockholders’ equity by
that amount, as follows:
|
|
September
30,
2009
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Equity,
as Previously Reported
|
|
$
|
40,709
|
|
|
|
|
|
|
Increase
for ASC 810-10-65 Reclassification of Non-Controlling
Interest
|
|
|
10,180
|
|
|
|
|
|
|
Equity,
as Adjusted
|
|
$
|
50,889
|
|
|
|
|
|
Additionally,
the adoption of ASC 810-10-65 requires that net income, as previously reported
prior to the adoption of ASC 810-10-65, be adjusted to include the net income
attributable to the noncontrolling interest, and that a new separate caption for
net income attributable to common shareholders be presented in the condensed
consolidated statements of operations. Thus, after the adoption of ASC
810-10-65, condensed consolidated net income increased (decreased) by $59
thousand and $(137) thousand for the three and six months ended March 31, 2009,
respectively.
ASC
810-10-65 also requires similar disclosure regarding comprehensive income.
Therefore, after the adoption of ASC 810-10-65 condensed consolidated
comprehensive income decreased by $1 and $7 for the three and six months ended
March 31, 2009 respectively.
Revenue
Recognition
Video
Showcase Subscription Revenues
Revenue
is generated by Subaye on a monthly subscription model basis through its Video
Showcase Product. Customers are charged a monthly subscription fee of
approximately $117 beginning on the date the customer’s video showcase is
available for viewing online. Subscription revenues are recognized on a pro-rata
basis, calculated on a day-to-day basis and invoiced at the end of each month in
accordance under the relevant sections of the ASC, namely ASC Topic 605 “Revenue Recognition” (“ASC
605”). The Company does not currently charge for the production of the video
showcase and does not charge a cancellation fee or penalty if and when a
customer decides to terminate the subscription.
Cloud Subscription
Revenues
Revenue
is generated by Subaye on a monthly subscription model basis through the sale of
its Cloud Product. Customers are charged a monthly subscription fee of $100
beginning on the date the customer first has access to Subaye’s online services
network or through specific individually negotiated contracts, all of which have
to date have been in the form of a monthly subscription model with fees of $100
per customer. Subaye’s proprietary cloud computing product includes various
software modules including content management, customer relationship management
and video management solutions. The software is not downloadable and is not
capable of being installed and run on a customer’s own computer
network.
Costs
of Sales
Subaye
entered into agreements with two sales and customer relationship agents (the
“Agents”) on October 2, 2009 and an additional four Agents on January 4, 2010.
The Agents are responsible for sales territories in Guandong Province, Fujian
Province, Guangxi Province, Jiangxi Province and Hong Kong. The Agents have two
tasks: (i) to develop business for Subaye, by offering the Video Showcase
Product or the Cloud Product and support the production of each customer’s video
showcase and/or the implementation of the customer’s online services associated
with the Cloud Product, and (ii) to manage the customer relationship and collect
the monthly subscription fees, which are currently paid in cash, from each
customer. Collecting these cash receipts, tracking which of the Company’s many
customers have paid and which have not, and remitting the cash to the Company,
is a time intensive project each month. Subaye.com has never experienced
collection issues and does not expect any collection issues to occur in the
future. These six Agents were compensated with a total of 560,000 shares of the
Company’s common stock valued at $5,800 thousand. Each agreement is for a term
of between two and three years. The Company amortizes the compensation provided
to these Agents over each contract term and records approximately 90% of the
stock compensation expense associated with these Agents as costs of sales. The
remainder of the stock compensation expense is included in operating
expenses.
Advertising
Costs
The
Company expenses advertising costs incurred for its own online, print and
outdoor advertising expenses as the costs are incurred in accordance with ASC
720-35 Advertising
Costs.
Website
Development Costs
The Company does not develop its own
websites. The Company owns several websites and related assets, all of which
have been purchased from professional website developers and web infrastructure
developers, all of whom are third party unaffiliated entities.
Reclassifications
Certain
reclassifications to the Company’s condensed consolidated balance sheets and
condensed consolidated statements of operations and other comprehensive income
have been made to the September 30, 2009 and March 31, 2009 financial statements
to conform to the presentation of these financial statements. These
reclassifications did not impact the Company’s revenues, net income, total
assets, total liabilities or total equity for the three and six months ended
March 31, 2010 and 2009 and as of September 30, 2009 or March 31, 2009,
respectively.
NOTE
3 – DIVESTITURE ACTIVITIES
The
Company’s management has agreed to a plan for disposal of the Company’s trading
services business segment and also determined the Company would immediately
commence a formal search for potential buyers of the assets of the Company’s
entertainment media business segments, namely copyrights to entertainment
productions originally created in China. In accordance with ASC 360-45-9, the
Company met the conditions for classifying the assets and liabilities of the
business segments and assets to be disposed of, as held for sale, on March 16,
2010. The assets and liabilities of the discontinued operations of the trading
services and entertainment media business segments have been aggregated and
presented as separate line items in the Company’s condensed consolidated balance
sheets for each period presented. The results of operations of the
discontinued operations have been aggregated and presented as a separate line
item in the condensed consolidated statement of operations for each period
presented.
The
following table provides the amount of cash proceeds, adjusted cost basis and
gain or loss on the sale assets and liabilities for the three and six month
periods ended March 31, 2010 and March 31, 2009, respectively:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Gross
Proceeds From the Sale of Assets
|
|
$
|
6,400
|
|
|
$
|
4,123
|
|
|
$
|
6,400
|
|
|
$
|
4,123
|
|
Adjusted
Cost Basis of Assets Sold
|
|
|
8,939
|
|
|
|
3,681
|
|
|
|
8,939
|
|
|
|
3,681
|
|
(Loss)
Gain on Sale of Assets
|
|
$
|
(2,539
|
)
|
|
$
|
442
|
|
|
$
|
(2,539
|
)
|
|
$
|
442
|
|
During
the three and six months ended March 31, 2010, the Company realized a total loss
of $2,539 thousand on the sale of copyrights to three entertainment production
titles, “Dayoucun,” “True?” and “Paobu,” respectively. The three copyrights were
sold to an unaffiliated entity based in China. During the three and six months
ended March 31, 2009, the Company realized a gain of $442 thousand on the sale
of a copyright to an entertainment production titled “Stockbrokers,”
respectively.
Assets
Held for Sale
Assets
held for sale at March 31, 2010 and September 30, 2009 are detailed in the table
below.
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,526
|
|
|
$
|
319
|
|
Accounts
Receivable
|
|
|
10,850
|
|
|
|
7,441
|
|
Inventory
|
|
|
51
|
|
|
|
582
|
|
Prepaid
Expenses
|
|
|
1,560
|
|
|
|
2,794
|
|
Property
& Equipment, Net
|
|
|
4
|
|
|
|
46
|
|
Copyrights,
Net
|
|
|
15,413
|
|
|
|
17,621
|
|
Goodwill
|
|
|
557
|
|
|
|
557
|
|
Total
Assets Held for Sale
|
|
$
|
30,961
|
|
|
$
|
29,360
|
|
Liabilities
held for sale at March 31, 2010 and September 30, 2009 are detailed in the table
below.
|
|
March
31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
2,674
|
|
|
$
|
3,867
|
|
Customer
Deposits
|
|
|
431
|
|
|
|
545
|
|
Bank
Loan Payable
|
|
|
2,973
|
|
|
|
863
|
|
Total
Liabilities Held for Sale
|
|
$
|
6,078
|
|
|
$
|
5,275
|
|
The
results of operations of the discontinued trading services business segment are
presented in the condensed consolidated unaudited statement of operations for
the three and six month periods ended March 31, 2010 and 2009 presented
below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Sales
|
|
$
|
2,705
|
|
|
$
|
1,554
|
|
|
$
|
6,960
|
|
|
$
|
4,408
|
|
Costs
of Sales
|
|
|
2,637
|
|
|
|
1,496
|
|
|
|
6,770
|
|
|
|
4,290
|
|
Gross
Profit
|
|
|
68
|
|
|
|
58
|
|
|
|
190
|
|
|
|
118
|
|
Net
Income
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
19
|
|
|
$
|
15
|
|
The
results of operations of the discontinued entertainment media business segment
are presented in the condensed consolidated unaudited statement of operations
for the three and six month periods ended March 31, 2010 and 2009 presented
below:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Sales
|
|
$
|
6,455
|
|
|
$
|
5,633
|
|
|
$
|
8,002
|
|
|
$
|
6,944
|
|
Costs
of Sales
|
|
|
9,213
|
|
|
|
4,022
|
|
|
|
10,764
|
|
|
|
4,676
|
|
Gross
(Loss) Profit
|
|
|
(2,758
|
)
|
|
|
1,611
|
|
|
|
(2,762
|
)
|
|
|
2,268
|
|
Net
Income
|
|
$
|
(3,324
|
)
|
|
$
|
1,525
|
|
|
$
|
(3,646
|
)
|
|
$
|
2,118
|
|
NOTE
4 - ACCOUNTS RECEIVABLE
The
Company’s business operations are conducted in China. During the normal course
of business, the Company extends unsecured credit to its customers. Management
reviews its accounts receivable on a regular basis to determine if the allowance
for doubtful accounts is adequate. An estimate for doubtful accounts is made
when collection of the full amount is no longer probable. The Company has not
experienced significant difficulty in collecting its accounts receivable in the
past and has no reason to believe this may change in the near
future.
Trade
accounts receivable at March 31, 2010 and September 30, 2009 consisted of the
following:
|
March
31,
2010
|
|
September
30,
2009
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
Trade
Accounts Receivable
|
|
$ |
8,261 |
|
|
$ |
8,629 |
|
Less:
Allowance for Doubtful Accounts
|
|
|
(363
|
) |
|
|
(363
|
) |
Totals
|
|
$ |
7,898 |
|
|
$ |
8,266 |
|
The
activity in the allowance for doubtful accounts for trade accounts receivable as
of March 31, 2010 and September 30, 2009 is as follows:
|
March
31,
2010
|
|
September
30,
2009
|
|
|
(Dollars
in Thousands)
|
|
Beginning
Allowance for Doubtful Accounts
|
|
$ |
363 |
|
|
$ |
31 |
|
Additional
Charge to Bad Debt Expense
|
|
|
- |
|
|
|
332 |
|
Ending
Allowance for Doubtful Accounts
|
|
$ |
363 |
|
|
$ |
363 |
|
NOTE
5 – DEPOSIT FOR INVENTORIABLE ASSETS
On May 3,
16 and 26, 2009, the Company’s subsidiary, Subaye IIP Limited, entered into
three agreements with three consumer goods distributors in China. The products
will include clothes, footwear, bags and garniture, jewelry and electronics. The
consumer goods distributors committed to delivering goods ordered by Subaye IIP
Limited or the members of www.subaye.com “just in time.” If the consumer goods
distributors do not deliver the products ordered by the first day subsequent to
the order, the consumer goods distributors will pay Subaye IIP Limited a penalty
equal to 5% of the cost of the product ordered per day it is delivered
late. The contracts are valid from May 3, 16 and 26, 2009 through
November 2, 15 and 25, 2010, respectively. In accordance with the
contract, Subaye IIP Limited paid a deposit of $8,152 thousand. The
deposit will be used by the consumer goods distributor to ensure product is
available for ordering by Subaye IIP Limited or the members of www.subaye.com on
an as needed basis.
NOTE
6 - PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
March
31,
2010
|
|
|
September
30,
2009
|
|
|
|
(Dollars
in Thousands)
|
|
Computer
Software & Equipment
|
|
$ |
9,409 |
|
|
$ |
9,418 |
|
Websites
|
|
|
27,435 |
|
|
|
13,965 |
|
Furniture
& Fixtures
|
|
|
60 |
|
|
|
60 |
|
|
|
|
36,904 |
|
|
|
23,443 |
|
Less:
Accumulated depreciation and amortization
|
|
|
(15,943
|
) |
|
|
(12,863
|
) |
|
|
$ |
20,961 |
|
|
$ |
10,580 |
|
NOTE
7 – DEPRECIATION AND AMORTIZATION
The
Company’s depreciation and amortization recorded within these financial
statements is significant and is related to the Company’s websites, software and
stock based compensation, respectively. Below is a table outlining depreciation
and amortization included in costs of goods sold or operating expenses for each
period presented within the financial statements.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Amortization
of Stock Based Compensation Included Within Costs of Sales
|
|
$
|
533
|
|
|
$
|
-
|
|
|
$
|
722
|
|
|
$
|
-
|
|
Amortization
of Websites, Software and Hardware Included Within Costs of
Sales
|
|
|
842
|
|
|
|
1,352
|
|
|
|
2,184
|
|
|
|
2,817
|
|
Amortization
of Stock Based Compensation Included in Operating
Expeneses
|
|
|
957
|
|
|
|
338
|
|
|
|
1,808
|
|
|
|
649
|
|
Depreciation
and Amortization Included Within Operating Expenses
|
|
|
5
|
|
|
|
7
|
|
|
|
10
|
|
|
|
14
|
|
Total
Depreciation and Amortization
|
|
$
|
2,337
|
|
|
$
|
1,697
|
|
|
$
|
4,724
|
|
|
$
|
3,480
|
|
NOTE
8 - STOCKHOLDERS’ EQUITY
The
Company is authorized to issue 200,000,000 shares, in aggregate, consisting of
150,000,000 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 March 31, 2010, no shares of
the Company’s preferred stock and 7,444,931 shares of the Company’s common stock
were issued and outstanding.
On March
11, 2010, the Company awarded a contract to a marketing and investor relations
consultant and issued a stock warrant to purchase 125,000 shares of
the Company’s common stock valued at $838 thousand. The agreement is for a term
of one year. The stock warrant is exercisable at a price of $18.00 per share and
expires on March 11, 2014, if unexercised. The Company amortizes the
compensation provided to the consultant over the contract term.
On March
8, 2010, the Company awarded an entity controlled by the Chief Financial Officer
a total of 10,000 shares of the Company’s common stock valued at $125 thousand.
The entity was awarded the shares as a result of the terms of an agreement
entered into on September 18, 2009 between the Company and the entity whereby
upon approval of the Company’s listing application for the NASDAQ Global Market,
the shares would be awarded to the entity. The Company amortized the stock award
as a one-time expense on March 8, 2010.
On March
2, 2010, the Company entered into an acquisition agreement (the “Agreement”)
with CoCloud Infoserve Limited, a Chinese company (“CIL”). Pursuant
to the terms of the Agreement, the Company acquired all of the website domains
and related assets, used by CIL to operate various online shopping websites,
www.gzxiti.com, www.gzxing.com.cn, www.gzbuyun.com.cn, www.gzjinxiu.com,
www.gznantian.com, and www.gzxhaxi.com, in exchange for 480,000 shares of the
Company’s common stock, valued at $5,760 thousand.
On
February 10, 2010, the Company awarded a stock option for a total of 23,200
shares of common stock to an independent board member valued at $287 thousand.
The stock option will be earned over one year, is exercisable at a price of
$16.05 per share and will expire on February 10, 2020. The Company amortizes the
compensation provided to this independent board member over the one year
term.
On
February 10, 2010, the Company awarded contracts to three vice presidents for a
total of 40,000 shares of the Company’s common stock valued at $642 thousand.
The agreements are for a term of two years. The Company amortizes the
compensation provided to these executives over each contract term.
On
February 8, 2010, the Company awarded a contract to a Vice President for a total
of 15,000 shares of the Company’s common stock valued at $239 thousand. The
agreement is for a term of two years. The Company amortizes the compensation
provided to this Vice President over the contract term.
On
January 4, 2010, the Company awarded contracts to two Agents for a total of
240,000 shares of the Company’s common stock valued at $3,240 thousand. Each
agreement is for a term of two years. The Company amortizes the compensation
provided to these Agents over each contract term.
On
November 18, 2009, the Company awarded a total of 23,200 shares of common stock
to two of its independent board members valued at $339 thousand. The stock
awards will be earned over one year. The Company amortizes the compensation
provided to each independent board member over each contract term.
On
November 9, 2009, the Company awarded contracts to two consultants for a total
of 96,000 shares of the Company’s common stock valued at $1,164 thousand. The
agreements are for a term of two years. The Company amortizes the compensation
provided to each consultant over each contract term.
On
November 9, 2009, the Company awarded a contract to a marketing and investor
relations consultant for a total of 30,000 shares of the Company’s common stock
valued at $364 thousand. The agreement is for a term of two years. The Company
amortizes the compensation provided to this consultant over the contract
term.
On
November 6, 2009, the Company entered into a Share Exchange Agreement with
certain shareholders of its subsidiary, Subaye.com, Inc. Pursuant to the terms
of the Share Exchange Agreement, the Company issued 3,408,852 shares of its
common stock in exchange for all outstanding shares of common stock of
Subaye.com, Inc. the Company did not already own (the “Share Exchange”). As a
result of the Share Exchange, Subaye.com, Inc., and the wholly-owned
subsidiaries of Subaye.com, Inc., effectively became wholly-owned subsidiaries
of the Company.
On
October 23, 2009, the Company effectuated a reverse stock split on a 100 to 1
(100:1) basis.
On
October 11, 2009, the Company awarded a contract to its Chief Financial Officer
for a total of 22,500 shares of the Company’s common stock valued at $259
thousand. The agreement is for a term of three years. The Company amortizes the
compensation provided to the Chief Financial Officer over the contract
term.
On
October 2, 2009, the Company awarded contracts to two Agents for a total of
320,000 shares of the Company’s common stock valued at $2,560 thousand. Each
agreement is for a term of three years. The Company amortizes the compensation
provided to these Agents over each contract term.
On
October 2, 2009, the Company awarded a contract to a Vice President for a total
of 7,500 shares of the Company’s common stock valued at $60 thousand. The
agreement is for a term of two years. The Company amortizes the compensation
provided to this Vice President over the contract term.
NOTE
9 – NONCONTROLLING INTEREST
On
November 6, 2009, the Company entered into a Share Exchange Agreement with
certain shareholders of its subsidiary, Subaye.com, Inc. Pursuant to the terms
of the Share Exchange Agreement, the Company issued 3,408,852 shares of its
common stock with a market value of $43,460 thousand, in exchange for all
outstanding shares of common stock of Subaye.com, Inc. the Company did not
already own. As a result of the Share Exchange Agreement, Subaye.com, Inc., and
each of the wholly-owned subsidiaries of Subaye.com, Inc., effectively became a
wholly-owned subsidiaries of the Company. The transaction was accounted for as a
change in the ownership interests of the Company with an entity under common
control, in accordance with ASC 810-10-65. As a result, the value of the
3,408,852 shares issued to consummate the Share Exchange Agreement was recorded
by the Company as an increase to stockholders’ equity of $10,652 thousand, which
represented the historical cost basis of the balance of the net assets acquired
through the Share Exchange Agreement, which included significant assets as well
as liabilities owed to the Company.
The
following disclosure provides details regarding the change in the noncontrolling
ownership interests of the Company’s subsidiaries, in accordance with ASC
810-10-55-4.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
Net
Loss (Income) Attributable to Subaye, Inc.
|
|
$
|
-
|
|
|
$
|
608
|
|
|
$
|
(472
|
)
|
$
|
137
|
|
Transfers
from the Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Subaye, Inc.’s Additional Paid in Capital for the Issuance of 3,408,852
Shares of Common Stock to the Shareholders of the Noncontrolling
Interest
|
|
|
-
|
|
|
|
-
|
|
|
|
10,652
|
|
|
-
|
|
Change
from Net Income Attributable to Subaye, Inc. and Transfers to the
Noncontrolling Interest
|
|
$
|
-
|
|
|
$
|
608
|
|
|
$
|
10,180
|
|
$
|
137
|
|
NOTE
10 - INCOME TAX
United
States of America
Since the
Company had no operations within the United States. As a result there is no
provision for United States taxes and there are no deferred tax
amounts.
Delaware
The
Company and its subsidiary, Subaye.com, Inc. are incorporated in Delaware but do
not conduct business in Delaware. Therefore, the Company is not subject to
Delaware corporate income tax.
British
Virgin Islands
Subaye
IIP is incorporated in the British Virgin Islands and, under the current laws of
the British Virgin Islands, are not subject to income taxes.
People’s
Republic of China
Enterprise
income tax in PRC is generally charged at 25% of a company’s assessable profit,
of which 22% is a national tax and 3% is a local tax. The Company’s subsidiary,
Guangzhou Subaye, is incorporated in the PRC, and is 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.
No
provision for enterprise income tax in the PRC had been made for the years ended
September 30, 2009 and 2008 due to the fact that the Company was exempt from PRC
tax based on the statutory provisions granting a tax holiday for a two year
period, which was applicable for the years ended September 30, 2009 and 2008
respectively.
The
Company is governed by the Income Tax Law of the People’s Republic of China
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (“the Income Tax Laws”). Under the Income Tax Laws,
foreign investment enterprises (“FIE”) generally are subject to an income tax at
an effective rate of 25% on income as reported in their statutory financial
statements after appropriate tax adjustments unless the enterprise is located in
specially designated regions of cities for which more favorable effective tax
rates apply.
The
provision for enterprise income tax in the PRC is $572 and $1,449 thousand for
the three and six months ended March 31, 2010. No provision for enterprise
income tax in the PRC had been made the three and six months ended March 31,
2009 due to the fact that certain subsidiaries of the Company are exempt from
PRC tax based on the statutory provisions granting a tax holiday for a two year
period, as stated above, specifically for the years ended September 30, 2009 and
2008, respectively. The Company’s PRC tax holiday expired on October
1, 2009. The following table details the aggregate effect of the tax
holiday on the Company’s results of operations.
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
PRC
Tax Without Consideration of Tax Holiday
|
|
$
|
572
|
|
|
$
|
105
|
|
|
$
|
1,449
|
|
|
$
|
141
|
|
PRC
Tax Savings as a Result of Tax Holiday
|
|
$
|
-
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
141
|
|
Increase
in Basic and Diluted Earnings Per Share as a Result of Tax
Holiday
|
|
$
|
-
|
|
|
$
|
0.06
|
|
|
$
|
-
|
|
|
$
|
0.08
|
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three and six months ended March 31, 2010 and 2009:
|
|
Six
and Three Months Ended
|
|
|
|
March
31,
2010
|
|
March
31,
2009
|
|
U.S.
Statutory Rates
|
|
|
35.0
|
%
|
35.0
|
%
|
Foreign
Income
|
|
|
(35.0
|
)%
|
(35.0
|
)
|
China
and Hong Kong Tax Rates, Blended Effective Rate
|
|
|
18.0
|
%
|
25.0
|
|
China
Income Tax Exemption
|
|
|
0.0
|
%
|
(25.0
|
)
|
Effective
Income Tax Rates
|
|
|
18.0
|
%
|
0
|
%
|
NOTE
11 - COMMITMENTS & CONTINGENCIES
Operating
Leases
In the
normal course of business, the Company leases office space under operating lease
agreements. The Company rents office space, primarily for regional sales
administration offices, in commercial office complexes that are conducive to
administrative operations. The operating lease agreements generally contain
renewal options that may be exercised at the Company's discretion after the
completion of the base rental terms. In addition, many of the rental agreements
provide for regular increases to the base rental rate at specified intervals,
which usually occur on an annual basis.
On July
1, 2008, the Company entered into a lease for new office space in Foshan City,
Guangdong, China for approximately $5 thousand per month through June 30,
2011.
On
February 1, 2009, the Company entered into a lease agreement to utilize
approximately 22,000 square feet of office space at 349 Dabei Road, Shiqiao
Street, Panyu District, Guangzhou City, Guangdong, China 511400 for
approximately $9 thousand per month through January 31, 2011.
The
following table summarizes the Company’s future minimum lease payments under
operating lease agreements for the five years subsequent to March 31,
2010:
Twelve
Months Ended March 31, 2011 (in thousands)
|
|
$ |
165 |
|
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 $62
thousand and $23 thousand and $104 thousand and $40 thousand for the three and
six months ended March 31, 2010 and 2009, respectively.
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
12 – SUBSEQUENT EVENTS
On April
29, 2010, the Company entered into a purchase and sale agreement (the
“Agreement”) with Superb Quality Limited (“Superb”), pursuant to which the
Company sold its 100% ownership interest in Panyu M&M Co. Ltd., the
Company’s wholly-owned PRC subsidiary (“Panyu”), to Superb in exchange for $600
thousand in cash. Panyu has been disclosed previously as the Company’s
trade services business segment and holds the necessary licenses to conduct
international and domestic trading and provide logistics services to
customers.
NOTE
13 - RECENTLY ISSUED ACCOUNTING STANDARDS
In
October 2009, the Financial Accounting Standards Board (FASB) issued
amended revenue recognition guidance for arrangements with multiple
deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of management’s best estimate of selling price
for individual elements of an arrangement when vendor specific objective
evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE)
is unavailable. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. The Company is
currently assessing its implementation of this new guidance, but does not expect
a material impact on the consolidated financial statements.
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. For the Company, this guidance is effective for all new or
materially modified arrangements entered into on or after October 1, 2011 with
earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be
adopted in the same period that the company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
The Company is currently assessing its implementation of this new guidance, but
does not expect a material impact on the consolidated financial
statements.
On
October 1, 2009, the Company adopted the revised FASB guidance regarding
business combinations which was required to be applied to business combinations
on a prospective basis. The revised guidance requires that the acquisition
method of accounting be applied to a broader set of business combinations,
amends the definition of a business combination, provides a definition of a
business, requires an acquirer to recognize an acquired business at its fair
value at the acquisition date and requires the assets and liabilities assumed in
a business combination to be measured and recognized at their fair values as of
the acquisition date (with limited exceptions). There was no impact upon
adoption and the effects of this guidance will depend on the nature and
significance of business combinations occurring after the effective
date.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted this guidance in the quarter ended
September 30, 2009 and there was no material impact on the consolidated
financial statements.
In
June 2009, the FASB issued amendments to the accounting rules for
variable interest entities (VIEs) and for transfers of financial assets. The new
guidance for VIEs eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest entity and requires
ongoing qualitative reassessments of whether an enterprise is the primary
beneficiary. In addition, qualifying special purpose entities (QSPEs) are no
longer exempt from consolidation under the amended guidance. The amendments also
limit the circumstances in which a financial asset, or a portion of a financial
asset, should be derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented, and/or when the
transferor has continuing involvement with the transferred financial asset. The
Company will adopt these amendments for interim and annual reporting periods
beginning on October 1, 2010. The Company does not expect the adoption of these
amendments to have a material impact on the consolidated financial
statements.
In
May 2009, the FASB issued guidelines on subsequent event accounting which
sets forth: 1) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; 2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. These guidelines were effective for
interim and annual periods ending after June 15, 2009, and the Company
adopted them in the quarter ended June 30, 2009. There was no impact on the
consolidated financial statements.
In
April 2009, the FASB issued additional requirements regarding interim
disclosures about the fair value of financial instruments which were previously
only disclosed on an annual basis. Entities are now required to disclose the
fair value of financial instruments which are not recorded at fair value in the
financial statements in both their interim and annual financial statements. The
new requirements were effective for interim and annual periods ending after
June 15, 2009 on a prospective basis. The Company adopted these
requirements in the quarter ended June 30, 2009. There was no impact on the
consolidated financial results as this relates only to additional
disclosures.
In
April 2008, the FASB issued new requirements regarding the determination of
the useful lives of intangible assets. In developing assumptions about renewal
or extension options used to determine the useful life of an intangible asset,
an entity needs to consider its own historical experience adjusted for
entity-specific factors. In the absence of that experience, an entity shall
consider the assumptions that market participants would use about renewal or
extension options. The new requirements apply to intangible assets acquired
after October 1, 2009. The adoption of these new rules did not have a
material impact on the Consolidated Financial Statements.
In
December 2007, the FASB issued new guidance on noncontrolling interests in
consolidated financial statements. This guidance requires that the
noncontrolling interest in the equity of a subsidiary be accounted for and
reported as equity, provides revised guidance on the treatment of net income and
losses attributable to the noncontrolling interest and changes in ownership
interests in a subsidiary and requires additional disclosures that identify and
distinguish between the interests of the controlling and noncontrolling owners.
Pursuant to the transition provisions, the Company adopted this new guidance on
October 1, 2009 via retrospective application of the presentation and
disclosure requirements.
In
March 2008, the FASB issued new disclosure requirements regarding
derivative instruments and hedging activities. Entities must now provide
enhanced disclosures on an interim and annual basis regarding how and why the
entity uses derivatives; how derivatives and related hedged items are accounted
for, and how derivatives and related hedged items affect the entity’s financial
position, financial results and cash flow. Pursuant to the transition
provisions, the Company adopted these new requirements on October 1, 2009.
These new requirements do not impact the consolidated financial results as they
are disclosure-only in nature.
The FASB
guidance on fair value measurements and disclosures became effective
January 1, 2008. However, in February 2008, the FASB delayed the
effective date regarding fair value measurements and disclosures of nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to October 1, 2009. The adoption of these provisions
related to nonfinancial assets and nonfinancial liabilities on October 1,
2009 did not have a material impact on the consolidated financial
statements.
In
June 2008, the FASB issued guidance in determining whether instruments
granted in share-based payment transactions are participating securities. The
guidance became effective on October 1, 2009 via retrospective application.
According to the new guidance, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents are participating
securities and, therefore, are included in computing earnings per share (EPS)
pursuant to the two-class method. The two-class method determines earnings per
share for each class of common stock and participating securities according to
dividends or dividend equivalents and their respective participation rights in
undistributed earnings. The adoption of these provisions is not expected to have
a material impact on the consolidated financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
• Highlights
and Executive Summary
• Results
of Operations—an analysis of the Company’s consolidated results of operations,
for the two years presented in the consolidated financial
statements
• Liquidity
and Capital Resources—an analysis of the effect of the Company’s operating,
financing and investing activities on the Company’s liquidity and capital
resources
• Off-Balance
Sheet Arrangements—a discussion of such commitments and
arrangements
• Critical
Accounting Policies and Estimates—a discussion of accounting policies that
require significant judgments and estimates
• New
Accounting Pronouncements—a summary and discussion of the Company’s plans for
the adoption of relevant new accounting standards relevant
The following discussion contains
forward-looking statements that reflect the Company’s plans, estimates and
beliefs. Actual results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this Quarterly Report particularly in "Special Note Regarding Forward-Looking
Statements," "Market Data" and "Risk Factors."
Highlights
and Executive Summary
For the
three months ended March 31, 2010, the Company reported net income from
continuing operations of $2,965 thousand, an increase of 271.1% as compared to
net income from continuing operations revenues of $799 thousand reported for the
three months ended March 31, 2009. The Company generated additional revenues for
its Video Showcase Product and Cloud Product, respectively, decreased its
advertising spending by 73.6% and committed a fraction of the funds previously
allocated to advertising to its expansion iniative for a significant increase in
its salesforce.
For the
six months ended March 31, 2010, the Company reported net income from continuing
operations of $6,214 thousand, an increase of 523.9% as compared to net income
from continuing operations revenues of $996 thousand reported for the three
months ended March 31, 2009. The Company generated additional revenues for its
Video Showcase Product and Cloud Product, respectively, decreased its
advertising spending by 85.3% and committed a fraction of the funds previously
allocated to advertising to its expansion intiative for a significant increase
in its salesforce.
The
following tables are key performance indicators utilized by management for
internal decision making. We believe these performance indicators are likely
also important for our shareholders to consider.
|
|
Three
Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Net
Income From Continuing Operations Per Share Growth
Rate
|
|
|
|
|
|
|
|
|
|
Continuing
Operations Net Margin
|
|
|
|
|
|
|
Six
Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Net
Income From Continuing Operations Per Share Growth
Rate
|
|
|
|
|
|
|
|
|
|
Continuing
Operations Net Margin
|
|
|
|
|
As a
result of the tax exempt status of the Company’s continuing operations, no
income tax expense was recorded in the three and six months ended March 31,
2009, respectively. However, the tax exemption expired as of September 30, 2009.
Therefore an income tax expense is recorded for the three and six months ended
March 31, 2010. By subtracting an estimated income tax expense from net income
from continuing operations for each period in which a tax exemption was
applicable during 2009, the Company believes the results of operations for each
period presented are more comparable. The tables below provide the
adjusted net income from continuing operations per basic common share on a
comparable basis, by adding in the effect of the applicable income taxes had
they been charged to the Company during the three and six months ended March 31,
2009.
Adjusted
net income from continuing operations per basic common share is calculated as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Net
Income From Continuing Operations
|
|
$
|
2,965
|
|
|
$
|
799
|
|
|
$
|
6,214
|
|
|
$
|
996
|
|
Less:
Estimated Benefit Derived From PRC Tax Holiday
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
-
|
|
|
|
(141
|
)
|
Adjusted
Net Income From Continuing Operations Per Basic Common
Share
|
|
$
|
2,965
|
|
|
$
|
694
|
|
|
$
|
6,214
|
|
|
$
|
855
|
|
Adjusted net income from continuing
operations per basic common share is calculated as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
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March
31,
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March
31,
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March
31,
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March
31,
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2010
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2009
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2010
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2009
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(Dollars
in thousands)
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Net
Income From Continuing Operations Per Basic Common Share
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|
$
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0.42
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$
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0.47
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$
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1.02
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$
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0.60
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Less:
Estimated Benefit Derived From PRC Tax Holiday
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-
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(0.06
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)
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-
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|
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(0.08
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)
|
Adjusted
Net Income From Continuing Operations Per Basic Common
Share
|
|
$
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0.42
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|
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$
|
0.41
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|
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$
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1.02
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$
|
0.52
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|
Results
of Operations
The
following tables set forth key components of the Company’s results of operations
for the three and six months ended March 31, 2010 and March 31, 2009,
respectively. All numbers referenced herein are “in
thousands”.
For
the Three Months Ended March 31, 2010 Compared to the Three Months Ended March
31, 2009
(In
Thousands, Except per Share Data)
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2010
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2009
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Income
From Continuing Operations Before Income Taxes
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Provision
for Income Taxes
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Income
From Continuing Operations
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(Loss)
Income from Discontinued Operations
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Net
(Income) Loss Attributable to the Noncontrolling
Interest
|
|
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Net
Income Attributable to Subaye
|
|
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Basic
Earnings Per Share, Continuing Operations
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Diluted
Earnings Per Share, Continuing Operations
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Basic
(Loss) Earnings Per Share, Discontinued Operations
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Diluted
(Loss) Earnings Per Share, Discontinued Operations
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Revenues
Revenues
for the three months ended March 31, 2010 were $7,388 thousand as compared to
$6,707 thousand for the three months ended March 31, 2009. The increase of $681
thousand, or 10.2%, was due to the increase in revenues from both the Video
Showcase Product and the Cloud Product. Video showcase subscription revenues for
the three months ended March 31, 2010 increased to $6,868 thousand as compared
to $6,317 thousand for the three months ended March 31, 2009, an increase of
$551 thousand over the same period a year ago. Cloud Product revenues increased
to $520 thousand for the three months ended March 31, 2010 as compared to $390
thousand for the three months ended March 31, 2009, an increase of 33.3%. The
Company’s paying customers for the video showcase subscription product increased
to 22,019 as of March 31, 2009, a 42.3% increase over the paying customers as of
December 31, 2009. However, much of the growth in membership occurred in March,
2010. The Company recognizes revenues on a pro-rata daily basis. A significant
portion of the additional revenues resulting from this membership growth were
not recognized until April, 2010.
Costs
of Sales
Costs of
sales for the three months ended March 31, 2010 were $1,799 thousand as compared
to $1,434 thousand for the three months ended March 31, 2009. The
increase of $365 thousand, or 25.5%, was primarily due to additional costs of
sales associated with the stock based compensation to the Company’s new Agents
in certain Chinese provinces. Stock based compensation included in costs of
sales was $533 thousand and $0 for the three months ended March 31, 2010 and
2009, respectively. Additionally, commissions to the company’s sales persons
increased $297 thousand during the three months ended March 31, 2010, as
compared to the three months ended March 31, 2009. The Company
instituted a new, more substantial, sales commission structure as of January 1
2010. Depreciation and amortization of websites, software and hardware totaled
$842 and $1,352 for the three months ended March 31, 2010 and 2009,
respectively.
Gross
Margin
The
Company’s gross margin was 75.6% and 78.6%, respectively, for the three months
ended March 31, 2010 and 2009.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2010 amounted to $2,052 thousand
as compared to $4,474 thousand for the three months ended March 31,
2009. The decrease of $2,422 thousand or 54.1% was primarily due to
the curtailing of advertising costs during the three months ended March 31,
2010. During the three months ended March 31, 2010, the Company
incurred $1,000 thousand in advertising costs for a marketing promotion while
during the three months ended March 31, 2009, the Company incurred approximately
$3,369 thousand for a one-time marketing promotion. Other selling, general and
adminstrative expenses for each period presented were comparable.
Provision
for Income Taxes
Provison
for income taxes was $572 thousand and $0 for the three months ended March 31,
2010 and 2009, respectively. The Company’s continuing business operations are
estimated to be subject to PRC income taxes of approximately 18% for the three
months ended March 31, 2010. For the three months ended March 31, 2009, the
Company’s continuing business operations were not subject to any income taxes
due to a PRC tax holiday.
Net
(Loss) Income
Net
(loss) income for the three months ended March 31, 2010 was $(358) thousand as
compared to $2,333 thousand for the three months ended March 31,
2009. Net income from continuing operations was $2,965 thousand and
$799 thousand for the three months ended March 31, 2010 and 2009, respectively.
Net (loss) income from discontinued operations was $(3,323) and $1,534 thousand
for the three months ended March 31, 2010 and 2009, respectively.
Basic
and Diluted Income per Share for Continuing Operations
The
Company’s basic net income per share for continuing operations was $0.42 and
$0.47 for the three months ended March 31, 2010 and 2009,
respectively.
The
Company’s diluted net income per share for continuing operations was $0.42 and
$0.47 for the three months ended March 31, 2010 and 2009, respectively. A total
of 170,200 shares of common stock are potentially issuable upon the exercise of
stock warrant or stock option agreements.
Basic
and Diluted Income per Share for Discontinued Operations
The
Company’s basic net (loss) income per share for discontinued operations was
$(0.47) and $0.90 for the three months ended March 31, 2010 and 2009,
respectively.
The
Company’s diluted net (loss) income per share for discontinued operations was
$(0.47) and $0.90 for the three months ended March 31, 2010 and 2009,
respectively. A total of 170,200 shares of common stock are potentially issuable
upon the exercise of stock warrant or stock option agreements.
For
the Six Months Ended March 31, 2010 Compared to the Six Months Ended March 31,
2009
(In
Thousands, Except per Share Data)
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|
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2010
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2009
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Income
From Continuing Operations Before Income Taxes
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Provision
for Income Taxes
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Income
From Continuing Operations
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(Loss)
Income from Discontinued Operations
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Net
(Income) Loss Attributable to the Noncontrolling
Interest
|
|
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|
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|
Net
Income Attributable to Subaye
|
|
|
|
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|
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|
|
Basic
Earnings Per Share, Continuing Operations
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|
Diluted
Earnings Per Share, Continuing Operations
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|
|
|
|
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|
|
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Basic
(Loss) Earnings Per Share, Discontinued Operations
|
|
|
|
|
|
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Diluted
(Loss) Earnings Per Share, Discontinued Operations
|
|
|
|
|
|
|
|
|
Revenues
Revenues
for the six months ended March 31, 2010 were $14,300 thousand as compared to
$12,397 thousand for the six months ended March 31, 2009. The increase of $1,903
thousand, or 15.3%, was due to the increase in revenues from both the Video
Showcase Product and the Cloud Product. Video showcase subscription revenues for
the six months ended March 31, 2010 increased to $12,740 thousand as compared to
$11,227 thousand for the six months ended March 31, 2009, an increase of
$1513 thousand over the same period a year ago. Cloud Product revenues increased
to $1,560 thousand for the six months ended March 31, 2010 as compared to $1,170
thousand for the six months ended March 31, 2009, an increase of 33.3%. The
Company’s paying customers for the video showcase subscription product increased
to 22,019 as of March 31, 2009, a 35.6% increase over the paying customers as of
September 30, 2009. However, much of the growth in membership occurred in March,
2010. The Company recognizes revenues on a pro-rata daily basis. A significant
portion of the additional revenues resulting from this membership growth were
not recognized until April, 2010.
Costs
of Sales
Costs of
sales for the six months ended March 31, 2010 were $3,226 thousand as compared
to $2,843 thousand for the six months ended March 31, 2009. The
increase of $383 thousand, or 13.5%, was primarily due to additional costs of
sales associated with the stock based compensation to the Company’s new Agents
in certain Chinese provinces. Stock based compensation included in costs of
sales was $722 thousand and $0 for the six months ended March 31, 2010 and 2009,
respectively. Depreciation and amortization of websites, software and hardware
totaled $ 2,184 and $2,817 for the six months ended March 31, 2010 and 2009,
respectively.
Gross
Margin
The
Company’s gross margin was 77.4% and 77.1%, respectively, for the six months
ended March 31, 2010 and 2009.
Operating
Expenses
Operating
expenses for the six months ended March 31, 2010 amounted to $3,411 thousand as
compared to $8,558 thousand for the six months ended March 31,
2009. The decrease of $5,147 thousand or 60.1% was primarily due to
the curtailing of advertising costs during the six months ended March 31,
2010. During the six months ended March 31, 2010, the Company
incurred $1,000 thousand in advertising costs for a marketing promotion while
during the six months ended March 31, 2009, the Company incurred approximately
$6,737 thousand for a one-time marketing promotion. Other selling, general and
adminstrative expenses for each period presented were comparable.
Provision
for Income Taxes
Provison
for income taxes was $1,449 thousand and $0 for the six months ended March 31,
2010 and 2009, respectively. The Company’s continuing business operations are
estimated to be subject to PRC income taxes of approximately 18% for the six
months ended March 31, 2010. For the six months ended March 31, 2009, the
Company’s continuing business operations were not subject to any income taxes
due to a PRC tax holiday.
Net
Income
Net
income for the six months ended March 31, 2010 was $2,587 thousand as compared
to $3,129 thousand for the six months ended March 31, 2009. Net
income from continuing operations was $6,214 thousand and $996 thousand for the
six months ended March 31, 2010 and 2009, respectively. Net income from
discontinued operations was $(3,627) and $2,133 thousand for the six months
ended March 31, 2010 and 2009, respectively.
Basic
and Diluted Income per Share for Continuing Operations
The
Company’s basic net income per share for continuing operations was $1.02 and
$0.60 for the six months ended March 31, 2010 and 2009,
respectively.
The
Company’s diluted net income per share for continuing operations was $1.01 and
$0.60 for the six months ended March 31, 2010 and 2009, respectively. A total of
170,200 shares of common stock are potentially issuable upon the exercise of
stock warrant or stock option agreements.
Basic
and Diluted Income per Share for Discontinued Operations
The
Company’s basic net income per share for discontinued operations was $(0.59) and
$1.28 for the six months ended March 31, 2010 and 2009,
respectively.
The
Company’s diluted net income per share for discontinued operations was $(0.59)
and $1.28 for the six months ended March 31, 2010 and 2009, respectively. A
total of 170,200 shares of common stock are potentially issuable upon the
exercise of stock warrant or stock option agreements.
Liquidity
and Capital Resources
As of
March 31, 2010, the Company’s current assets were $49,343 thousand and current
liabilities were $8,654 thousand. Cash and cash equivalents totaled $207
thousand as of March 31, 2010. The Company’s shareholders’ equity at March 31,
2010 was $61,650 thousand. The Company had cash provided by operating activities
for the six months ended March 31, 2010 and 2009 of $7,923 thousand and $3,410
thousand, respectively. The Company had net cash used in investing activities of
$6,850 thousand and $5 thousand for the six months ended March 31, 2010 and
2009, respectively. During the six months ended March 31, 2010, the Company
incurred $6,850 thousand in fees paid to a contractor to begin development work
on a video search software application. The Company had net cash used in
discontinued operations of $763 thousand and $3,171 thousand for the six months
ended March 31, 2010 and 2009, respectively.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that will have a current or future effect on
our financial condition and changes in financial condition during the fiscal
year ending September 30, 2010.
Protection
of Intellectual Property
As of
March 31, 2010, the Company held approximately $15,413 thousand in copyrights
covering programming rights for movies, internet broadcasts, DVDs and television
programming originally created in the PRC. These assets are included within the
Company’s balance sheets as Assets Held for Sale. We cannot guarantee that if a
competitor or anyone else were to commence litigation against us, we would be
able to adequately defend our position and retain ownership and value in the
intellectual property.
Capital
Requirements
In the
past several years, the Company has raised cash by issuing equity securities.
Although management is attempting to raise capital through the sale of the
assets of its discontinued businesses, management may determine that additional
financing is necessary, and the Company may or may not be able to find adequate
sources of financing in the future.
Trends,
Events, and Uncertainties
The
present demand for our products will be dependent on, among other things, market
acceptance of the Company’s concept, the quality of its products, and general
economic conditions which are cyclical in nature. The Company’s business
operations may be adversely affected by increased competition and any slowdown
in the economic expansion currently underway in the PRC.
Dividends
We do not
expect to pay dividends for the foreseeable future. As a result, you
could lose your entire investment in the Company.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements, which have been
prepared in accordance with GAAP. In connection with the preparation of
consolidated financial statements, the Company is required to make assumptions
and estimates about future events, and apply judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and the related disclosures.
The assumptions, estimates and judgments included within these estimates are
based on historical experience, current trends and other factors we believe to
be relevant at the time the consolidated financial statements were prepared. On
a regular basis, the accounting policies, assumptions, estimates and judgments
are reviewed to ensure that the consolidated financial statements are presented
fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from
the assumptions and estimates, and such differences could be
material.
The
preparation of consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions are used for, but are not limited to:
(1) asset impairments and (2) depreciable lives of assets. Future
events and their effects cannot be predicted with certainty, and accordingly,
accounting estimates require the exercise of judgment. The accounting estimates
used in the preparation of the consolidated financial statements will change as
new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. We evaluate and update these
assumptions and estimates on an ongoing basis and may employ outside experts to
assist with these evaluations. Actual results could differ from the estimates
that have been used.
Significant
accounting policies are discussed in Note 1, Summary of Significant Accounting
Policies, to the accompanying consolidated financial statements. We
believe the following accounting policies are the most critical to aid in fully
understanding and evaluating our reported financial results, as they require
management to make difficult, subjective or complex judgments, and to make
estimates about the effect of matters that are inherently
uncertain.
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|
Description
|
|
Judgments
and Uncertainties
|
|
Effect
if Actual Results
Differ
from Assumptions
|
Impairment
of Long Lived Assets
|
|
|
|
|
The
carrying amounts of long-lived assets are reviewed periodically in order
to assess whether the recoverable amounts have declined below the carrying
amounts.
|
|
These
assets are tested for impairment whenever events or changes in
circumstances indicate that their recorded carrying amounts may not be
recoverable. When such a decline has occurred, the carrying amount is
reduced to recoverable amount. The recoverable amount is the greater of
the net selling price and the value in use. It is difficult to
precisely estimate selling price because quoted market prices for the
Company’s assets or cash-generating units are not readily available. In
determining the value in use, expected cash flows generated by the asset
or the cash-generating unit are discounted to their present value, which
requires significant judgment relating to level of sales volume, selling
price and amount of operating costs. The Company uses all readily
available information in determining an amount that is a reasonable
approximation of recoverable amount, including estimates based on
reasonable and supportable assumptions and projections of sales volume,
selling price and amount of operating costs.
|
|
Estimates
contemplated by the Company with regard to the recoverability of carrying
amounts for its long lived assets may prove to be inaccurate, in which
case property, plant and equipment may be understated or overstated. In
the future, if property, plant and equipment are determined to be
overvalued, the Company would be required to recognize such costs in
operating expenses at the time of such determination. Likewise, if
property, plant and equipment are determined to be undervalued, operating
expenses may have been over-reported in previous periods and the Company
would be required to recognize such additional operating income at the
time of sale.
|
ITEM 4 CONTROLS AND
PROCEDURES
Evaluation of Disclosure
Controls and Procedures
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation
with the participation of the Company’s management, the Company’s Chief
Executive Officer and Chief Financial Officer of the effectiveness of the
Company’s disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Exchange Act) as of the six months March 31,
2010, Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that as of
March 31, 2010, our disclosure controls and
procedures were not effective at the reasonable assurance level due to the
material weaknesses described below.
In light
of the material weaknesses described below, we performed additional analysis and
other procedures to ensure our financial statements were prepared in accordance
with generally accepted accounting principles. Accordingly, we believe that the
financial statements included in this report fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented.
A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified three material
weaknesses which have caused management to conclude that, as of March 31, 2010, our disclosure controls and procedures were
not effective, including (i) the number of audit
adjustments recorded for the fiscal year
ended September 30, 2009 and 2008, (ii) a lack of segregation of duties, and
(iii) weaknesses related to document control.
Remediation of Material
Weaknesses
To
remediate the material weaknesses in our disclosure controls and procedures
identified above, we are developing a plan to ensure that all information will
be recorded, processed, summarized and reported accurately, and as of the date
of this report, we have taken the following steps to address the
above-referenced material weaknesses in our internal control over financial
reporting:
|
1.
|
We
will continue to educate our management personnel to comply with the
disclosure requirements of Securities Exchange Act of 1934 and Regulation
S-K; and
|
|
|
|
|
2.
|
We
will increase management oversight of accounting and reporting functions
in the future.
|
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
We may be
involved in litigation, negotiation and settlement matters that may occur in our
day-to-day operations. Management does not believe the implication of this type
of litigation will have a material impact on our consolidated financial
statements.
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, 2009. An investment in our common stock involves various
risks. When considering an investment in our common stock, 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.
However, we wish to emphasize that upon the
Company’s decision to discontinue its entertainment media business segment, the Company was
left with $15,413 thousand of intellectual property, namely copyrights to PRC
entertainment assets. The Company is attempting to sell these assets
and has been successful selling similar assets in the past. However,
the Company can not be certain that it will be able to sell these assets for the
full current carrying value of the assets or that any transaction whereby credit
is offered to potential purchasers of the assets will be free from default
risk.
These may be considered to be additional risks that we have undertaken that
could negatively impact the Company and the shareholders of the Company,
respectively.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March
11, 2010, the Company awarded a contract to a marketing and investor relations
consultant and issued a stock warrant for a total of 125,000 shares of the
Company’s common stock valued at $838 thousand. The agreement is for a term of
one year. The stock warrant is exercisable at a price of $18.00 per share and
expires on March 11, 2014, if unexercised. The Company amortizes the
compensation provided to the consultant over the contract term.
On March
8, 2010, the Company awarded an entity controlled by the Chief Financial Officer
a total of 10,000 shares of the Company’s common stock valued at $125 thousand.
The entity was awarded the shares as a result of the terms of an agreement
entered into on September 18, 2009 between the Company and the entity whereby
upon approval of the Company’s listing application for the NASDAQ Global Market,
the shares would be awarded to the entity. The Company amortized the stock award
as a one-time expense on March 8, 2010.
On March
2, 2010, the Company entered into an acquisition agreement (the “Agreement”)
with CoCloud Infoserve Limited, a Chinese company (“CIL”). Pursuant
to the terms of the Agreement, the Company acquired all of the website domains
and related assets, used by CIL to operate various online shopping websites,
www.gzxiti.com, www.gzxing.com.cn, www.gzbuyun.com.cn, www.gzjinxiu.com,
www.gznantian.com, and www.gzxhaxi.com, in exchange for 480,000 shares of the
Company’s common stock, valued at $5,760 thousand.
On
February 10, 2010, the Company awarded a stock option for a total of 23,200
shares of common stock to an independent board member valued at $287 thousand.
The stock option will be earned over one year, is exercisable at a price of
$16.05 per share and will expire on February 10, 2020. The Company amortizes the
compensation provided to this independent board member over the one year
term.
On
February 10, 2010, the Company awarded contracts to three vice presidents for a
total of 40,000 shares of the Company’s common stock valued at $642 thousand.
The agreements are for a term of two years. The Company amortizes the
compensation provided to these executives over each contract term.
On
February 8, 2010, the Company awarded a contract to a Vice President for a total
of 15,000 shares of the Company’s common stock valued at $239 thousand. The
agreement is for a term of two years. The Company amortizes the compensation
provided to this Vice President over the contract term.
On
January 4, 2010, the Company awarded contracts to two Agents for a total of
240,000 shares of the Company’s common stock valued at $3,240 thousand. Each
agreement is for a term of two years. The Company amortizes the compensation
provided to these Agents over each contract term.
On
November 18, 2009, the Company awarded a total of 23,200 shares of common stock
to two of its independent board members valued at $339 thousand. The stock
awards will be earned over one year. The Company amortizes the compensation
provided to each independent board member over each contract term.
On
November 9, 2009, the Company awarded contracts to two consultants for a total
of 96,000 shares of the Company’s common stock valued at $1,164 thousand. The
agreements are for a term of two years. The Company amortizes the compensation
provided to each consultant over each contract term.
On
November 9, 2009, the Company awarded a contract to a marketing and investor
relations consultant for a total of 30,000 shares of the Company’s common stock
valued at $364 thousand. The agreement is for a term of two years. The Company
amortizes the compensation provided to this consultant over the contract
term.
On
November 6, 2009, the Company entered into a Share Exchange Agreement with
certain shareholders of its subsidiary, Subaye.com, Inc. Pursuant to the terms
of the Share Exchange Agreement, the Company issued 3,408,852 shares of its
common stock with a market value of $43,460 thousand, in exchange for all
outstanding shares of common stock of Subaye.com, Inc. the Company did not
already own. As a result of the Share Exchange Agreement, Subaye.com, Inc., and
each of the wholly-owned subsidiaries of Subaye.com, Inc., effectively became a
wholly-owned subsidiaries of the Company. The transaction was accounted for as a
change in the ownership interests of the Company with an entity under common
control, in accordance with ASC 810-10-65. As a result, the value of the
3,408,852 shares issued to consummate the Share Exchange Agreement was recorded
by the Company as an increase to stockholders’ equity of $10,652 thousand, which
represented the historical cost basis of the balance of the net assets acquired
through the Share Exchange Agreement, which included significant assets as well
as liabilities owed to the Company.
On
October 23, 2009, the Company effectuated a reverse stock split on a 100 to 1
(100:1) basis.
On
October 11, 2009, the Company awarded a contract to its Chief Financial Officer
for a total of 22,500 shares of the Company’s common stock valued at $259
thousand. The agreement is for a term of three years. The Company amortizes the
compensation provided to the Chief Financial Officer over the contract
term.
On
October 2, 2009, the Company awarded contracts to two Agents for a total of
320,000 shares of the Company’s common stock valued at $2,560 thousand. Each
agreement is for a term of three years. The Company amortizes the compensation
provided to these Agents over each contract term.
On
October 2, 2009, the Company awarded a contract to a Vice President for a total
of 7,500 shares of the Company’s common stock valued at $60 thousand. The
agreement is for a term of two years. The Company amortizes the compensation
provided to this Vice President over the contract term.
The foregoing shares were issued pursuant to exemption
from registration under Section 4(2) of the Securities Act of 1933.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS
(a) Exhibits
31.1 |
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Rule
13a-14(a)/15d-14(a) Certification (CEO) ++ |
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31.2 |
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Rule
13a-14(a)/15d-14(a) Certification (CFO) ++ |
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32.1 |
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Section 1350
Certification (CEO) ++ |
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32.2 |
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Section 1350
Certification (CFO) ++ |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
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SUBAYE,
INC.
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By:
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/s/
Zhiguang Cai
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Zhiguang
Cai
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Chief
Executive Officer and President
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(Principal
Executive Officer)
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Date:
May 17, 2010
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By:
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/s/
James T. Crane
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James
T. Crane
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Chief
Financial Officer
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(Principal
Financial and Accounting Officer)
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