ITEM 1. DESCRIPTION OF BUSINESS
Our Business
We conduct business in North America under the name of Northport Network Systems, Inc. We own a Chinese company, Dalian Beigang Information Industry Development Company Limited (“Dalian Beigang”), that operates two separate businesses- (1) the Company has developed a digital photo processing kiosk technology, which operates under the trade name “Colorstar”, and which business is now ready to be fully commercialized in China. The technology has been developed on a “platform” basis and this initial application is presented in a modular kiosk format. This application is presented as a stand-alone, digital photo processing kiosk, allowing users to select and print standard size photos for a fee. Other applications are currently being developed.; and (2) Dalian Beigang owns a 51% equity interest in Shenyang Ling Xiao Aviation Service Company Limited, (“Ling Xiao”), which operates online and call center travel booking operations in the Chinese cities of Dalian and Shenyang and which will use a terminal version of the Colorstar platform in their travel booking locations. During the year, we discontinued operations of a third business, our Tenet, tax filing software division as a result of changes to the China National Tax Bureau filing access procedures.
In addition, during the year we commenced development of an e-commerce website known as UrMart.net which we intend to launch in 2010 and generate revenues from sales made through the site. The website UrMart.net was at its trial stage at the end of 2009, and the revenue derived therefrom was insignificant and recorded on receipt of subscription fees from members. UrMart is an online trading platform designed for registered shopping guide members and is also an online shopping platform for the general buying public. Shopping guide members can make decisions such as analyzing and evaluating merchants’ product information and price strategies, which are released by merchants on our platform. General shopping guide members can operate their own business by using our no-cost and zero-risk platform located at www.urmart.net..
The Company maintains its primary office in North America at #4200, 601 Union Street, Seattle, Washington, 98101. The telephone numbers used at the location are 206-508-3689, 206-652-3451 and the facsimile number is 206-652-3205.
The Company’s Dalian Colorstar business operates from an office facility located at Suite #512, A. No. 1 Huoju Road Qixianlinq Industrial Base - High-Tech Zone in Dalian, China.
The Ling Xiao business in Dalian operates from leased office space in the central area of Dalian at Rooms 2704, 2705, 2706, and 1101 in the Yue Xiu Building, No.82 Xin Kai Road, Xi Gang District, Dalian, China. Ling Xiao in Shenyang operates from office and dormitory facilities located at No. 109- 6-1 Nanjing North Street, Peace District, Shenyang, China.
Corporate History
We were originally incorporated in Colorado as dotcom.netmgmt.com Inc. on July 25, 2000. The authorized number of common shares was set at 25,000,000 at a par value of $0.001 with no preferred shares authorized.
The original planned business was an Internet website designed to assist small business owners. From formation until 2004, we engaged in no significant operations other than organizational activities. We received no revenues during this period.
On April 28, 2004, we held a special shareholder’s meeting at which our authorized capital was increased from 25,000,000 common shares, $0.001 par value to 100,000,000 common shares, $0.001 par value. At the same meeting the two original directors and officers resigned and Zhao Yan, Zhong Bo Jia and James Wang were elected as new directors. Zhao Yan was appointed president and James Wang appointed as secretary/treasurer. At the same meeting the issued common shares of 6,250,000 were split on a four to one basis resulting in a new total of 25,000,000 issued common shares and retained the same par value of $.001. At the same meeting our name was changed from dotcom-netmgmt.com Inc to Northport Capital Inc.
We entered into an agreement dated June 23, 2005, to acquire 100% of Dalian Beigang, an existing Chinese tax software and data processing business. The June 23, 2005 agreement required Company shareholder approval as well as PRC government approval by way of the issuance of a business license for the revised corporate structure, which would be a Wholly Owned Foreign Enterprise (“WOFE”). Pursuant to Chinese laws, within one year after approval of a business license for a WOFE by the Chinese government, the Purchaser must pay the full purchase price to the Sellers.
The Chinese government approved the business license for the WOFE on May 17, 2006, at which time the acquisition closed. A total of 1,500,000 treasury shares of the Company were issued as the purchase price for the acquisition. Subsequently on January 10, 2008, 1,000,000 restricted, common shares were authorized to be issued to Xiao Jun, an employee of the Company and the original developer of the Company’s Colorstar digital photo technology, as an employment incentive. We registered certain of our shares by way of a Form SB2 filing which was declared effective by the Securities and Exchange Commission (the “SEC”) on July 13, 2007. Our common shares began trading on the OTCBB on January 16, 2008 under the symbol NPCA.
On October 9, 2008 at our annual shareholders meeting held in Dalian, China, our shareholders approved the election of our existing three directors and also approved:
-a plan of merger for the reincorporation of the Company from the State of Colorado to the State of Washington and the change of the name of the Company to Northport Network Systems, Inc.;
- the authorization of 100,000,000 shares of preferred stock with a par value of $.001 to be adopted in the Articles of Incorporation, governed by the Washington Business Corporation Act in connection with the reincorporation merger;
- the requirement that not less than 25% of all the votes entitled to be cast on an issue will have the right to call a special meeting of the shareholders by submitting a written demand to the Company;
-the Company’s proposed 2008 Stock Option Plan authorizing the amount of 2,750,000 shares of common stock; and
-ratified the appointment of Jimmy C.H. Cheung & Co as the Company’s independent registered public accountants for the fiscal year ending December 31, 2008.
Our original trading symbol was revised to NNWS upon approval of our corporate name change in Washington State to Northport Network Systems, Inc. in November 2008.
Our authorized capital stock now consists of 100,000,000 shares of common stock, $0.001 par value per share, of which 34,200,012 shares have been issued and outstanding, fully paid and non-assessable as of December 31, 2009. We also have 100,000,000 preferred shares authorized at a par value of $.001 of which none are currently issued.There are no outstanding options, warrants or calls pursuant to which any person has the right to purchase any of our authorized and unissued common or other securities.
Throughout this Form 10K report, we have used an exchange rate of $1.00 US = 6.84 Rmb (Chinese yuan) for all conversions except those taken directly from our audited financial statements which may vary marginally from this rate. The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, and significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting.
Dalian Beigang is duly organized, validly existing and in good standing under the laws of the People’s Republic of China. The original business enterprise was incorporated in the PRC on June 20, 1997. The original business license issued to Dalian Beigang ended on June 19, 2007 and has been renewed until June 8, 2026.
In accordance with the Chinese Articles of Association, the registered capital of Dalian Beigang at the date of incorporation of June 20, 1997, was $144,928 (RMB 1,200,000) which was fully paid on June 19, 1997, in cash by the stockholders. On October 24, 2007, the registered capital of Dalian Beigang was increased from $144,928 (Rmb1.2 million) to $30,144,928 (Rmb220 million) to allow for new investment of foreign capital either in the form of equity or debt. According to the amended Articles of Association, and as at December 31, 2007, Dalian Beigang was required to fulfill a total registered capital contribution of $30 million of which $10 million was payable on or before April 16, 2008 subject to extension allowances. The remaining balance is payable on or before January 16, 2010. The Company was unable to fully pay the increased capital portion during 2008 and as a result, the registered capital of Dalian Beigang remains the actual capital contribution to date of $144,928.
On October 9, 2008, Dalian Beigang entered into a definitive agreement with the stockholders of Ling Xiao to acquire a 51% equity interest of Ling Xiao for 2,700,000 shares of treasury stock of the Company at a fair value of $3,240,000 based on the closing price of the Company’s common stock as quoted on the Over-the-Counter Bulletin Board as of the date of the closing of the transaction. The stockholders of Ling Xiao did not have any prior affiliation with the Company. According to the terms of the definitive agreement, the consideration amount is determined on the basis of a formula of 51% of 5 times the planned Ling Xiao net earnings for the year ended March 31, 2009. After completion of the review of the Ling Xiao’s operation and the audited financial statements for the year ended March 31, 2009, additional treasury shares of the Company were to be issued if the net earnings is in excess of the net earning as projected in the formula estimate of 2,700,000 shares. Upon review, no such additional shares were issued.
On August 11, 2009, the Company entered into a Subscription Agreement with a subscriber relating to the issuance of 3,000,000 shares of restricted common stock of the Company to the subscriber in two tranches at a price of $0.75 per share for a total purchase price of $2,250,000.
On August 28, 2009, the Company issued 1,500,000 shares of common stock valued at $1,125,000 to the subscriber who has paid $900,359 in cash to the Company. The remaining balance of $224,641 was recorded as stock subscription receivables as of December 31, 2009. The subscriber was subsequently appointed director of the Company on October 27, 2009.
Principal Products
(A.) Tenet tax filing software- now discontinued
The State Administration of Taxation governs the national tax bureaus in different Chinese provincial capital cities, which are responsible for the national tax bureau offices as well as local tax bureaus in different cities in their province. With the upgrade of these offices complete, the shift now moves to getting its users, the commercial taxpayers, filing and paying taxes online with software systems that are compatible with the Federal system. National tax bureaus handle all aspects of federal taxes as compared to local taxes payable to, and collected by, local city tax bureaus. The business of the National tax bureau covers (product) transaction value added taxes, business income tax, with the tax collected to be handed to the national treasury directly, constituting national fiscal income.
The business of the local tax bureaus covers enterprise business and personal income tax, with the tax collected handed in part to the national treasury and the rest kept as local fiscal income.
Management of Dalian Beigang was advised that their Tenet tax reporting and payment system was China’s first online federal tax reporting/tax payment system. The “Tenet” system is an intranet based online tax filing and payment transfer system, which has been approved by the National Tax Bureau. Only those business users having an agreement for Tenet use with Dalian Beigang can access that system. Revenue flows from subscription agreements with commercial taxpayers.
Following the successful beta test in late 2001 with 2000 of Dalian’s commercial taxpayers, the Tenet system was officially launched and began the sign up of Dalian’s commercial federal taxpayers. The local city of Dalian newspaper, the Dalian Daily on Friday, July 13, 2001, contained an article written by reporter Zhi Bin Dong as follows: “Yesterday, the Dalian National Tax Bureau announced that, starting from August 1, 2001, business tax payers of Dalian will use the new intranet system to file and to pay their federal taxes. The new system is designed and developed by Dalian Beigang Information Industry and Development Co., Ltd. .” See, Exhibit 99.5 in our SB-2 filing.
As of December 31, 2008, there were approximately 8243 subscribers in Dalian and an additional 886 subscribers in Yingkou, Liaoning province, which business was operated under a cooperation agreement between Dalian Beigang and Lenovo Corporation. Management opted to launch its first city operation of Tenet outside of Dalian in Yingkou, the nearest large city, and only 200 km from Dalian. The local partner in Yingkou was Yingkou City Beigang Network Information Industry Service Co., Ltd., a wholly owned subsidiary of Lenovo Corporation, a Chinese computer manufacturer and retailer. Lenovo Yingkou is a large computer dealer and service provider in Yingkou maintaining a good relationship with the national tax bureau there.
Initial subscribers pay a fee of 1200 Rmb for the initial year and then decreases on an incremental basis over three years to a base of 600 Rmb per year thereafter.
Although there are security and service problems with many available, competitive systems, most are free and have attracted business users. As a result, the number of users of the Tenet system had continually declined since its initial introduction.
In late 2008, the China State Administration of Taxation installed a systematic black box on its website, designed to guarantee network safety for the system. As a result, Dalian Beigang was thereafter unable to upgrade its TENET tax filing system. We negotiated with representatives of the Federal Administration of Taxation in the Dalian Office on how to deal with the problems that have risen as a result. Because we were unable to update the Tenet system for our subscribers and were unable to bill for services or access- we had no option but to discontinue Tenet operations as of June 2009.
(B.) Graphic Printing Technology-Colorstar
In mid 2005, management of Dalian Beigang was introduced to a digital photo processing technology being developed by a Beijing engineer. The project required funding and the Company’s management approved a decision to invest funds to develop the technology to a level where it could be commercially analyzed. Key aspects of the technology that differentiate it from other kiosk digital photo systems include silver halide print technology instead of thermal print processes, reduced print times and lower cost per processed photo- this allowing for lower price points. A trade name of Colorstar was registered with the China State Administration for Industry and Commerce in China as well as a Chinese patent applied for on the technology. Total expenditures on research and development undertaken by Dalian Beigang on this project were charged to general and administrative expenses for the years ended December 31, 2008 and 2009, and such expenditures amounted to $162,894 and $0, respectively.
The project has involved the development of a digital “platform” with an initial application to be a user-operated, stand alone, digital photo developing and printing network operating system controlled through a proprietary network server with terminals and self serve digital photo developing printers- with user interfaces contained in a kiosk format. The stand-alone devices provide users with print images equivalent to regular photographic pictures.
Over the past two years various test units were developed and installed in commercial locations in Dalian so as to generate consumer response and also to measure unit operating characteristics. Twelve units of the latest test model have been installed in various locations in and around Dalian since June 2007, including malls, hotels, telephone retail shops, etc and four units were in operation as at December 31, 2009.
Dalian Beigang entered into an agreement on March 1, 2008 to supply a total of 542 Colorstar units to various Internet cafe locations and also retail telephone store locations in Liaoning Province in China. The agreement partner was China Netcom, a significant Chinese landline and broadband supplier with annual revenues in excess of $1.0 billion US. The agreement called for monthly service fees to be paid to China Netcom and revenues to be divided on an 85-15 percent basis between Dalian Beigang and China Netcom. Only a total of only 24 units were produced due to production and design issues.
Shortly after the original China Netcom contract was signed, the China Netcom Network system was closed and did not accept any new business from May 1st to October 30, 2008 for the sake of ensuring the safety of the Beijing Olympic Games. The network system was opened again in November 2008, but China Netcom and its planned merger partner China Unicom commenced a re-structure program, including a name change to China Unicom. The agreement terminated on February 1, 2009 and was not renewed.
An enhanced “modular” version of the kiosk design is near completion but commercial production awaits availability of funding to cover manufacturing costs.
The design and manufacture of the network and the self-help digital photo-developing printer are the most important components of the project, and various test machines were developed. The original model, although capable of operation, had no promotion value; a second model was unusable because of low output speed and long waiting times; and a third model machine realized all design functions but because of large volume requirements, high cost and questionable intellectual property rights, it was not suitable for commercial development. The fourth design also proved unsuccessful due to manufacturing costs. The fifth version, based upon a modular design, is near completion.
The Digital Photo Processing Market in Northeast China
Dalian Beigang retained the services of independent research companies in northeast China in order to assist management in determining the present status of the northeast China digital printing market as well as determination of possible market acceptance and development of the Colorstar project.
The research was undertaken in Beijing, Shenyang and Dalian and included sampling from consumers (local citizens, tourists and professionals), imaging shop proprietors (color film processing shops and photo-printing collection agencies), as well as convenience stores, lottery shops and advertising agencies and companies.
Management determined that the Chinese market is in a stage of rapid increase of sales of digital cameras. Since the end of 2005, increases of 30% to 50% in demand for digital printing have been shown in larger cities - in fact, higher than for traditional film printing. In addition, there are now a total of over 550 million cellular telephones in use in China, of which 70% of these mobile phones come with a camera function. Colorstar units allow for print operations from Cellular telephones.
Traditional digital color printing shops in the Chinese domestic market utilize equipment technology of one of four brands including Kodak, Fuji, Konica and Lucky. Kiosk models in use in China include those developed by Kodak and Sony, both models that have been introduced in the North American marketplace as well.
Fuji digital printing machine technology has also been in a leading position in the China industry, enjoying the capability for producing stand alone devices and establishing network platforms, as well as providing customer financing. Doli, a China domestic manufacturer of production-type digital printing machines, has good quality equipment but has little strength in providing additional functions and network operating management platforms.
Analysis of data collected showed that both the operational mode and technological advantages of the Colorstar project were recognized by the China market. However, the project needed to improve its technological level, perfect its equipment quality, and also establish and implement detailed and effective marketing plans, in order for it to be commercially viable. Dalian Beigang has now completed these.
Colorstar Operations
In China, management has entered into negotiations with a number of organizations that operate retail facilities. Agreement relationships are planned to entail Dalian Beigang manufacturing and installing kiosk units in partner locations and revenues split on an 85/15 percentage basis between the partners. A typical agreement is expected to be initially two years in length and renewable if agreed to by both parties. All Colorstar units will remain in the ownership of the Company. All unit operations, repairs, maintenance, cash handling and accounting functions are handled by Dalian Beigang. The kiosk design currently produces only a 4 inch by 6 inch size photo.
Based on results of test units installed in various retail locations in Dalian city, average usage has been 35% and each user averages 20 photos per session. Average retail purchase pricing has been set at $.085 per photo. The current design has an initial processing period for each user order followed by a much faster production time for the individual photos. Each 20 photo order takes approximately 8 minutes to complete after adding times for selection, payment and production.
To date, units have had a Company staff person in attendance at all times to ensure customer familiarity with Colorstar operational features and to explain questions or issues that users may have. The plan is for these attendant functions to be handled by the retail partner staff after an initial operating period, likely 90 days. Since each unit is always connected to the Colorstar central server, management will always be able to identify maintenance, usage numbers or repair issues that arise for each individual unit.
Revenue from the sale of color photo printing services is derived from its own and affiliate operations, which consist of franchise agency and licensing programs.
The franchise agent acts as the Company's agent in a similar manner as a branch manager in the Company-owned locations. In the franchise arrangement, the Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also obligated for the employee payroll, electricity and related overheads regardless of customer acceptance of the services.
The Company also has a licensing program whereby the licensee had the direct contractual relationships with the customers, held title to the related customer receivables and was the legal employer of the employees. Accordingly, net sales and costs of services generated by the license operation are included in the Company's consolidated financial statements. Fees are paid to the Company based on a fixed price for each of the photo printed and such license fees are recorded by the Company as revenue.
For sales from its own operation, revenue is recognized after the photos are printed and delivered to the customers and cash has been collected.
Currently we have two Colorstar units located in Vancouver, Canada where they are being analyzed to determine any and all issues that could affect performance and regulatory compliance if the units were to be introduced into the North American marketplace. We are currently awaiting the adaptation of these units to the new modular design prior to completing a full analysis. We expect that such adaptations and analysis will be completed by the end of 2010, after which the North American Colorstar business plan is expected to be finalized.
Sales and Marketing
In China, marketing of Colorstar to date has involved Company personnel making direct sales calls to potential joint venture partners such as China Netcom and others. In addition, there are a number of potential franchise-type relationships being discussed with individuals in Dalian city itself. These franchise-type arrangements await completion of formal documentation and availability of manufacturing financing. A total of 4 test units have been installed at locations under an informal franchise arrangement. Agreements with other potential partners await various approvals.
(C.) Ling Xiao Aviation Booking Operations
Ling Xiao was registered with the Shenyang Industrial and Commercial Administration on September 26, 2007 and its business term is approved until September 2017. Ling Xiao is principally engaged in the air-ticketing agency business. In addition to its operation in the city of Shenyang, Liaoning Province in the PRC, Ling Xiao assumed all of the business operations of Dalian Ling Xiao Aviation Service Co., Ltd (“Dalian Ling Xiao”) on October 10, 2008. Dalian Ling Xiao is owned by the stockholders of Ling Xiao and is principally engaged in an air-ticketing agency business in the City of Dalian.
Since we provide travel-related services through our website, we are subject to all of the PRC laws and regulations relating to the telecommunications industry and Internet, and regulated by various government authorities, including the Ministry of Information Industry and the State General Administration of Industry and Commerce.
The travel industry in China is subject to the supervision of the China National Tourism Administration and local tourism administrations. The principal regulatory regulations governing travel agencies in China include:
- Administration of Travel Agencies Regulations (1996), as amended;
-Telecommunications Regulations (2000);
-The Administrative Measures for Telecommunications Business Operating Licenses (2001)
Under these regulations, a travel agency must obtain a license from the China National Tourism Administration to conduct cross-border travel business, and a license from the provincial-level tourism administration to conduct domestic travel agency business.
In China, the business of air ticket bookings being conducted online still remains in its early stages. Currently, it is only promoted in the larger cities and not in medium and smaller cities. Published statistics show that in 2008, there were some 192 million passenger flights that were booked online in China, among them 8.22 million in Dalian and 6.80 million in Shenyang. The quantity of booking air ticket online in Liaoning Province accounted
for 7.82% of total China bookings. To start up an online booking service in a particular city, it is necessary to obtain a business license and a franchise license (or special permits) issued by the China Air Transportation Association. Typically the business license is valid for 10 years and the franchise license is valid for 1 year, after which the enterprise must pass a rigid evaluation and examination. If successful, a new license will be issued.
Ling Xiao is a leading retailer of air tickets in northeast China. We aggregate information on flights and enable our customers to make informed and cost-effective flight bookings. We also sell charter flight seating. We target our services primarily at business and individual travelers in our area of focus in northeast China. We act as agent in substantially all of our transactions . We derive our air-ticketing revenues mainly through commissions. The business of Ling Xiao is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and exposure to risks associated with online commerce security.
No individual customer contributed to more than 10% of total revenues for the years ended December 31, 2009 and 2008. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2009 and 2008.
The business of Ling Xiao is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and exposure to risks associated with online commerce security. Agency commission from an airline accounted for 79% and 84 % of the Company’s total revenues for the year ended December 31, 2009 and 2008 respectively. As of December 31, 2009 and 2008, accounts receivable from this airline were $41,059 and $272,678 respectively.
We believe that we are the largest air ticket booking facility in Dalian in terms of the number of air tickets booked and sold and are rapidly expanding our business in Shenyang. Once established there, we intend to expand elsewhere in other northeast China urban areas. Our airline ticket suppliers include all major Chinese airlines and many international airlines that operate flights originating from China. We are among the few airline ticket booking entities in China that maintain a centralized reservation system and ticket fulfillment infrastructure. Our customers can make flight reservations on their chosen routes and arrange ticket payment and delivery through us directly or third-party agencies located in northeast China.
We offer our services to customers through an advanced transaction and service platform consisting of our centralized toll-free, 24 hour customer service center and website. In 2009, transactions effected through our customer service center accounted for over 90% of our transaction volume.
We sell air tickets for all major domestic Chinese airlines, including Air China, China Eastern Airlines, China Southern Airlines, Hainan Airlines and Shanghai Airlines and a number of international airlines operating flights that originate from cities in China.
In air-ticketing transactions, a customer generally pays the ticket delivery agent upon delivery of the ticket. The customer has the option of picking up a ticket at a Ling Xiao ticketing office or obtaining an electronic ticket. In 2008, China has mandated, full scale use of electronic ticketing, or E-ticketing, systems for all air travel. We believe that E-ticketing allows us to execute air-ticketing transactions more efficiently. E-ticketing also makes our business expansion into other northeastern China cities easier and more efficient. The airline industry, including airline ticket pricing, is regulated. Therefore, we have no discretion in offering discounts on the air tickets we sell. Our commission rate per ticket usually increases as the total number of tickets we sell for an airline increases.
Other products and services accounted for a small portion of our total revenue in 2009.
Transaction and Service Platform
Our customers can reach us for their travel-related needs through either our toll-free customer service center or our website.
Our centralized toll-free customer service center is located in Dalian, China and is operated 24 hours a day and seven days a week. Customers can call our toll free number to consult with customer service representatives, receive flight information and make travel bookings. As of December 31, 2009, we employed 99 customer service representatives, all of whom participated in formal training programs before commencing work.
We have a Chinese-language website located at www.lingxiao.net.
Environmental Impact
None of the Company's activities utilize any hazardous materials or results in any discharge of pollutants into the environment. The Company believes it complies fully with all environmental laws and regulations.
Intellectual Property
Our ability to compete effectively will depend on our success in protecting our proprietary technology, both in China, in the United States and elsewhere. We have filed for patent protection in China and certain other countries to cover proprietary design aspects of our Colorstar products.
These patent applications are under review by the Chinese Patent Office and, to date, we have not been issued any patent approvals in China or elsewhere. No assurance can be given that any patents relating to our existing technology will be issued from any patent offices; that we will receive any patent approvals in the future based on our continued development of our technology; or that any patent protection, once approved, will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
In addition to the patent filing, we have registered the trade names “Colorstar” and “Tenet” in China. The name Colorstar has also been registered in Canada.
Employees and Staffing
We had 143 full-time employees as of December 31, 2009. Our employees are not covered by any collective bargaining agreement and we have never experienced a work stoppage. We believe that our relations with our employees are good. The Company currently operates with a staff of 43 in Dalian. The Ling Xiao subsidiary operates with 75 staff in Dalian and 24 in Shenyang. One director operates from North American offices located in Seattle, Washington.
All of our management personnel have university degrees. Customer support personnel require a junior college or technical college degree. Software engineers require a minimum of a computer science degree.
The 143 current staff members are employed as follows:
ITEM 1A.
ITEM 1A. RISK FACTORS
Prospective investors should carefully consider the risks described below, in conjunction with other information and our consolidated financial statements and related notes included elsewhere in this Form 10K.. You should pay particular attention to the fact that we conduct our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in other countries that you may be familiar with. Our business, financial condition and results of operations could be affected materially and adversely by any or all of these risks. Where financial results for our China operations are commented upon in US dollars, an exchange rate of $1.00 = 6.84 Renminbi (Yuan) has been used, except where numbers are directly taken from our audited financial statements.
Risk Factors Relating to the Company and its Businesses
We have yet to attain profitable operations and our accountants believe there is substantial doubt about our ability to continue as a going concern.
As reflected in the accompanying financial statements, the Company has an accumulated deficit of $5,532,209 at December 31, 2009. The Company’s current liabilities also exceed its current assets by $260,834 and the Company used cash in operations during the year ended December 31, 2009 of $633,960. These factors raise substantial doubt about our ability to continue as a going concern. In view of the matters described above, continued operation of the Company is dependent upon the Company’s ability to raise additional capital, reduce its operating expenses, obtain financing and succeed in its future operations. Management is taking steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue operations.
As of December 31, 2009 and 2008, the Company owed $251,312 and $173,432 respectively to a stockholder as unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand. Total imputed interest expenses recorded as additional paid-in capital amounted to $11,125 and $3,659 for the years ended December 31, 2009 and 2008 respectively.
As of December 31, 2009, a related company owed $99,209 to the Company which arises during the normal course of business and is under the same terms as other customers.
Revenues for the year ended December 31, 2009, were increased to $755,678 from $485,752 during the previous fiscal year ended December 31, 2008.
The Company is actively pursuing additional equity funding, bank financing for its planned Colorstar operations, a potential e-mall website, Ling Xiao expansion, potential merger or acquisition candidates and strategic partners; any of which would enhance stockholders’ investment.
As yet, the Company has not finalized arrangements for such additional financing and there is no guarantee that such financing can be raised or that such financing will be available at terms acceptable to the Company.
Limitations on liability and indemnification of directors and officers may result in expenditures by the Company.
The Company’s bylaws provide that it must indemnify its directors and officers to the fullest extent permitted under Washington law against all liabilities incurred by reason of the fact that the person is or was a director or officer of the Company or a fiduciary of an employee benefit plan, or is or was serving at the request of the Company as a director or officer, or fiduciary of an employee benefit plan, of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.
The effect of these provisions is potentially to indemnify the Company’s directors and officers from all costs and expenses of liability incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their affiliation with the Company. Pursuant to Washington law, a corporation may indemnify a director, provided that such indemnity shall not apply on account of: (a) acts or omissions of the director finally adjudged to be intentional misconduct or a knowing violation of law; (b) unlawful distributions;
or (c) any transaction with respect to which it was finally adjudged that such director personally received a benefit in money, property, or services to which the director was not legally entitled.
The Company’s bylaws also permit it to maintain insurance on behalf of its officers, directors, employees and agents against any liability asserted against and incurred by that person whether or not the Company has the power to indemnify such person against liability for any of those acts.
Due to the indemnification and limitation of liability of our directors and officers, any limitation on the liability of any director, or indemnification of directors, officer, or employees, could result in substantial expenditures being made by the Company in covering any liability of such persons or in indemnifying them.
We have sustained losses in the past and may experience earnings declines or net losses in the future.
We sustained net losses in the periods prior to, and including, 2009. We cannot assure you that we can attain profitability or avoid net losses in the future. We expect that our operating expenses will increase and the degree of increase in these expenses will be largely based on anticipated organizational growth and revenue trends. As a result, any decrease or delay in generating additional sales volume and revenue could result in substantial operating losses.
We may be subject to litigation for information provided on our websites, which may be time-consuming to defend.
Our websites contain information about the various divisions of our business operations, both in English and Chinese print. It is possible that if any information, accessible on our websites, contains errors or false or misleading information, third parties could take action against us for losses incurred in connection with the use of such information. Any such claims, with or without merit, could be time consuming and costly to defend, result in litigation and divert management’s attention and resources.
We could be liable for breaches of security on our websites and fraudulent transactions by users of our websites.
We conduct a portion of our transactions through our websites. In such transactions, secured transmission of confidential information (such as customers’ air ticket reservation information, credit card information, personal information and billing addresses) over public networks is essential to maintain consumer and supplier confidence. Our current security measures may not be adequate. Security breaches could expose us to litigation and possible liability for failing to secure confidential customer or supplier information and could harm our reputation and ability to attract customers.
If we are unable to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected.
If our business continues to expand, we will need to hire additional employees, including management personnel to maintain and expand our networks, information technology and engineering personnel to maintain and expand our websites, customer service centers and systems, and customer service representatives to serve an increasing number of customers for Colorstar, Ling Xiao and other planned operations in China and in North America. If we are unable to identify, attract, hire, train and retain sufficient employees in these areas, users of our websites and Colorstar equipment may have negative experiences and turn to our competitors, which could adversely affect our business and results of operations.
A slow-down of economic growth in China may adversely affect our growth and profitability.
Our business and operations are primarily based in China and almost all of our revenues are derived from our operations in China. Accordingly, our financial results have been, and are expected to continue to be, affected by the growth in the economy in China. Although the economy in China has grown significantly in the past decades, we cannot assure you that growth will continue or that any slow-down will not have a negative effect on our businesses. For our Ling Xiao business, any slow-down of economic growth in China could reduce expenditures for travel, which in turn may adversely affect our operating results and financial condition.
Our limited operating history makes evaluating our business and prospects difficult.
We began our operations in 2006. As a result, we have a limited operating history for you to evaluate our business. It is also difficult to evaluate our prospective business, because we may not have sufficient experience to address the risks frequently encountered by early stage companies using new and unproven business models
and entering new and rapidly evolving markets, including markets for online commerce including air ticket booking. These risks include our potential failure to:
obtain new customers at reasonable cost, retain existing customers, encourage repeat purchases or convert visitors to our websites into customers;
increase awareness of our Colorstar and Ling Xiao brand sand continue to build user loyalty;
adequately and efficiently operate, upgrade and develop our platform systems that we use to develop additional applications for the technology;
maintain adequate control of our expenses;
attract and retain qualified personnel;
respond to technological changes; and
respond to competitive market conditions.
If we are unsuccessful in addressing any of these risks, our business could be materially and adversely affected.
The requirement for additional financing will affect future profitability.
We continue to experience cash shortages from ongoing development of the Colorstar technology. We will require additional cash infusions to finance the expected growth of our Colorstar business, including purchases of inventory and computer equipment. The Company anticipates raising minimum funding of $500,000 over the next 12 months and that such funding would involve the new issuance of stock of at least 1,000,000 shares. Failure to generate such funding will have a direct effect on our expansion plans, cash flows and profitability of China operations and ultimately on our operations.
As at December 31, 2009 the corporate cash resources were such that we had a negative working capital position of $260,834. We estimate that cash flows from ongoing shareholder loans and launch of our planned e-commerce website, UrMart.net during 2010, will be sufficient to allow continuing operations for the next twelve months.
Directors and officers are non-residents of the United States and could be beyond reach in the event of litigation.
Because two of our directors and officers reside outside of the United States, it may be difficult for shareholders to enforce your rights against them or enforce U.S. court judgments against them in the PRC or Canada. Our current operations are conducted in China. In addition, two of our directors and officers are nationals of countries other than the United States. Zhao Yan and Zhong Bo Jia are both citizens and residents of the PRC. James Wang is a citizen of Canada but a resident in Washington State under a US L-1 visa. Dr. Jim Howell Qian is a resident of California.
Each director maintains his or her principal assets in their country of residence. As a result, it may be difficult for you to effect service of process within the United States upon those persons residing outside of the United States. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against us or such persons predicated upon the securities laws of the United States or any state thereof.
We rely on key members of management, the loss of whose services would have a material adverse effect on our success and development.
Our success depends to a certain degree upon certain key members of the management. These individuals are a significant factor in our growth and success. In particular, our success is highly dependent upon the efforts of our President, our Chief Executive Officer, our Vice President, and our directors; the loss of whose services would have a material adverse effect on our success and development.
All of our management team located in China currently have signed employment agreements with us. These individuals are a significant factor in our growth and success. The loss of the service of members of the management could have a material adverse effect on us. None of the executives have key life insurance policies on their lives and the loss of any one of them could have a negative cash effect on our business.
Risks Related to Conducting Business in China
Chinese government policies could have potential negative impacts on our businesses.
Policies of the Chinese government can have significant effects on the economic conditions of China. The Chinese government has confirmed that economic development will follow a model of market economy under socialism. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in China will follow market forces. While we believe that this trend will continue, there can be no assurance that such will be the case. Our interests could be adversely affected through:
Changes in laws, regulations or the interpretation thereof;
Confiscatory taxation;
Restrictions on currency conversion, imports or sources of supplies; or
The expropriation or nationalization of private enterprises.
Although the Chinese government has been pursuing economic reform policies for approximately two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China's political, economic and social life.
As this may specifically relate to our business segments, we face an emerging economy where laws and regulations are continually changing. Increased requirements for system security and integrity could result in the requirement for us to expend additional funds to enhance our systems to meet new regulatory rules.
China tax rules regarding repatriation of profits and payment of dividends could be increased which could affect our ability to generate cash flows from our subsidiary. All such policies could materially affect our future business operations in China.
Our business may be adversely affected by relationships between the United States and any country in which we do business which may impede our ability to operate in the countries in which we are located.
We are a Washington corporation and subject to the laws of the United States. Our principal business is conducted through a wholly-owned subsidiary that operates in China. Our business is directly affected by political and economic conditions in China. Our business may be adversely affected by the diplomatic and political relationship between the U.S. and China. This relationship may adversely influence the Chinese government and public opinion of U.S. corporations conducting business in that country and may affect our ability to obtain or maintain regulatory approvals to operate in China.
Our business may be adversely affected by internal Chinese issues such as boycotts, strikes, protests and government sanctions which may impede our ability to operate our business in China.
Our business in China could be affected by government sanctions, or strikes, boycotts, protests and other actions which could result from political issues between the United States and China. These are issues of which we would have no control over. Should such events occur, we would attempt to distance ourselves as much as possible from local negative actions and could even consider shutting our business down until such time as the negative actions have subsided. To date no such actions have occurred that affected our China business and we anticipate no such actions occurring in Dalian, Shenyang or elsewhere in northeast China, based on our understanding of current events in that region of China.
Chinese laws and regulations could have potential negative impact on us.
The Company and Dalian Beigang are considered foreign persons or foreign funded enterprises under PRC laws and, as a result, we are required to comply with PRC laws and regulations. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In the late 1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters. The overall effect of legislation enacted over the past 20 years has significantly enhanced the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent, are evolving rapidly, and their interpretation and enforcement involves uncertainties. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold and/or maintain licenses and permits such as requisite business licenses. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, the PRC authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatments issued or granted to us by relevant governmental bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We may be subject to sanctions, including fines, and could be required to restructure our operations. As a result of these substantial uncertainties, we cannot assure you that we will not be found in violation of any current or future PRC laws or regulations.
China is still a developing nation and therefore the rules, regulations and practices are not necessarily as transparent as western investors may be used to. China has made significant changes to its legal and accounting rules and has recently allowed international accounting firms to audit domestic Chinese companies.
Management is unaware of any additional current regulations, or any new regulations that are pending introduction, that are currently required by Dalian Beigang in respect to its business operations or its Ling Xiao or planned Colorstar systems. Neither the Company nor Dalian Beigang has ever been found to be in violation of any PRC law or regulation.
Adverse changes in economic and political policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could adversely affect our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Because substantially all of our revenues are currently in the form of RMB, any restrictions on currency exchange may limit our ability to use revenue generated in RMB to fund our business activities outside China or to make dividend payments in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under the Rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of the State Administration of Foreign Exchange of the People’s Republic of China is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries’ capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.
Online payment systems in China are at an early stage of development and may restrict our ability to expand our online commerce service business.
Online payment systems in China are at an early stage of development. Although major Chinese banks are instituting online payment systems, these systems are not as widely available or acceptable to consumers in China as in the United States and other developed countries. In addition, only a limited number of consumers in China have credit cards or debit cards, relative to countries like the United States. The lack of adequate online payment systems may limit the number of online commerce transactions that we can service. If online payment services do not develop, our ability to grow our online commerce business may be limited.
The Internet market has not been proven as an effective commercial medium in China.
The market for Internet products and services in China has only recently begun to develop. The Internet penetration rate in China is lower than those in the United States and other developed countries. Since the Internet is an unproven medium for commerce in China, our future operating results from online services will depend substantially upon the increased use and acceptance of the Internet for distribution of products and services and facilitation of commerce in China.
The Internet may not become a viable commercial marketplace in China for various reasons in the foreseeable future. Issues that could detract from Internet development in China include:
consumer dependence on traditional means of commerce;
inexperience with the Internet as a sales and distribution channel;
inadequate development of the necessary infrastructure to facilitate online commerce;
concerns about security, reliability, cost, ease of deployment, administration and quality of service associated with conducting business over the Internet;
inexperience with credit card usage or with other means of electronic payment; and
limited use of personal computers.
If the Internet is not widely accepted as a medium for online commerce in China, our ability to grow our online business would be impeded.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our wholly-owned subsidiaries incorporated in China. Our subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. In addition, we depend on several affiliated Chinese entities in China to honor their service agreements with us. Almost all of these agreements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit remedies available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
The continued growth of Chinese Internet market depends on the establishment of an adequate telecommunications infrastructure.
In China, almost all access to the Internet is maintained through state-owned telecommunication operations under the administrative control and regulatory supervision of China’s Ministry of Information Industry. In addition, the national networks in China connect to the Internet through government-controlled international gateways. These international gateways are the only channels through which a domestic Chinese user can connect to the international Internet network. We rely on this infrastructure, China Telecom and China Unicom to provide data communications capacity primarily through local telecommunications lines. Although the government has announced plans to develop aggressively the national information infrastructure, we cannot assure you that this infrastructure will be developed. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in China may not support the demands associated with continued growth in Internet usage.
The lack of availability in China of business liability insurance could materially affect our business.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
Restrictions on dividends imposed by the Chinese government could negatively affect our business.
Chinese legal restrictions could affect the Company’s ability to distribute dividends. Chinese legal restrictions permit payment of dividends only out of its net income, if any, determined in accordance with Chinese accounting standards and regulations.
Under current Chinese regulations, the payment of dividends, trade and service-related foreign transactions to a foreign investor or a foreign-invested enterprise is treated as a “current account” payment for which the approval of the State Administration of Foreign Exchange is not required. However, in order to distribute dividends the Company must file documentation to a designated foreign exchange bank that certifies that all requirements have been met, such as payment of taxes, board of directors’ approval and a capital verification report issued by an accounting firm. A return of capital, which includes foreign direct investment, upon the dissolution of a foreign-invested enterprise, is treated as a “capital account” payment and requires the State Administration of Foreign Exchange approval in addition to the filing of documentation. Restrictions on dividends flow through to the parent company could adversely affect cash flows and the US company’s ability to honor its financial obligations including providing dividends to our shareholders. In this document, we have disclosed all figures in US dollars other than the disclosures on annual fees paid by Tenet subscribers.
Potential restrictions on dividends could adversely affect our cash flow.
Dalian Beigang may not be able to obtain sufficient foreign exchange to satisfy its foreign exchange requirements or pay dividends to us. A substantial portion of our revenues and operating expenses are denominated in Renminbi while a portion of our capital expenditures is denominated in US dollars. Accordingly, failure by Dalian Beigang to generate sufficient foreign exchange to pay dividends to us could adversely affect our cash flows and adequately address our ongoing working capital needs.
Restrictions on the ability of our subsidiary to pay dividends.
Failure of our Chinese subsidiary to generate profits will restrict us from paying dividends to our US parent corporation. Restrictions on dividends flow through to the parent company could adversely affect cash flows and the US company’s ability to honor its financial obligations including providing dividends to our shareholders. Although we currently do not anticipate such an issue, new China government policies could be implemented or be change such that we are restricted from paying dividends from our China subsidiary to our US parent corporation. This again would restrict our ability to meet our corporate cash flow needs and restrict our abilities to pay dividends to our shareholders.
Currency conversion could have a negative impact on our business.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The Company’s major operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between United States dollars and the Chinese Renminbi. Historically, the PRC government has benchmarked the Renminbi exchange ratio against the US dollar, thereby mitigating the associated foreign currency exchange rate fluctuation risk. The Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the PRC government continues to benchmark the Renminbi against the US dollar.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The PRC government regulates the air-ticketing, travel agency, advertising and Internet industries. If we fail to obtain or maintain all pertinent permits and approvals or if the PRC government imposes more restrictions on these industries, our business may be adversely affected.
The PRC government regulates the air-ticketing, travel agency, advertising and Internet industries. We are required to obtain applicable permits or approvals from different regulatory authorities to conduct our business, including separate licenses for Internet content provision, air-ticketing, advertising and travel agency activities. If we fail to obtain or maintain any of the required permits or approvals, we may be subject to various penalties, such as fines or suspension of operations in these regulated businesses, which could severely disrupt our business operations. As a result, our financial condition and results of operations may be adversely affected.
In particular, the Civil Aviation Administration of China, or CAAC, regulates pricing of air tickets as well as commissions payable to air- ticketing agencies. If restrictive policies are adopted by CAAC or any of its regional branches, our air-ticketing revenues may be adversely affected.
Risk Factors Relating to the Company’s Colorstar Industry
The requirement for additional financing will affect future profitability.
Currently the Company uses its existing cash resources to finance construction of Colorstar test units. We anticipate that our current sales and marketing efforts will result in agreements being entered into under which we will be required to provide Colorstar units for partner retail locations, Since we intend to maintain ownership of all Colorstar units at all times, we must fully finance all manufacturing, assembly and operating costs. Our current banking arrangements will not cover such needs, however we are in discussions with a number of other Chinese banking entities regarding a 100% inventory financing program for orders in hand. We believe that such bank financing will materialize. In the event that it does not, then we will be forced to implement a program whereby we sell the Colorstar units for a fee and then charge an ongoing monthly fee to operate such units on behalf of the purchasers. Alternatively we would scale back proposed Colorstar operations which would have a negative effect on planned operations and on the financial health of the Company.
Our systems may experience operating difficulties as the number of Colorstar kiosks increases.
To date we have had a limited number of kiosk units installed in the Dalian, China area which have been subject to constant and ongoing consumer usage for over eighteen months. The current model unit has achieved the performance levels which we have set and we have concluded that the unit has reached a commercial stage. However, once we start producing units in volume and we start subjecting our server units to increasing unit and transaction volumes, we could expect operational issues may develop that could seriously impact our financial performance and ability to enter into further agreements or franchise-type arrangements. Our historical expertise in developing the Tenet system, with its online security and access systems, makes us confident that we have the expertise to correct any issues that may arise from Colorstar unit operations.
Security Issues related to cash controls and debit/credit card handling procedures could negatively affect profitability.
Our planned Colorstar business will entail the installation of many individual Colorstar kiosks, each installed remotely from our central server, and each located in a separate retail location. Users will be paying for transactions with cash, bank debit cards or credit cards. We must ensure that our security systems adequately provide for payment transactions to be handled correctly and that auditable cash handling procedures are
implemented at each location. Our online server, to which each Colorstar kiosk is connected at all times, has systems built in which will indicate actual cash and debit-credit card payments and when such payments were picked up-collected. We are confident that our expertise in development of Tenet systems has provided us with the expertise to develop and implement any and all security related issues required for the Colorstar network.
Component failures in kiosk manufacture could result in field location financial problems.
Our manufacturing process for Colorstar kiosk assembly and production includes a comprehensive and detailed quality control program which has been designed to ensure that all units are fully operational when shipped. Since each unit is connected to our central server at all times, we expect that any field malfunctions will be immediately identified. The Company will establish a field service team whose responsibility will be to address any repair and maintenance issues as soon as they arise.
Introduction of Colorstar into North America and elsewhere could be restricted due to local regulatory compliance issues.
Currently we have two Colorstar units located in Vancouver, Canada where they are being analyzed to determine any and all issues that could affect performance and regulatory compliance if the units were to be introduced into the North American marketplace. We are currently awaiting the adaption of these units to the new modular design prior to completing a full analysis. We expect that such adaptations and analysis will be completed by the end of 2010, after which the North American Colorstar business plan should be finalized.
Competition could have a materially adverse effect on our business.
In China, we expect that stand alone digital photo kiosks produced by other manufacturers will continue to be introduced into the marketplace. Management`s assessment of potential market demand is such that competition is inevitable and likely from significant players such as Kodak, Sony and others. Our plan is to aggressively approach the geographical markets that we have expertise in and to establish operating relationships with large partners, who have retail locations located in areas where we currently do not conduct business. Based on our market research to date, we believe that Colorstar units are more cost efficient and provide higher quality photo products that all other photo production units currently on the market. Hence, we believe that we will have a significant competitive advantage in our planned expansion in China. In North America, we are currently analyzing Colorstar units to confirm regulatory compliance and user acceptance in the United States and in Canada. Once that analysis is completed, we will then finalize our business plan for that market.
Resistance by users towards our products could negatively affect our revenues and profits.
Consumers may not find value in Colorstar units such that average usage numbers are below break-even levels. Based on usage figures of test units installed, we believe that our projected 35% usage figure is reasonable and achievable. Because of the cost effectiveness of the design and production process, we could lower user selling prices if required, although to date, consumer response has indicated that our price point is acceptable to the market.
Intellectual property protection may be inadequate to protect us from competitive intervention.
Our ability to compete effectively will depend on our success in protecting our proprietary technology, both in China, in the United States and elsewhere. We have filed for patent protection in China and certain other countries to cover proprietary design aspects of our Colorstar products.
These patent applications are under review by the Chinese Patent Office and, to date, we have not been issued any patent approvals in China or elsewhere. No assurance can be given that any patents relating to our existing technology will be issued from any patent offices; that we will receive any patent approvals in the future based on our continued development of our technology; or that any patent protection, once approved, will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage. Although we have entered into or intend to enter into confidentiality and invention agreements with our employees, consultants and advisors,
no assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
Risk factors relating to our Ling Xiao Travel Services Business
Growth in the overall economy and demand for travel services in China.
We expect that our financial results will continue to be affected by the overall growth of the economy and demand for travel services in China. According to the statistical report published on the website of the National Bureau of Statistics of China on February 28, 2007, GDP per capita rose from RMB 9,398 (US$1,135) to RMB15,973 (US$2,047), representing a 14% compound annual growth rate. This growth led to a significant increase in the demand for travel services. According to the statistical report published on the website of National Bureau of Statistics of China on February 28, 2007, domestic tourism spending grew from RMB387.8 billion (US$46.9 billion) in 2002 to RMB623.0 billion (US$79.8 billion) in 2006, representing a compound annual growth of 13%. However, current economic conditions have changed and such continued growth rates are not now expected. A slow-down of the Chinese economy, will have a material and adverse effect on the travel industry in China, which in turn would harm our business.
Our business may be harmed if our infrastructure and technology are damaged or otherwise fail or become obsolete.
Our customer service center and substantially all of our computer and communications systems are located at single facilities in Dalian and Shenyang and are therefore vulnerable to damage or interruption from human error, computer viruses, fire, flood, power loss, telecommunications failure, physical or electronic break-ins, sabotage, vandalism, natural disasters and similar events. We currently do not have backup systems and do not carry business interruption insurance to compensate us for losses that may occur.
We use an internally developed booking software system known as 8000e that supports the aspects of our booking transactions. Capacity constraints could cause unanticipated system disruptions, slower response times, poor customer service, impaired quality, and delays in reporting accurate financial and operating information. These factors could cause us to lose customers , which will have a material and adverse effect on our results of operations and financial condition.
Declines or disruptions in the travel industry generally could reduce our revenue.
A large part of our Ling Xiao business is driven by the trends that occur in the travel industry in China, including the airline and tour sectors. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. We could be severely affected by declines or disruptions in the travel industry and in many cases, have little or no control over those changes.
Seasonality in the travel service industry.
The travel service industry is characterized by seasonal fluctuations and accordingly our Ling Xiao revenues may vary from quarter to quarter. Typically, the revenues generated during the summer season of each year generally are higher than those generated during the winter season, mainly because the summer season coincides with the peak business and leisure travel season, while the winter season of each year includes the Chinese New Year holiday, during which our customers reduce their business activities.
Risk Factors Relating to the Company’s Capital Stock
There is no significant trading market for our common stock as yet and if a market for our common stock does not develop, our investors will be unable to sell their shares.
We currently have our common stock quoted on the National Association of Securities Dealers Inc.'s OTC Bulletin Board under the trading symbol NNWS. The trading market for our common stock has not yet developed to any significant level. We cannot provide our investors with any assurance that a significant public market will materialize for our common stock. Further, the OTC Bulletin Board is not a listing service or exchange, but is instead a dealer quotation service for subscribing members. The market price of our common
stock may be significantly affected by factors such as actual or anticipated fluctuations in our operation results, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the shares of developmental stage companies, which may materially adversely affect the market price of our common stock.
Risks of dilution in new stock issuance.
We intend to approach potential funders, investors and brokerage firms to assist in raising a minimum of $500,000 over the next 12 month period. Such investment, if available at all, will result in dilution of our existing shareholder’s holdings. Such dilution percentage could vary dependent upon our acceptance in the investment community as against other investment opportunities available. We anticipate that such financing would result in new share issuances of at least 1,000,000 shares. We` are authorized to issue up to 100,000,000 preferred shares of which none are currently issued and also authorized to issue up to100,00,000 common shares of which 34,200,012 are currently issued.
Sales of a substantial number of shares of our common stock into the public market by the selling stockholders may result in significant downward pressure on the price of our common stock and could affect the ability of our stockholders to realize any current trading price of our common stock.
Sales of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock, when and if such market develops. Based upon the registration of stock in our registration statement, selling stockholders may be reselling a substantial number of our shares of common stock which have been issued and are available for resale when any significant market develops for our common stock, which could have an adverse effect on the price of our common stock. As a result of any such decreases in price of our common stock, purchasers who acquire shares from the selling stockholders may lose some or all of their investment.
Selling shareholders may impact our stock value through the execution of short sales which may decrease the value of our common stock.
Any significant downward pressure on the price of our common stock as the selling stockholders sell their registered shares of our common stock could encourage short sales by the selling stockholders or others. Any such short sales could place further downward pressure on the price of our common stock.
Short sales are transactions in which a selling shareholder sells a security it does not own. To complete the transaction, a selling shareholder must borrow the security to make delivery to the buyer. The selling shareholder is then obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be higher or lower than the price at which the security was sold by the selling shareholder. If the underlying security goes down in price between the time the selling shareholder sells our security and buys it back, the selling shareholder will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the selling shareholder will realize a loss on the transaction. The risk of such price increases is the principal risk of engaging in short sales. The selling shareholders could short the stock by borrowing and then selling our securities in the market. Because the selling shareholders control a large portion of our common stock, the selling shareholders could have a large impact on the value of our stock if they were to engage in short selling of our stock. Such short selling could impact the value of our stock in an extreme and volatile manner to the detriment of other shareholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our North American executive office consists of approximately 100 square feet of temporary space and is located at Suite #4200, 601 Union Street, Seattle, Washington, 98101. The lease is a month-to month arrangement with the option to increase space as needs require. The current monthly rent is $225.
In China, the Company leases office spaces from certain third parties under eight operating leases in Dalian and Shenyang which expire on dates between February 28, 2010 and September 30, 2013 at monthly rentals of between $293 and $2,925.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any legal proceedings, nor are we aware of any contemplated or pending legal proceedings against us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 20, 2009, the Company held its Annual Shareholder meeting at the offices of the Company’s attorney in Seattle, Washington. The specific issues which were presented at the meeting were a proposal to re-elect three (3) directors to serve until the next annual meeting of shareholders and a proposal to ratify the appointment of Jimmy C.H. Cheung & Co as the Company’s independent registered public accountants for the fiscal year ending December 31, 2009. Both proposals were approved by the shareholders.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market For Common Stock
Our common stock has been traded on the NASD OTC Bulletin Board under the symbol “NPCA” since January 2008 and changed to “NNWS” in November 2008. The following table sets forth the high and low bid price per share of our common stock for the quarters during 2009. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
We had 253 registered shareholders of record as of December 31, 2009.
Penny Stock Rule
Our shares currently comply with the Penny Stock Reform Act of 1990 which may potentially decrease your ability to easily transfer our shares. Broker-dealer practices in connection with transactions in “penny stocks” are regulated. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that has to comply with the penny stock rules. As our shares will likely have to comply with such penny stock rules, our shareholders will in all likelihood find it more difficult to sell their securities.
Our common stock commenced trading on the NASD OTC Bulletin Board on January 16, 2008 under the symbol “NPCA.” and changed to “NNWS” in November, 2008. During 2007 there was no formal market for our shares.
Holders of Common Stock
As of December 31, 2009, we had 253 shareholders of record for our common stock.
Dividend Policy
To date, we have not declared or paid cash dividends on our shares of common stock. We intend to retain all future earnings, if any, for our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and such other factors as our board of directors may deem relevant.
Recent Issuances of Unregistered Securities
On August 11, 2009, the Company entered into an agreement with a director, Yu Jianhua, to issue up to 3,000,000 treasury shares in exchange for investment of $2,250,000. As of August 11, 2009, Yu Jianhua had advanced $1,125,000 and accordingly the Company issued a total of 1,500,000 treasury shares in exchange for the investment at that time.
Equity Compensation Plan Information
The Company currently has no equity compensation plan in place for its employees, consultants or directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is our historical financial data with respect to the fiscal years ended December 31, 2009, 2008, 2007, and 2006. The information is only a summary. This information has been derived from, and should be read in conjunction with, our historical Unaudited Condensed Consolidated Financial Statements and Consolidated Financial Statements and related notes beginning on page and the section entitled "Management's Discussion and Analysis" beginning on page 26.
Selected Historical Financial Data
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) our short operating history; (ii) our ability to increase revenues and profits in 2010 as we anticipate launch of our e-commerce website, expansion of Ling Xiao operations and operating and other efficiencies and to otherwise manage our planned business expansion; (iii) whether there will be a commercial market, domestically and internationally, for our Colorstar products, (iv) the success of Ling Xiao air-ticket operations in Dalian, Shenyang and other potential northeastern China city locations where Ling Xiao may decide to commence business operations therein; (v)characterization of our market by new products and rapid technological change and an ability to adapt to the same; (vi) our ability to compete against other companies that have greater economic and human resources than we do; (vii) our dependence on key personnel; (viii) our ability to attract and retain quality employees; (ix) ) our dependence on manufacturers and suppliers; (x) our ability to protect technology through patents; (xi) our ability to protect our proprietary technology and information as trade secrets and through other similar means; (xii) our revenues and operating results may fluctuate unexpectedly from quarter to quarter; (xiii) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xiv) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404 in 2010; (xv) our non-payment of dividends and lack of plans to pay dividends in the future; (xvi) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xvii) our additional securities available for issuance, which, if issued, could adversely affect the rights of the current holders of our common stock; (xviii) our stock price which is likely to be highly volatile because of several factors, including a relatively limited public float; and (xix) indemnification of our officers and directors.
Since inception of our Chinese subsidiary, we had been primarily engaged in the commercial tax filing software systems business, with operations located in Dalian city in Liaoning province in northeast China. Since 2005, we have also undertaken a research and development program of a proprietary digital photo processing technology, (`Colorstar`), which has now been commercialized in a kiosk format. The technology has been developed as a “platform”, thus allowing additional applications to be developed for the kiosk technology besides the photo processing use. Very preliminary revenues were generated beginning in 2007 and in 2008 and we anticipated a number of agreements with retail store partners to develop in 2009. We entered into an agreement on March 1, 2008 to supply and operate a total of 564 Colorstar kiosks in conjunction with China Netcom, a significant Chinese telecom company. This agreement has now lapsed and will not be renewed because of customer re-structuring of their business which will preclude arrangements such as we had originally entered into. In October 2008, we acquired a 51% equity interest in a China based air ticket booking business known as Ling Xiao which is generating business and expanding rapidly.
Results of Operations-
Fiscal Year Ended December 31, 2009 Compared to Fiscal year Ended December 31, 2008
The Company currently operates its business exclusively through its Chinese subsidiary. Dalian Beigang has two businesses; one being the supply and operation of stand alone, digital photo processing kiosks in partnership with retail locations, either by way of license or franchise-type arrangements; and the second being an air ticket
booking business known as Ling Xiao which has operations in the north eastern China cities of Shenyang and Dalian, and in which the Company has a 51% equity interest.
Up until June 2009, we continued operation of a non-revenue generating division known as Tenet- being a business of providing platforms to customers in Dalian China for electronic filing of federal tax returns and payment of taxes (Tenet). As described above, in late 2008, the China State Administration of Taxation installed a systematic black box on its website, designed to guarantee network safety for the system. As a result, Dalian Beigang was thereafter unable to upgrade its Tenet tax filing system. We negotiated with representatives of the Federal Administration of Taxation in the Dalian Office on how to deal with the problems that had risen as a result. Because we were unable to update the Tenet system for our subscribers and were unable to bill for services or access- we had no option but to discontinue Tenet operations as of June 2009.
The assets employed in the provision of platform for electronic filing of tax returns, comprised mainly of computer equipment with a net book value of $851 at July 1, 2009 was transferred to other segments or written off in the fourth quarter of 2009
Results of the discontinued operations for the year ended December 31, 2009 and 2008 are as follows:
The assets and liabilities of discontinued operations as of December 31, 2009 and December 31, 2008 are summarized as follows:
Net cash flow of the discontinued operations from the categories of investing activities was not significant for the year ended December 31, 2009 and 2008.
Revenues from Colorstar installations take the form of a revenue charge to users of the kiosks, and such revenues are typically split between the Company and the retail location on an 85/15 basis.
Revenues from Ling Xiao take the form of commissions earned from air ticket bookings to a number of China airlines as conducted through Ling Xiao’s in-house call centers and also through a network of some 300 independent travel agents that utilize Ling Xiao’s proprietary booking systems.
The Company operates in three reportable segments, color photo printing, online shopping and air-ticketing agency. The operation of platforms for electronic filing of tax returns and payment of taxes was discontinued on 1 July 2009 and the losses and assets of this operation were accounted for under discontinued operations. A new e-Commerce website division is at its trial stage and expected to commence operations during 2010.
The following is a summary of the Company’s segment information for the year ended December 31, 2009 and 2008:
Revenues/Sales
Revenues for the year ended December 31, 2009, were $755,678 as compared to $485,752 during the previous fiscal year ended December 31, 2008. The primary reason for the increase was due to the acquisition of a 51% equity interest in Ling Xiao on October 9, 2008 and the allocated revenues from Ling Xiao since that date.
As described above, in late 2008, the China State Administration of Taxation installed a systematic black box on its website, designed to guarantee network safety for the system. As a result, Dalian Beigang is now unable to upgrade its Tenet tax filing system. Because we were unable to update the Tenet system for our subscribers, we were not billing for services or access- thus not currently generating any Tenet revenues. We were unable to resolve this issue, and had no option but to discontinue Tenet operations in June 2009.
During 2007 and 2008 we installed a number of Colorstar photo processing kiosks in the Dalian area under informal franchise arrangements. Minor income amounts were generated from these units, although the purpose of such installations was to generate consumer feedback and also to prove that units were operating effectively and correctly. By December 31, 2007 we had confirmed that this latest Colorstar model met all operating conditions established by management and had reached a commercial stage. Due to failure by the Company to generate working capital to pay for manufacturing of kiosks, only 12 units were produced in 2008 and four were in service as at December 31, 2009. Until such time as the Company can raise sufficient capital to cover kiosk manufacturing costs, expansion of this division will be limited.
During 2009, Ling Xiao generated net revenue of $751,565. The majority of its revenues originated from air ticket bookings during the period.
Revenue Recognition
The Company recognizes revenues under the provisions of FASB Codification Topic 605 (“ASC Topic 605”), Revenue Recognition when all of the following have occurred: persuasive evidence of arrangement with the customer, services have been performed, fees are fixed or determinable and collectability of the fees is reasonably assured.
These criteria as related to the Company’s revenues are considered to have been met as follows:
--Electronic tax filing services
The Company provides electronic tax filing services to its customers based on fixed -price contracts with contractual period of one year. The customers are billed on approval of the contracts and based on the terms included in the contracts. Revenue is recognized rateably over the term of the contract and those billed and received in advanced by the Company for future services not yet performed is deferred. On early termination of the contracts, the fees received in advance will be refunded to the customers.
On April 12, 2009, the Directors resolved to discontinue the operations of the provision of platform for electronic filing of tax returns with effect from July 1, 2009. As the State Administration of Taxation in Dalian (“SAT in Dalian”) has made available its electronic tax filing facilities to all tax payers, subscribers to the Company’s platform for electronic filing of tax returns, and the revenue derived therefrom had continued to drop to a very low level. In view of these recent developments, the Directors decided to discontinue the operations of its platform for electronic filing of tax returns.
--Color photo printing services
Revenue from the sale of color photo printing services is derived from its own and affiliate operations, which consist of franchise agency and licensing programs. The Company follows the guidance of Emerging Issues Task Force (EITF) 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent" for its presentation of revenue and direct costs. This guidance requires the Company to assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. Where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in the statements of income. Revenue and related costs of services generated by the franchise agents are included as part of the Company's consolidated revenue and costs of services, respectively, since the Company has the direct contractual relationships with the customers, holds title to the related customer receivables and is the legal employer of the employees.
The franchise agent acts as the Company's agent in a similar manner as a branch manager in the Company-owned locations. In the franchise arrangement, the Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also responsible for the employees payroll, electricity and related overheads regardless of customer acceptance of the services. These factors, among others, designate the Company as the principal with respect to its franchise agent operations. Franchise agents’ sales were $2,223 and $6,532 for 2009 and 2008 respectively.
The Company also has a licensing program whereby the licensee has direct contractual relationships with the customers, held title to the related customers’ receivables and is the legal employer of the employees. Accordingly, net sales and costs of services generated by the licensee are not included in the Company's consolidated financial statements. Fees are paid to the Company based on a fixed price for each of the photo printed and such license fees are recorded by the Company as revenue. Fees received from licensees were $0 and $428 for 2009 and 2008 respectively.
For sale from its own operations, revenue is recognized after the photos are printed and delivered to the customers and cash has been collected.
--Air-ticketing agency services
The Company receives commissions from travel suppliers for air-ticketing services through the Company’s transaction and service platform under various services agreements. Commissions from air-ticketing services rendered are recognized after air tickets are issued, net of estimated cancellations. The Company presents revenues from such transactions on a net basis in the statements of operations as the Company does not assume inventory risks and has no obligations for cancelled airline ticket reservations. Contracts with certain airlines contain discretionary escalating commissions that are paid to the Company subject to achieving specific performance targets. Such discretionary escalating commissions are recognized when the air tickets are issued and performance guarantees, if any, are achieved.
Selling, General and Administrative Expenses.
General and administrative expenses were $756,570 in 2009, as compared to $396,494 in 2008; an increase of 91%. This increase was primarily a result of the costs incurred with attempted commercialization of Colorstar, increased travel to North America to investigate market opportunities and ongoing public entity related legal and audit costs. In addition, during the year we added administrative staffing for the Colorstar project, which also added to overall general expenses. Depreciation costs were $21,149 in 2009 as compared to $9,828 in 2008. Research and development expenses were $95,811 in 2009 as compared to $162,894 in 2008. Losses from operations were $3,883,757 in 2009 as compared to losses of $357,480 in 2008 with the loss due primarily to impairment of goodwill, public professional services costs, reduced new Tenet subscribers, and increased support costs in anticipation of the Colorstar product launch. Net loss for the comparable year periods of 2009 and 2008 were $3,816,911 and $818,894 respectively.
Gross profit for fiscal year 2009 was $104,711 as compared to $211,736 in 2008.
Research and Development
Research and development costs related to both present and future products are expensed as incurred. Total expenditures on research and development related to the color printing project and charged to general and administrative expenses for the years ended December 31, 2009 and 2008 were $0 and $162,894 respectively. During 2009, 100% of the $95,811 incurred as development costs related to the development of the planned e-commerce website www.urmart.net.
Payroll and Employees Benefits Expense
The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits was $9,117 and $16,147 for the years ended December 31, 2009 and 2008, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
The Company’s PRC subsidiaries are required to make appropriations to reserves funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with the laws and regulations of the PRC. Prior to January 1, 2007 the appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the laws and regulations of the PRC until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 5% to 10% of the after tax net income determined by the Board of Directors. Effective January 1, 2007, the Company is only required to contribute to one statutory reserve fund at 10 percent of net income after tax per annum, such contributions not to exceed 50 percent of the respective companies’ registered capital.
The statutory reserve funds are restricted for use to set off against prior period losses, expansion of production and operation or for the increase in the registered capital of the Company. The statutory public welfare fund is restricted for use in capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation.
Dalian Beigang is not required to make further appropriations to the statutory reserve funds after 2004 as the funds have exceeded 50% of its registered capital after the 2003 appropriation.
Depreciation
Property and equipment assets are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line basis, less estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:
The following is a summary of property and equipment at December 31:
Depreciation expense for the years ended December 31, 2009 and 2008 was $39,415 and $28,764 respectively.
Net Income (Loss) and earnings (Loss) per Share
Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted loss per share is computed on a similar basis to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The increase in loss per share was primarily the result of increased administrative costs and legal and audit requirements as components of the public company disclosure process .
Liquidity and Capital Resources
As reflected in the accompanying financial statements, the Company has an accumulated deficit of $5,532,209 at December 31, 2009 as compared to an accumulated deficit of $1,715,298 at its year end of December 31, 2008. The Company’s current liabilities exceed its current assets by $260,834 and the Company used cash in operations during the year period ended December 31, 2009 of $633,960.
Contractual cash commitments for the fiscal years subsequent to December 31, 2009, are summarized as follows:
The Company leases office spaces from certain third parties under eight operating leases which expire on dates between February 28, 2010 and September 30, 2013 at monthly rentals of between $293 and $2,925.
As of December 31, 2009, the Company has outstanding commitments of with respect to the above operating leases, which are due as follows:
For the year ended December 31, 2009, our cash and cash equivalents decreased from $440,226 to $307,273.
As reflected in the accompanying financial statements, we had an accumulated deficit of $5,532,209 at December 31, 2009. Our current liabilities exceed our current assets by $260,834 and during the year period, we used cash in operations of $633,960. Our auditor commented that these factors raise substantial doubt about our ability to continue as a going concern. In view of the matters described above, continued operation of the Company is dependent upon the Company’s ability to raise additional capital, reduce its operating expenses, obtain financing and succeed in its future Colorstar operations. Management is taking steps to revise our operating and financial requirements, which we believe will be sufficient to provide us with the ability to continue as a going concern.
We are now pursuing additional funding and potential merger or acquisition candidates, which would enhance stockholders’ investment. Management believes that the above actions will allow us to continue operations through the next fiscal year.
Cash Used in Operating Activities
Cash used in operating activities was $633,960 during the year ended December 31, 2009, as compared to $714,776 during the year ended December 31, 2008.
Cash Used in Investing Activities
Cash used in investing activities was a negative amount of $79,381 comprised primarily of issues related to the acquisition of computer related software and hardware..
Cash from Financing Activities
We have funded our business to date primarily from sales of our common stock and by way of shareholder loans. During 2009, specific financing activities totaled $580,985 and which included sale of securities for $900,359 and additional stockholder loans of $77,407.
On August 28, 2009, the Company issued 1,500,000 shares of common stock valued at $1,125,000 to the subscriber who has paid $900,359 in cash to the Company. The remaining balance of $224,641 was recorded as stock subscription receivables as of December 31, 2009. The subscriber was subsequently appointed director of the Company on October 27, 2009.
As of December 31, 2009, a related company owed $99,209 to the Company during the normal course of business and is under the same terms as other customers.
As of December 31, 2009 and 2008, the Company owed $251,312 and $173,432 respectively to a stockholder as unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand.
There are no assurances that we will be able to achieve further sales of our common stock or any other form of additional financing. If we are unable to achieve the financing necessary to continue our plan of operations, then we will not be able to continue our exploration of the prospect lease and our venture will fail.
Going Concern
As reflected in the accompanying financial statements, the Company has an accumulated deficit of $5,532,209 at December 31, 2009 that includes a net loss of $3,816,911 for the year ended December 31, 2009. The Company’s total current liabilities exceed its total current assets by $260,834 and the Company used cash amounted to $633,960 in its operations. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, continued operation of the Company is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is also actively pursuing additional funding and potential merger or acquisition candidates and strategic partners, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year.
Our auditors stated in their report on our audited financial statements for the year ended December 31, 2009 that they have substantial doubt we will be able to continue as a going concern.
Future Financings
We anticipate continuing to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned exploration activities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial conditions and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition
Substantially all of the Company’s revenue is generated from the Ling Xiao travel booking business and color photo printing services. Effective December 31, 2009, the Tenet, electronic tax filing business had ceased all revenue generating activities, having effectively discontinued operations as at June 2009. During 2008, the Company recognized revenue from the sale of electronic tax filing service contracts and color photo printing services under the provisions of ASC Topic 605, Revenue Recognition, where persuasive evidence of an arrangement exists; the service is rendered; the fee is fixed or determinable; the collection of the receivable is reasonably assured; and no significant post-delivery obligations remain unfulfilled.
The Company provided electronic tax filing services to its customers based on fixed -price contracts with contractual period of one year. The customers were billed on approval of the contracts and based on the terms included in the contracts. Revenue was recognized rateably over the term of the contract and those billed and received in advanced by the Company for future services not yet performed was deferred. On early termination of the contracts, the fees received in advanced are refunded to the customers.
Revenue from the sale of color photo printing services is derived from affiliate operations, which consist of franchise agency and licensing program. The Company follows the guidance of Emerging Issues Task Force (EITF) 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent", for its presentation of revenue and direct costs. This guidance requires the Company to assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. Where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in the statements of income. Revenue and related costs of services generated by the franchise agents are included as part of the Company's consolidated revenue and costs of services, respectively, since the Company has the direct contractual relations.
The franchise agent acts as the Company's agent in a similar manner as a branch manager in the Company-owned locations. In the franchise arrangement, the Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also obligated for the employee payroll, electricity and related overheads regardless of customer acceptance of the services. These factors, among others, designate the Company as principal with respect to its franchise agent operations. Franchise agent’ sales were $2,223 and $6,532 for fiscal 2009 and 2008, respectively.
The Company also has a licensing program whereby the licensee had the direct contractual relationships with the customers, held title to the related customer receivables and was the legal employer of the employees. Accordingly, sales and costs of services generated by the license operation are not included in the Company's consolidated financial statements. Fees are paid to the Company based on a fixed price for each of the photo printed and such license fees are recorded by the Company as revenue. Fees received from licensed offices were $428 and $815 for fiscal 2009 and 2008, respectively.
Allowance for Doubtful Accounts
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on managements’ assessment of the credit history with the customer and current relationships with them.
Foreign currency translation
Northport Network maintains its accounting records in its functional currencies of United States Dollars (“US$”) while Dalian Beigang and Ling Xiao maintain their accounting records in their functional currencies of Renminbi (“RMB”).
Foreign currency transactions during the year are translated to the functional currency at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.
The financial statements of Dalian Beigang and Ling Xiao whose functional currencies are RMB are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity.
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the financial statements were as follows:
The translation difference recorded for the years ended December 31, 2009 and 2008 was loss of $2,823 and $46,737 respectively.
No presentation is made that RMB amounts have been, or would be, converted into US$ at the above rates. Although the Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representation that the RMB could be converted into US$ at that rate or any other rate.
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect
Long-lived assets
In accordance with FASB Codification Topic 360 (“ASC Topic 360”), “Accounting for the impairment or disposal of Long-Lived Assets", long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long- lived assets. The Company reviews long-lived assets to determine that carrying values are not impaired. There was no impairment recorded by the Company on property and equipment during the year ended December 31, 2009.
Goodwill
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. The Company accounts for goodwill in accordance with FASB Codification Topic 350 (“ASC Topic 350”), “Accounting for Goodwill and Other Intangible Assets” and FASB Codification Topic 805 (”ASC Topic 805”), “Business Combinations”. ASC Topic 350 requires goodwill to be tested for impairment on an annual basis or more frequently, if impairment indicators arise, and written down when impaired. In accordance with ASC Topic 350, the Company tests goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events. The annual test of goodwill impairment is performed in the fourth quarter using a two-step process in accordance with ASC Topic 350. First, the Company determines if the carrying amount of its reporting unit exceeds the fair value of the reporting unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the implied fair value of the goodwill, as defined by ASC Topic 350, to its carrying amount to determine if there is an impairment loss. During the fourth quarter of 2009, the Company completed a review of its goodwill and determined an impairment had occurred and provided for a 100% impairment of goodwill amounting to $3,114,938.
Disclosure about Fair value of Financial Instruments
FASB Codification Topic 825 (“ASC Topic 825”), "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. Fair value of financial instrument is made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgments, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable (trade and others), accounts payable (trade and related party) and accrued liabilities approximate their fair values because of the short-term nature of these instruments. The management of the Company is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Income and Other Taxes and Obligatory Payments
The Company accounts for income taxes under the FASB Codification Topic 740-10-25, “Accounting for Income Taxes” (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.
On January 1, 2007, the Company adopted the provisions of FASB Codification Topic 740, “Accounting for Uncertainty in Income Taxes” (“ASC 740”). ASC 740 prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The adoption of ASC 740 has not resulted in any material impact on the Company’s financial position or results.
Recently Issued Accounting Standards
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the standard to have any impact on the Company’s financial position.
In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification , originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company does not expect the standard to have any impact on the Company’s financial position.
In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification , originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company does not expect the standard to have any impact on the Company’s financial position.
In December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) . The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the standard to have any impact on the Company’s financial position.
In December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140 . The amendments in ASU 2009-16 improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the standard to have any impact on the Company’s financial position.
In October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company does not expect the standard to have any impact on the Company’s financial position.
In October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include Software Elements, now codified under FASB ASC Topic 985, “Software”, (“ASU 2009-14”). ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the standard to have any impact on the Company’s financial position.
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”, (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the standard to have any impact on the Company’s financial position.
In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”) (not part of the codification yet). SFAS 167 amends FASB Interpretation No. 46 (Revised December 2003) “Consolidation of Variable Interest Entities-an interpretation of ARB No. 51” (FIN 46(R)) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. SFAS 167 will be effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is not permitted. This guidance will be codified under FASB ASC Topic 810, “Consolidation” when it becomes effective. The Company does not expect the standard to have any impact on the Company’s financial position.
In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140” (“SFAS 166”) (ASC Topic 810). SFAS 166 (not part of the codification yet) amends various provisions of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125” by removing the concept of a qualifying special-purpose entity and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure;among others. SFAS 166 will be effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Early adoption is not permitted. This guidance will be codified under FASB ASC Topic 860, “Transfers and Servicing when it becomes effective. The Company does not expect the standard to have any impact on the Company’s financial position.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”) (ASC Topic 715-20-65). FSP FAS 132(R)-1 (ASC Topic 715-20-65) requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 (ASC Topic 715-20-65) also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan assets required by FSP FAS 132(R)-1 (ASC Topic 715-20-65) must be provided for fiscal years ending after December 15, 2009. As this pronouncement is only disclosure-related, it will not have an impact on the financial position and results of operations.`
ITEM 7A.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company’s market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains cash and cash equivalents which consist of cash, money market funds and certificates of deposit with financial institutions. Due to the conservative nature and relatively short duration of our cash and cash equivalents, interest rate risk is mitigated.
We currently maintain no short-term investments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company are included following the signature page to this Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On February 17, 2010, the Company was notified of the resignation, effective immediately, of the US Audit Practice of Jimmy C.H. Cheung & Co. (“JCHC”), as the Company’s independent registered public accounting firm in connection with JCHC’s merger on January 29, 2010, with Baker Tilly Hong Kong Limited (“BTHK”). On February 19, 2010, the Company’s Board of Directors approved the appointment of BTHK as the Company’s independent registered public accounting firm.
The audit reports of JCHC on the financial statements of the Company as of and for the years ended December 31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles , except that the audit reports of JCHC for the
financial statements of the Company as of December 31, 2008 and December 31, 2007 indicated uncertainty as to the Company’s ability to continue as a going concern because the Company had working capital deficits.
In connection with the audits of the Company’s financial statements for the fiscal years ended December 31, 2008 and 2007 and through the date of this Current Report, there were: (i) no disagreements between the Company and JCHC on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of JCHC, would have caused JCHC to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) on reportable events within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.
During the Company’s most two recent fiscal years ended December 31, 2008 and 2007 and through January 29, 2010, the Company did not consult with BTHK on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and BTHK did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in ITEM 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, has evaluated the effectiveness of the design and operation of the Company's “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) under the Exchange Act, as of this annual report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by our Company is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. In making this assessment, management used the framework set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our President, Zhao Yan, our Northport Chief Financial Officer James Wang and our Dalian Beigang Chief Financial Officer, Zi Feng Liu, are responsible for establishing and maintaining disclosure controls and procedures for our Company.
Our management has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009 (under the supervision and with the participation of our Chief Executive Officer, our Northport Chief Financial Officer and the Dalian Beigang Chief Financial Officer), pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended. The evaluation included analysis of systems and procedures for all of Dalian Beigang operations including those of Ling Xiao. Based on this evaluation, our Company’s Chief Executive Officer, our Northport Chief Financial Officer and our Dalian Beigang Chief Financial Officer identified no material weakness in our Company’s disclosure controls and procedures as of December 31, 2009. We will state that the disclosure controls and procedures as at December 31, 2009 were effective and we concluded that the financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
During 2007 we installed and implemented a custom software program known as “Northport Office Anywhere- 2007”, which was custom designed for us by Lenovo Corporation. The system provides us with a complete document edit and control function and requires authorized approvals prior to any financial transaction or entry being concluded. Our test procedures concluded that the system is fully functional and provides us with an acceptable process of accounting and financial control so as to ensure correct financial reporting.
Changes in Internal Control over Financial Reporting
The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management’s Report on Assessment of Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting in our financial statements prior to December 31, 2009.
A material weakness is defined in Public Company Accounting Oversight Board Auditing Standard No. 2 as a significant deficiency, or a combination of significant deficiencies, in internal control, over financial reporting that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Our management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only the management’s report in this annual report.
Inherent Limitation of the Effectiveness of Internal Control
Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
ITEM 9B.
ITEM 9B.OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers:
Yan Zhao - Chairperson and President
Yan Zhao is Chairperson and President of Dalian, China based, Dalian Beigang Information Industry Development Co. Ltd., which she co-founded in 1997. Prior to 1997, she spent five years as general manager of Dalian Electronic and Telecommunication Co. Ltd. From 1969 to 1992, she was general manager of the Dalian Post and Telecommunication Bureau. Yan Zhao is a 1976 Bachelor of Science graduate of Chang Chun Post and Telecommunications College. She became President and director of Northport in April 2004.
Jim Howell Qian, Chief Executive Officer and Director
Jim Howell Qian, Ph.D. is currently the president and CEO of American Centrality Group, Inc., Nevada and Abgenom, Inc. Hayward, CA. Prior to this, Dr. Qian was a co-founder & president of Abgenome, Inc. Berkeley, CA, which develops in vitro diagnostic kits for cardiovascular diseases. Prior to that, Dr. Qian was the co-founder & president of ProMab Biotechnologies, Inc. which develops and markets recombinant proteins, antibody-based reagents and diagnostic kits, and tissue chips to academic and pharmaceutical laboratories worldwide. Before launching ProMab, Dr. Qian was a scientist at Incyte Genomics, Inc. He received his postdoctoral training in Biochemistry from University of California at Berkeley and obtained his Ph.D. in Microbial Biology from University of Nebraska-Lincoln.
Zhong Bo Jia - Vice President and Director
From 1992 until co-founding Dalian Beigang Information Industry Development Co. Ltd. in 1997, Mr. Jia was President of Dalian Electronic and Telecommunication Co. Ltd. From 1969 to 1973 and from 1977 to 1992, he was with the Dalian Post and Telecommunication Bureau as Vice General Manager. Mr. Jia is a 1977 Bachelor of Science graduate from Beijing Post and Telecommunication University. He became a director of Northport in April 2004.
James Wang - Director and Secretary
James Wang, a Canadian citizen, has experience in business in both Canada and the US in areas of distribution and technology. Since 2001 and over the past five years, he has devoted his time and efforts with Dalian
Beigang as a marketing consultant. He has been extensively involved in assisting the management of the Dalian business in aspects of their core business and also assisting the Company in planning a US share listing. He became a director of Northport in April 2004. In February 2006, he changed his legal name from Richard Wang to James Wang.
Xiao Jun- Director
Xiao Jun has been an employee of Northport’s China subsidiary since April 2004. He obtained a Masters degree in Multimedia and Virtual Reality in 2002 from Leuven Engineering College in Belgium and also holds a 1992 degree in Computer Science and Engineering from Huazhong University of Science and Technology. From 1996 to 1998 he was Vice Chief Engineer of the spaceflight group at Guangyu Group in Shenzhen, China. From 1998 until 2000 he was Vice General Manager of Beijing Yuanchao Information Technology Ltd. where he assisted in the development of China’s first business image processing software. In 2000 he joined Beijing Yimei Network Technology Ltd as Vice CEO where he led the employee team in development of China`s first digital imaging network platform. While at Yimei, he assisted in the establishment of the Beijing Digital Image Industry Union along with Lenovo, BOE and Thunis; all major players in the field. Since joining Northport China, he has headed up the Company`s research and development division and was appointed Chief Technology Officer in October 2009.
Yu Jianhua- Director
Yu Jianhua is a resident of Dalian, China and has significant expertise in real estate and property development. Since 2001 he has been Chairman of Dalian Jintudi Real Estate Development Co. Ltd. Prior to that he was Deputy General Manager of Dalian Xintian Real Estate Development Co. Ltd. and Dalian Dongfang Real Estate Development Co. Ltd. Previously he spent almost twenty years as a Factory Manager with a number of food and safety equipment manufacturing factories in Dalian.
Directors
Directors serve for a term of one year or until their successors are elected and qualified. Directors do not receive cash compensation for serving as such.
Executive officers are appointed by and serve at the will of the Board of Directors. There are no family relationships between or among any of the directors or executive officers of the Company except Yan Zhao and Zhong Bo Jia who are husband and wife.
Section 16(a) beneficial ownership reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers, directors and persons who own more than ten percent of either the Common Stock or the Series A Preferred Shares to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such officers, directors and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on its review of copies of such reports received or representations from certain reporting persons, the Company believes that, during the year ended December 31, 2009, all of its officers, directors and ten percent shareholders complied with all Section 16(a) filing requirements applicable to them with respect to transactions during fiscal 2009.
Audit Committee
We do not have an independent Audit Committee and our Board of Directors is comprised of members of management. As a result, there may be a lack of independent oversight of the management team, lack of independent review of our operating and financial results, and lack of independent review of disclosures made by the Company.
Promoters
By virtue of their activities in founding and organizing the Company, as well as their beneficial ownership of its voting securities, Yan Zhao, Zhong Bo Jia and James Wang may be deemed to be "promoters" of the Company.
Related Party Transactions
As of December 31, 2009 and 2008, the Company owed $251,312 and $173,432 respectively to a stockholder as unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand.
Total imputed interest expenses recorded as additional paid-in capital amounted to $11,125 and $3,659 for the years ended December 31, 2009 and 2008 respectively.
As of December 31, 2009, a related company owed $99,209 to the Company during the normal course of business and is under the same terms and conditions as other customers.
On August 28, 2009, the Company issued 1,500,000 shares of common stock valued at $1,125,000 to the subscriber who has paid $900,359 in cash to the Company. The remaining balance of $224,641 was recorded as stock subscription receivable as of December 31, 2009. The subscriber was subsequently appointed director of the Company on October 27, 2009.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Summary Executive Compensation Table
The following table sets forth a summary of all compensation for the last fiscal ending year on December 31, 2009, awarded to, earned by, or paid to the persons serving as the Company’s principal executive officer and the two most highly compensated executive officers other than our principal executive officer.
(1) Executives residing in China, receive compensation in Chinese Yuan. The U.S. Dollar amounts expressed above have been derived using an exchange rate of $1.00 = 6.84 Yuan.
(2) There are no employment agreements or any other arrangements currently in place whereby the Company’s executive officers receive compensation in the form of bonuses, options or other compensation under non-equity incentive plans.
(3) There is no formal pension plan currently in place for the Company’s executives or employees other than pension plans required by law for Chinese staff.
(4) The Company has not paid any other compensation to its executives.
(5) During the 2008 and 2009 fiscal years, Mr. Wang did not receive any compensation for his duties as secretary of the Company.
Employment Agreements with Our Executives and Employees
Currently, employment agreements are in place with all of the Company’s China based executives and employees. No other arrangements exist whereby our executive officers would receive compensation in the form of bonuses, options or other compensation under non-equity incentive plans. Furthermore, no pension plan is currently in place for the Company’s executives or employees other than as required by law for China based executives.
The Company did not offer a pension plan during fiscal year 2009 other than as required by law for China based staff. The full time Chinese employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits was $9,117 and $16,147 for the years ended December 31, 2009 and 2008, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
Employment Bonus Compensation
The Company did not offer any employment bonuses during fiscal year 2009.
Outstanding Equity Awards at Fiscal Year End
The Company did not offer any equity options during fiscal year 2009.
Director Compensation
The Company did not enter into any director compensation arrangements during the fiscal year 2009.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2009, the Company’s outstanding Common Stock owned of record or beneficially by each Executive Officer and Director and by each person who owned of record, or was known by the Company to own beneficially, more than 5% of the Company’s Common Stock, and the shareholdings of all Executive Officers and Directors as a group. Each person has sole voting and investment power with respect to the shares shown.
NAME SHARES OWNED PERCENTAGE OF SHARES OWNED AS AT DECEMBER 31, 2009
Zhao Yan 5,750,000 16.81%
Zhong Bo Jia 3,375,000 9.86%
James Wang 2,239,120 6.54%
Jim Howell Qian
Xiao Jun 1,100,000 3.21%
Yu Jianhua 1,500,000 4.38%
All Executive Officers and Directors 13,964,120 40.83%
As a Group
The Company is not aware of any arrangement which might result in a change in control in the future. The addresses of the principal shareholders are:
Zhao Yan:
7th Floor, 21 Huabin Street
Xigang District
Dalian, Liaoning Province, China
Zhong Bo Jia:
Room 504, 32 Kang Zhuang Street
Bai Yun Xin Chun
Xigang District, Dalian, Liaoning Province, China
James Wang:
#4200, 601 Union Street,
Seattle, Washington, 98101
Xiao Jun
Suite #512, A. No. 1 Huoju Road
Qixianlinq Industrial Base - High-Tech Zone,
Dalian, China.
Yu Jianhua
Suite #512, A. No. 1 Huoju Road
Qixianlinq Industrial Base - High-Tech Zone,
Dalian, China.
Jim Howell Qian
Suite #512, A. No. 1 Huoju Road
Qixianlinq Industrial Base - High-Tech Zone,
Dalian, China.
ITEM 13.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Management, Promoters and Others.
We have not entered into any transactions with our directors, executive officers, any promoter or founder, or beneficial owners of our common stock. All of our Chinese directors, officers and employees have entered into employment agreements with the Company’s wholly owned Chinese subsidiary, as is required by Chinese labor laws.
Director Independence
None of the members of our Board of Directors are considered “independent”.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-K or 10-KSBs and 10-Q or 10-QSBs for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:
2009: $12,000 - Jimmy C.H. Cheung & Co.
$35,000 - Baker Tilly Hong Kong Limited
2008: $52,000 - Jimmy C.H. Cheung & Co.
Financial Information Systems Design and Implementation Fees
We did not engage Baker Tilly Hong Kong Limited, Certified Public Accountants to provide advice regarding financial information systems design and implementation during the last fiscal year.
Tax Fees
There have been no other fees billed or expected to be billed to us by Baker Tilly Hong Kong Limited, Certified Public Accountants for any other non-audit services, including tax-related services, provided during the last two fiscal years.
All Other Fees
For fiscal years 2009 and 2008, Baker Tilly Hong Kong Limited, Certified Public Accountants did not bill any fees for any other non-audit services rendered to us.
Audit Committee
We do not have an independent Audit Committee. Our Board of Directors is comprised of members of management. As a result, there may be a lack of independent oversight of the management team, lack of independent review of our operating and financial results, and lack of independent review of disclosures made by the Company.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND REPORTS on FORM 8-K
(1)
Previously filed as an exhibit to our amended registration statement on Form SB-2/A filed on December 14, 2006.
(2)
Previously filed as an exhibit to Form 8-K filed on October 16, 2008
(3)
Previously filed as an exhibit to Form 8-K filed on November 17, 2008.
* Filed herewith
Form 8-K filings during the quarter ended December 31,
October 28, 2009 Form 8-K filing-
On October 27, 2009, the Board of Directors unanimously approved a resolution to appoint three additional directors; Xiao Jun, Yu Jianhua and Dr Jim Howell Qian to sit as directors of the Company effective immediately and to act as directors until the next shareholder meeting or until they resign or are replaced. All three have agreed to act as directors. There are no family relationships between the new directors.
In addition, the Board accepted the resignation of Zhao Yan as Chief Executive Officer of the Company effective immediately. Dr. Jim Howell Qian has been appointed as the new CEO of the Company. Xiao Jun is appointed Chief Technology Officer of the Company effective immediately. Yu Jianhua is appointed Chief Operations Officer of China Operations effective immediately.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHPORT NETWORK SYSTEMS, INC.,
a Washington corporation
By: /s/ Jim Howell Qian
Jim Howell Qian
Chief Executive Officer
Each person whose signature appears below authorizes Jim Howell Qian to execute in the name of each such person who is then an officer or director of the registrant, and to file, any amendments to this Annual Report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934 and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such Report as such attorney-in-fact may deem appropriate.
In accordance with the Exchange Act this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title
Date
/s/ Jim Howell Qian, CEO
April 14, 2010
Jim Howell Qian, Chief Executive Officer
and Director
/s/ Zhao Yan, President
April 14, 2010
Zhao Yan, President and Director
/s/ Zhong Bo Jia, Vice-President
April 14, 2010
Zhong Bo Jia, Vice-President and Director
/s/ James Wang, CFO
April 14, 2010
James Wang, Chief Financial Officer and
Director
/s/ Xiao Jun
April 14, 2010
Xiao Jun, Director
/s/ Yu Jianhua
April 14, 2010
Yu Jianhua, Director
NORTHPORT NETWORK SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND 2008
F-i
NORTHPORT NETWORK SYSTEMS, INC.
AND SUBSIDIARIES
CONTENTS
F-ii
BAKER TILLY HONG
KONG LIMITED Registered with the Public Company
Certified Public Accountants Accounting Oversight Board
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Northport Network Systems, Inc.
We have audited the accompanying consolidated balance sheet of Northport Network Systems, Inc. and its subsidiaries as of December 31, 2009 and the related consolidated statement of operations and comprehensive loss, stockholders’ equity and cash flows for the year ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the financial statements provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northport Network Systems, Inc. and subsidiaries, as of December 31, 2009, and the results of its operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company had a net loss of $3,816,911, an accumulated deficit of $5,532,209 and a working capital deficiency of $260,834 and used cash in operations of $633,960. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 15. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Baker Tilly Hong Kong Limited
BAKER TILLY HONG KONG LIMITED
Certified Public Accountants
Hong Kong
Date: April 9, 2010
Jimmy C.H. Cheung & Co
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Northport Network Systems, Inc.
We have audited the accompanying consolidated balance sheet of Northport Network Systems, Inc. and its subsidiaries as of December 31, 2008 and the related consolidated statement of operations and comprehensive loss, stockholders’ equity and cash flows for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of the financial statements provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northport Network Systems, Inc. and subsidiaries, as of December 31, 2008, and the results of its operations and its cash flows for the year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the consolidated financial statements, the Company had a net loss of $818,894, an accumulated deficit of $1,715,298 and a working capital deficiency of $332,127 and used cash in operations of $714,776. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 15. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Jimmy C.H. Cheung & Co
JIMMY C.H. CHEUNG & CO
Certified Public Accountants
Hong Kong
Date: March 6, 2009
1607 Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
Tel: (852) 25295500 Fax: (852) 21277660
Email: Jimmy.cheung@jchcheungco.hk
Website: http://www.jchcheungco.hk
NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES ("NNWS")
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
The accompanying notes are an integral part of these consolidated financial statements
NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements
NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDAIRIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Organization
Northport Network Systems, Inc. (“Northport Network”) was incorporated under the laws of the State of Colorado on July 25, 2000 as Dotcom-netmgmt.com Inc. (“Dotcom”). The name was changed from Dotcom to Northport Capital Inc. on April 28, 2004. On October 9, 2008, the Company was re- incorporated in Washington State and changed its name to Northport Network Systems, Inc.
Dalian Beigang Information Industry Development Company Limited (“Dalian Beigang”) was incorporated in the People’s Republic of China (“PRC”) on June 20, 1997 with its principal place of business in Dalian, PRC.
Dalian Beigang is principally engaged in the provision of platforms, among other things, to customers in Dalian for electronic filing of tax returns and payment of taxes and color photo printing business in the PRC. The Company owns a trade name “Colorstar” which was registered with the China State Administration for Industry and Commerce in China as well as a Chinese patent which was applied for on the color photo printing technology. During the year, the Company developed an online shopping website known as UrMart.net which the Company intends to launch in 2010 and generate revenues from sales made through the site. In accordance with the business permit, the Company’s right of operation expires on June 20, 2026 and is renewable.
On June 23, 2005, Northport Network entered into a definitive agreement with the stockholders of Dalian Beigang in which Northport Network exchanged 100% of the registered and fully paid up capital of Dalian Beigang for $150,000 satisfied by the issue of 1,500,000 shares of common stock of $0.001 par value to the stockholders of Dalian Beigang. As both companies are under common management, the exchange of shares has been accounted for as a reorganization of entities under common control.
On October 9, 2008, Dalian Beigang entered into a definitive agreement with the stockholders of Shenyang Ling Xiao Aviation Services Co., Ltd (“Ling Xiao”) to acquire 51% equity interest of Ling Xiao for 2,700,000 treasury shares of common stock of the Company. Ling Xiao is engaged in air-ticketing agency services. See Note 2 for details of the transaction.
Northport Network, Dalian Beigang and Ling Xiao are hereafter referred to as (“the Company”).
(B) Principles of consolidation
The accompanying consolidated financial statements as of December 31, 2009 and 2008 include the financial statements of Northport Network and its wholly owned subsidiary company, Dalian Beigang and 51% equity interest owned subsidiary, Ling Xiao. The noncontrolling interests represent the noncontrolling stockholders’ 49% share of the results of Ling Xiao.
All significant inter-company accounts and transactions have been eliminated in consolidation.
(C) FASB Launches New Accounting Standards Codification
In June 2009 FASB issued FASB Accounting Standards Codification (“Codification”) as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities effective for interim and annual periods ending after September 15, 2009. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification have become non-authoritative.
Following the Codification, FASB will not issue new standards in the form of Statements, FASB Staff Positions (“FSP”) or Emerging Issues Task Force (“EITF”) Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the FASB's Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies. The
Trust has adopted the Codification in this quarterly report by using plain English to describe FASB broad topic references.
(D) Use of estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(E) Cash and cash equivalents
For purpose of the statements of cash flows, cash and cash equivalents include cash on hand and demand deposits with bankers with a maturity of less than 3 months.
(F) Accounts receivable
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based on managements’ assessment of the credit history with the customer and current relationships with them.
(G) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is provided on a straight-line basis, less estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows:
(H) Long-lived assets
In accordance with FASB Codification Topic 360 (“ASC Topic 360”), “Accounting for the impairment or disposal of Long-Lived Assets", long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long- lived assets. The Company reviews long-lived assets to determine that carrying values are not impaired. There was no impairment recorded by the Company on property and equipment during the year ended December 31, 2009.
(I) Goodwill
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. The Company accounts for goodwill in accordance with FASB Codification Topic 350 (“ASC Topic 350”), “Accounting for Goodwill and Other Intangible Assets” and FASB Codification Topic 805 (”ASC Topic 805”), “ Business Combinations” . ASC Topic 350 requires goodwill to be tested for impairment on an annual basis or more frequently, if impairment indicators arise, and written down when impaired. In accordance with ASC Topic 350, the Company tests goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events. The annual test of goodwill impairment is performed in the fourth quarter using a two-step process in accordance with ASC Topic 350. First, the Company determines if the carrying amount of its reporting unit exceeds the fair value of the reporting unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the implied fair value of the goodwill, as defined by ASC Topic 350, to its carrying amount to determine if there is an impairment loss. During the fourth quarter of 2009, the Company completed a review of its goodwill and determined an impairment had occurred and provided for a 100% impairment of goodwill amounting to $3,114,938.
(J) Fair value of financial instruments
FASB Codification Topic 825 (“ASC Topic 825”), "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. Fair value of financial instrument is made at a specific point in time, based on relevant information about financial
markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgments, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable (trade and others), accounts payable (trade and related party) and accrued liabilities approximate their fair values because of the short-term nature of these instruments. The management of the Company is of the opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
(K) Noncontrolling interests
The noncontrolling stockholders’ interests in the equity and net income of Ling Xiao for the year ended December 31, 2009 and 2008 are included in noncontrolling interests in the accompanying consolidated financial statements.
In late 2007, the Financial Accounting Standard Board (“FASB”) issued FASB Codification Topic 810 (“ASC Topic 810”), “Noncontrolling Interests in Consolidated Financial Statements- an amendment of ARB No. 51” , which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (minority interest) and for the deconsolidation of a subsidiary. We have adopted the provisions of ASC Topic 810 with effect from January 1, 2009. The adoption of ASC Topic 810 did not have any significant impact on the financial position and results of operations of the Company.
(L) Revenue recognition
The Company recognizes revenues under the provisions of FASB Codification Topic 605 (“ASC Topic 605”), Revenue Recognition when all of the following have occurred: persuasive evidence of arrangement with the customer, services have been performed, fees are fixed or determinable and collectibility of the fees is reasonably assured. These criteria as related to the Company’s revenues are considered to have been met as follows:
Electronic tax filing services
The Company provides electronic tax filing services to its customers based on fixed -price contracts with contractual period of one year. The customers are billed on approval of the contracts and based on the terms included in the contracts. Revenue is recognized ratably over the term of the contract and those billed and received in advanced by the Company for future services not yet performed is deferred. On early termination of the contracts, the fees received in advanced will be refunded to the customers.
On April 12, 2009, the Directors resolved to discontinue the operations of the provision of platform for electronic filing of tax returns with effect from July 1, 2009. As the State Administration of Taxation in Dalian (“SAT in Dalian”) has made available its electronic tax filing facilities to all tax payers, subscribers to the Company’s platform for electronic filing of tax returns, and the revenue derived therefrom had continued to drop to a very low level. In view of these recent developments, the Directors decided to discontinue the operations of its platform for electronic filing of tax returns.
Color photo printing services
Revenue from the sale of color photo printing services is derived from its own and affiliate operations, which consist of franchise agency and licensing programs. The Company follows the guidance of ASC Topic 605, "Recording Revenue Gross as a Principal versus Net as an Agent" for its presentation of revenue and direct costs. This guidance requires the Company to assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. Where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in the statements of income. Revenue and related costs of services generated by the franchise agents are included as part of the Company's consolidated revenue and costs of services, respectively, since the Company has the direct contractual relationships with the customers, holds title to the related customer receivables and is the legal employer of the employees.
The franchise agent acts as the Company's agent in a similar manner as a branch manager in the Company-owned locations. In the franchise arrangement, the Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also responsible for the employees payroll, electricity and related overheads regardless of customer acceptance of the services. These factors, among others, designate the Company as the principal with respect to its franchise agent operations. Franchise agents’ sales were $2,223 and $6,532 for 2009 and 2008 respectively.
The Company also has a licensing program whereby the licensee has direct contractual relationships with the customers, held title to the related customers’ receivables and is the legal employer of the employees. Accordingly, net sales and costs of services generated by the licensee are not included in
the Company's consolidated financial statements. Fees are paid to the Company based on a fixed price for each of the photo printed and such license fees are recorded by the Company as revenue. Fees received from licensees were $0 and $428 for 2009 and 2008 respectively.
For sale from its own operations, revenue is recognized after the photos are printed and delivered to the customers and cash has been collected.
Online shopping
The website UrMart.net is at its trial stage, the revenue derived therefrom is insignificant and recorded on receipt of subscription fees from members. The management will review this policy on official launch of this website.
Air-ticketing agency services
The Company receives commissions from travel suppliers for air-ticketing services through the Company’s transaction and service platform under various services agreements. Commissions from air-ticketing services rendered are recognized after air tickets are issued, net of estimated cancellations. The Company presents revenues from such transactions on a net basis in the statements of operations as the Company does not assume inventory risks and has no obligations for cancelled airline ticket reservations. Contracts with certain airlines contain discretionary escalating commissions that are paid to the Company subject to achieving specific performance targets. Such discretionary escalating commissions are recognized when the air tickets are issued and performance guarantees, if any, are achieved.
(M) Research and development
Research and development costs related to both present and future products are expensed as incurred. Total expenditures on research and development related to the color printing project and charged to general and administrative expenses for the years ended December 31, 2009 and 2008 were $95,811 and $162,894 respectively.
(N) Income taxes
The Company accounts for income taxes under the FASB Codification Topic 740-10-25, “Accounting for Income Taxes” (“ ASC 740-10-25” ). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date.
On January 1, 2007, the Company adopted the provisions of FASB Codification Topic 740, “Accounting for Uncertainty in Income Taxes” (“ASC 740”). ASC 740 prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The adoption of ASC 740 has not resulted in any material impact on the Company’s financial position or results.
(O) Foreign currency translation
Northport Network maintains its accounting records in its functional currencies of United States Dollars (“US$”) while Dalian Beigang and Ling Xiao maintain their accounting records in their functional currencies of Renminbi (“RMB”).
Foreign currency transactions during the year are translated to the functional currency at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the approximate rates of exchange at that date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statement of operations.
The financial statements of Dalian Beigang and Ling Xiao whose functional currencies are RMB are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and
expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity.
The exchange rates used to translate amounts in RMB into US$ for the purposes of preparing the financial statements were as follows:
The translation difference recorded for the years ended December 31, 2009 and 2008 was loss of $2,823 and $46,737 respectively.
No presentation is made that RMB amounts have been, or would be, converted into US$ at the above rates. Although the Chinese government regulations now allow convertibility of RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representation that the RMB could be converted into US$ at that rate or any other rate.
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting.
(P) Other comprehensive loss
The foreign currency translation gain or loss resulting from translation of the financial statements expressed in RMB to US$ is reported as other comprehensive loss in the statements of operations and stockholders’ equity. The foreign currency translation loss for the years ended December 31, 2009 and 2008 was $2,823 and $46,737 respectively.
(Q) Loss per share
Basic loss per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no potentially dilutive securities for 2009 and 2008.
(R) Segments
The Company operates in three reportable segments, color photo printing, air-ticketing agency and online shopping. The operation of platforms for electronic filing of tax returns and payment of taxes was discontinued on 1 July 2009 and the losses and assets of this operation were accounted for under discontinued operation.
(S) Recent Accounting Pronouncements
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the standard to have any impact on the Company’ s financial position.
In January 2010, FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (Subtopic 810- 10) of the FASB Accounting Standards Codification , originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is
deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company does not expect the standard to have any impact on the Company’ s financial position.
In December 2009, FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities ("ASU 2009-17"). ASU 2009-17 amends the FASB ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) . The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the standard to have any impact on the Company’ s financial position.
In December 2009, FASB issued ASU 2009-16 Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets ("ASU 2009-16"). ASU 2009-16 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140 . The amendments in ASU 2009-16 improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the standard to have any impact on the Company’ s financial position.
In October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company does not expect the standard to have any impact on the Company’ s financial position.
In October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That Include Software Elements, now codified under FASB ASC Topic 985, “Software”, (“ASU 2009-14”). ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the standard to have any impact on the Company’ s financial position.
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”, (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not expect the standard to have any impact on the Company’ s financial position.
In June 2009, the FASB issued SFAS No. 167 “ Amendments to FASB Interpretation No. 46(R)” (“ SFAS 167” ) (not part of the codification yet). SFAS 167 amends FASB Interpretation No.
(Revised December 2003) “ Consolidation of Variable Interest Entities-an interpretation of ARB No. 51” (FIN 46(R)) to require an enterprise to perform an analysis to determine whether the enterprise’ s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’ s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’ s involvement in a variable interest entity. SFAS 167 will be effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is not permitted. This guidance will be codified under FASB ASC Topic 810, “ Consolidation” when it becomes effective. The Company does not expect the standard to have any impact on the Company’ s financial position.
In June 2009, the FASB issued SFAS No. 166 “ Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140” (“ SFAS 166” ) (ASC Topic 810). SFAS 166 (not part of the codification yet) amends various provisions of SFAS No. 140 “ Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125” by removing the concept of a qualifying special-purpose entity and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. SFAS 166 will be effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Early adoption is not permitted. This guidance will be codified under FASB ASC Topic 860, “ Transfers and Servicing” when it becomes effective. The Company does not expect the standard to have any impact on the Company’ s financial position.
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1 “ Employers’ Disclosures about Postretirement Benefit Plan Assets” (“ FSP FAS 132(R)-1” ) (ASC Topic 715-20-65). FSP FAS 132(R)-1 (ASC Topic 715-20-65) requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 (ASC Topic 715-20-65) also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan assets required by FSP FAS 132(R)-1 (ASC Topic 715-20-65) must be provided for fiscal years ending after December 15, 2009. As this pronouncement is only disclosure-related, it will not have an impact on the financial position and results of operations.
2. BUSINESS COMBINATION
On October 9, 2008, Dalian Beigang entered into a definitive agreement with the stockholders of Ling Xiao to acquire 51% equity interest of Ling Xiao for 2,700,000 shares of treasury stock of the Company at a fair value of $3,240,000 based on the closing price of the Company’s common stock as quoted on the Over-the- Counter Bulletin Board as of the date of the closing of the transaction. The stockholders of Ling Xiao do not have any prior affiliation with the Company. According to the terms of the definitive agreement, the consideration amount is determined on the basis of a formula of 51% of 5 times of the planned Ling Xiao’s net earnings for the year ended March 31, 2009.
Ling Xiao was registered with the Shenyang Industrial and Commercial Administration on September 26, 2008 and its business term is approved until September 2017. Ling Xiao is principally engaged in air- ticketing agency business. In addition to its operation in the city of Shenyang, Liaoning Province in the PRC, Ling Xiao assumed all of the business operations of Dalian Ling Xiao Aviation Service Co., Ltd (“Dalian Ling
Xiao”) on October 10, 2008. Dalian Ling Xiao is owned by the stockholders of Ling Xiao and principally engaged in air-ticketing agency business in the City of Dalian, Liaoning Province in the PRC.
The preliminary allocation of the net assets acquired was as follows:
Analysis of the net inflow of cash and cash equivalents in respect of the business combination is as follows:
The acquisition of Ling Xiao was accounted for as a purchase under ASC Topic 805, Business Combinations. Accordingly, the operating results of Ling Xiao have been included in the consolidated statements of operation and comprehensive loss after the effective date of the acquisition of October 9, 2008.
The following table reflects the unaudited pro forma combined results of operations for the year ended December 31, 2008, assuming the acquisition of Ling Xiao had occurred and was completed at the beginning of 2008.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable at December 31, 2009 and 2008 consisted of the following:
As of December 31, 2009 and 2008, the Company considered all accounts receivable collectable and has not recorded a provision for doubtful accounts.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS, NET
Prepaid expenses and other current assets at December 31, 2009 and 2008 consisted of the following:
5. PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment at December 31:
Depreciation expense for the years ended December 31, 2009 and 2008 was $39,415 and $28,764 respectively.
6. OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2009 and 2008 consisted of the following:
7. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):
8. COMMITMENTS AND CONTINGENCIES
(A) Employee benefits
The full time employees of the Company are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits was $9,117 and $16,147 for the years ended December 31, 2009 and 2008, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.
(B) Commitments
The Company leases office spaces from certain third parties under eight operating leases which expire on dates between February 28, 2010 and September 30, 2013 at monthly rentals of between $293 and $2,925.
As of December 31, 2009, the Company has outstanding commitments of with respect to the above operating leases, which are due as follows:
On August 18, 2008, the Company issued 2,400,012 shares of common stock to two stockholders or their nominees for settlement of the loans owed by the Company in the aggregate amount of $1,200,006 at the conversion price of $0.5 per share.
Stock issued for acquisition of a subsidiary
On October 9, 2008, Dalian Beigang entered into a definitive agreement with the stockholders of Ling Xiao to acquire 51% equity interest of Ling Xiao for 2,700,000 treasury shares of common stock of the Company. On August 28, 2009, the 2,700,000 consideration shares were issued to the previous stockholders of Ling Xiao pursuant to the said definitive agreement.
Stock issued for private placement
On August 11, 2009, the Company entered into a Subscription Agreement with a subscriber relating to the issuance of 3,000,000 shares of restricted common stock of the Company to the subscriber in two tranches at a price of $0.75 per share for a total purchase price of $2,250,000.
On August 28, 2009, the Company issued 1,500,000 shares of common stock valued at $1,125,000 to the subscriber who has paid $900,359 in cash to the Company. The remaining balance of $224,641 was recorded as stock subscription receivables as of December 31, 2009. The subscriber was subsequently appointed director of the Company on October 27, 2009.
(B) Appropriated retained earnings
The Company’s PRC subsidiaries are required to make appropriations to reserves funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with the laws and regulations of the PRC. Prior to January 1, 2007 the appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the laws and regulations of the PRC until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the statutory public welfare fund are at 5% to 10% of the after tax net income determined by the Board of Directors. Effective January 1, 2007, the Company is only required to contribute to one statutory reserve fund at 10 percent of net income after tax per annum, such contributions not to exceed 50 percent of the respective companies’ registered capital.
The statutory reserve funds are restricted for use to set off against prior period losses, expansion of production and operation or for the increase in the registered capital of the Company. The statutory public welfare fund is restricted for use in capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation.
Dalian Beigang is not required to make further appropriations to the statutory reserve funds after 2004 as the funds have exceeded 50% of its registered capital after the 2003 appropriation.
In 2008, Ling Xiao appropriated $16,751 to the reserves funds based on its net income in accordance with the laws and regulations of the PRC.
10. INCOME TAX
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Northport Network was incorporated in the United States and has incurred net operating loss for income tax purposes for 2009 and 2008. Northport Network has net operating loss carry forwards for income taxes amounting to approximately $570,719 and $506,844 as at December 31, 2009 and 2008 which may be available to reduce future years’ taxable income. These carry forwards, will expire, if not utilized, commencing in 2027. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses. Accordingly, no deferred tax asset benefit has been recorded. The tax benefit not recorded at December 31, 2009 and 2008 was $194,045 and $172,327 respectively. The net change in the tax benefit for 2009 was an increase of $21,718.
Dalian Beigang and Ling Xiao were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old income tax laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaces the 33% rate applicable to both DES and FIEs. Both Dalian Beigang and Ling Xiao have incurred net operating loss for income tax purposes for 2009. Accordingly, no provision for income tax has been made. The net operating losses for income taxes can be carried forward to reduce future 5 years’ taxable income. No deferred tax
asset benefits have been recorded due to the uncertainty on realization of the benefits from the tax losses incurred by Dalian Beigang and the insignificant effect of the tax losses incurred by Ling Xiao. The tax benefits not recorded by Dalian Beigang and Ling Xiao for the year ended December 31, 2009 and 2008 were $144,410, $39,517, $160,770 and $0 respectively.
The income tax benefit net of income tax expense was $39,517 for 2009 and the income tax expense was $51,160 for 2008.
The reconciliation of income taxes computed at the statutory income tax rates to total income taxes for the years ended December 31, 2009 and 2008 is as follows:
11. CONCENTRATIONS AND RISKS
During 2009 and 2008, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from companies located in the city of Dalian and Shenyang which are both located in the PRC.
The Company has a diversified base of customers. No individual customer contributed to more than 10% of total revenues for the years ended December 31, 2009 and 2008. No individual customer accounted for more than 10% of accounts receivable as of December 31, 2009 and 2008.
The business of the Company’s newly acquired subsidiary, Ling Xiao acquired in 2008 is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and exposure to risks associated with online commerce security. Agency commission from an airline accounted for 56% and 84 % of the Company’s total revenues for the years ended December 31, 2009 and 2008 respectively. As of December 31, 2009 and 2008, accounts receivable from this airline were $41,059 and $272,678 respectively.
12. SEGMENTS
The Company operates in three reportable segments: color photo printing, air-ticketing agency services and online shopping. The Company evaluates segment performance based on income from operations. All inter-company transactions between segments have been eliminated. As a result, the components of operating income for one segment may not be comparable to another segment. The following is a summary of the Company’s segment information for the years ended December 31, 2009 and 2008:
13. DISCONTINUED OPERATIONS
On April 12, 2009, the Directors resolved to discontinue the operations of the provision of platform for electronic filing of tax returns with effect from July 1, 2009. As the State Administration of Taxation in Dalian (“SAT in Dalian”) has made available its electronic tax filing facilities to all tax payers, subscribers to the Company’s platform for electronic filing of tax returns, and the revenue derived therefrom had continued to drop to a very low level. In view of these recent developments, the Directors decided to discontinue the operations of its platform for electronic filing of tax returns.
The assets employed in the provision of platform for electronic filing of tax returns, comprised mainly computer equipment with a net book value of $851 at July 1, 2009 was written off in 2009
Results of the discontinued operations for the years ended December 31, 2009 and 2008 are as follows:
The assets and liabilities of discontinued operations as of December 31, 2009 and 2008 are summarized as follows:
Net cash flow of the discontinued operations from the categories of investing activities was not significant for the years ended December 31, 2009 and 2008.
14. RELATED PARTY TRANSACTIONS
As of December 31, 2009 and 2008, the Company owed $251,312 and $173,432 respectively to a stockholder as unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand.
Total imputed interest expenses recorded as additional paid-in capital amounted to $11,125 and $3,659 for the years ended December 31, 2009 and 2008 respectively.
As of December 31, 2009, a related company owed $99,209 to the Company during the normal course of business and is under the same terms and conditions as other customers.
On August 28, 2009, the Company issued 1,500,000 shares of common stock valued at $1,125,000 to the subscriber who has paid $900,359 in cash to the Company. The remaining balance of $224,641 was recorded as stock subscription receivable as of December 31, 2009. The subscriber was subsequently appointed director of the Company on October 27, 2009.
15. GOING CONCERN
As reflected in the accompanying financial statements, the Company has an accumulated deficit of $5,532,209 at December 31, 2009 that includes a net loss of $3,816,911 for the year ended December 31, 2009. The Company’s total current liabilities exceed its total current assets by $260,834 and the Company used cash amounted to $633,960 in its operations. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, continued operation of the Company is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is also actively pursuing additional funding and potential merger or acquisition candidates and strategic partners, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year.
16. RECLASSIFICATION
Prior year amounts have been reclassified to conform to the current year presentation.
17. SUBSEQUENT EVENTS
Management evaluated all activities of the Company through April 9, 2010 and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements.