UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly three month period ended June 30, 2007 |
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o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
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| For the transition period from [ ] to [ ] |
Commission File Number: 000-26347
NextMart, Inc. (f/k/a Sun New Media, Inc.)
(Name of small business issuer as specified in its charter)
DELAWARE |
| 410985135 |
(State or other jurisdiction of incorporation) |
| (IRS Employer |
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| Identification No.) |
Oriental Plaza Bldg. W#, Twelfth Floor |
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1 East Chang’an Avenue, Dongcheng District |
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Beijing, 100738 PRC [Shanghai?] |
| 100738 |
(Address of principal executive offices) |
| (Zip Code) |
Issuer’s telephone number +86 (0)10 8518 9669
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered pursuant to Section 12(g) of the Act: |
| Common Stock, par value $0.01 per share |
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| (Title of class) |
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Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered pursuant to Section 12(g) of the Act: |
| Common Stock, par value $0.01 per share |
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| (Title of class) |
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This Quarterly Report on Form 10-QSB is the Registrant’s Quarterly Report for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission.
Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days x Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
State the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
86,993,205 common shares issued and outstanding as of August 20, 2007
Transitional Small Business Disclosure Format (Check one): o Yes x No
TABLE OF CONTENTS
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| 3 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 27 |
| 32 | |
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| 32 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| 32 |
| 33 | |
Item 4. Submissions of Matters to a Vote of Security Holders |
| 33 |
| 33 | |
| 34 | |
| 35 | |
| 36 | |
EXHIBIT 31.1 |
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EXHIBIT 31.2 |
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EXHIBIT 32.1 |
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EXHIBIT 32.2 |
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2
FORWARD LOOKING INFORMATION
This annual report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. In this annual report, unless otherwise specified, all dollar amounts are expressed in United States Dollars.
As used in this annual report, the terms “we”, “us”, “our”, and “NXMR” mean NextMart, Inc. and its wholly-owned subsidiaries, including: Sun China Media (Beijing) Technology Co., Ltd., Suizhou Focus Trading Development Co., Ltd., Shanghai Shengji Technology Co., Ltd, Sun China Media (Beijing) International Advertising Co. Ltd, Dragon List Co. Ltd, Sun Trade Media (Beijing) Co. Ltd, Sun Asia (Beijing) Investments Consultants Ltd, NextMart Technology (Beijing) Co. Ltd, Wuhan Xinda Weiye Trade and Development Co. Ltd, Beijing Trans Global Logistics, Naixiu Exhibition (Beijing) Co. Ltd .
Item 1. Condensed Consolidated Financial Statements
NextMart, Inc.
Condensed Consolidated Financial Statements
June 30, 2007 and 2006
(Unaudited)
(Expressed In United States Dollars)
3
Condensed Consolidated Balance Sheets
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| Unaudited |
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| As of |
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| Note |
| 30-Jun-07 |
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| US$ |
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ASSETS |
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Current Assets |
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Cash and cashequivalants |
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| 1,679,246 |
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Accounts receivable, net of provision for doubtful accounts $30,139 |
| 6 |
| 3,278,697 |
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Other receivable, prepayments and deposits |
| 7 |
| 7,217,657 |
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Inventories |
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| 1,698,213 |
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Marketable securities |
| 11 |
| 13,548,437 |
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Amounts due from stockholders |
| 8 |
| 937,392 |
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Amounts due from related parties |
| 8 |
| 1,045,658 |
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Total current assets |
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| 29,405,300 |
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Investment in associated company |
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| 0 |
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Goodwill and intangible assets |
| 4 |
| 23,047,603 |
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Plant and equipment |
| 5 |
| 3,818,554 |
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Total Assets |
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| 56,271,457 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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| 277,488 |
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Other payables and accruals |
| 9 |
| 2,371,851 |
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Amounts due to related parties |
| 8 |
| 93,349 |
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Factoring loan |
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| — |
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Total current liabilities |
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| 2,742,688 |
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Minority interest |
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| 1,557,896 |
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Convertible notes |
| 10 |
| 1,500,000 |
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Discount on convertible notes and warrants |
| 10 |
| (852,952 | ) |
Commitments and Contingencies |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, authorized 150,000,000 shares, US$0.01 par value |
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None issued Common stock; authorized 350,000,000 shares, US$0.01 par value 94,393,178 shares of common stock issued and outstanding, US$0.01 par value |
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| 943,932 |
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20,000 shares of common stock reserved to be issued, US$0.01 par value |
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| 200 |
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Additional paid in capital |
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| 100,818,946 |
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Accumulated other comprehensive (loss) income: |
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Foreign currency translation adjustments |
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| 90,269 |
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Unrealized loss on marketable securities |
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| (4,419,765 | ) |
Total accumulated comprehensive loss |
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| (4,329,496 | ) |
Accumulated deficit |
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| (46,109,756 | ) |
Total stockholders’ equity |
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| 51,323,825 |
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Total liabilities and stockholders’ equity |
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| 56,271,457 |
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4
Condensed Consolidated Statement of Operations
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| Unaudited |
| Unaudited |
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| Note |
| June 30, 2007 |
| June 30, 2006 |
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| US$ |
| US$ |
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Revenues |
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| 1,803,071 |
| 8,819,429 |
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Costs of revenue |
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| 1,389,073 |
| 228,127 |
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Gross Profit |
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| 413,998 |
| 8,591,302 |
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Operating Expenses |
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General and administrative |
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Stock Based Compensation Costs |
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| — |
| 33,750 |
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Other General and administrative |
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| 748,814 |
| 1,542,966 |
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Marketing and sales |
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| 48,850 |
| 35,137 |
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Depreciation and amortization |
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| 578,778 |
| 509,629 |
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Consulting and professional fees |
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| 184,442 |
| 494,583 |
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Total operating expenses |
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| 1,560,884 |
| 2,616,065 |
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Operating loss |
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| (1,146,886 | ) | 5,975,237 |
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Interest income |
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| 1,271 |
| 18,073 |
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Amortization of discount on notes |
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| (14,457 | ) | (2,570,634 | ) |
Other income from divestment of non-core assets |
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| 5,473 |
| 11,183,924 |
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Interest expenses |
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| (39,000 | ) | — |
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Loss before income tax expense and minority interests |
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| (1,193,599 | ) | 14,606,600 |
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Income tax expenses |
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| — |
| (12,063 | ) |
Loss after income tax expense and before minority interests |
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| (1,193,599 | ) | 14,594,537 |
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Minority interests |
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| 18,158 |
| (446,107 | ) |
Net Loss |
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| (1,175,441 | ) | 14,148,430 |
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Other comprehensive loss – Currency translation adjustment |
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| (11,147 | ) | (17,316 | ) |
Comprehensive (loss) income |
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| (1,186,588 | ) | 14,131,114 |
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Basic (loss) income per share |
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| (0.01 | ) | 0.14 |
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Shares used in computing basic loss per share |
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| 94,413,178 |
| 98,488,837 |
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5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three month ended June 30, 2007 and 2006
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| Unaudited |
| Unaudited |
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| Three months ended |
| Three months ended |
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| June 30, 2007 |
| to June 30, 2006 |
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| US$ |
| US$ |
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Cash flows from operating activities |
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Net (loss) income |
| (1,175,441 | ) | 14,589,284 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities; |
| — |
| — |
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Depreciation and amortization |
| 578,778 |
| 509,629 |
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Share of profits from affiliate |
| — |
| (356,599 |
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Gain on sale of non-core assets paid by stock |
| — |
| (10,742,791 | ) |
Gain on disposal of subsidiary companies |
| (5,473 | ) | (74,556 | ) |
Non-cash expense for consultancy services fee |
| — |
| 75,000 |
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Amortization of discount on notes |
| 14,457 |
| 2,570,634 |
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Non-cash interest expenses |
| 39,000 |
| — |
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Currency translation adjustment |
| — |
| — |
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Changes in operating assets and liabilities: |
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Accounts receivable |
| 182,461 |
| (8,334,822 | ) |
Other debtor, deposits and prepayments |
| (463,889 | ) | (3,038,841 | ) |
Inventories |
| — |
| (15,630 |
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Amounts due from related parties |
| — |
| (344,316 | ) |
Amounts due from stockholders |
| — |
| 221,358 |
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Accounts payable |
| (178,019 | ) | 21,645 |
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Other payables and accruals |
| 121,740 |
| 558,563 |
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Amounts due to related parties |
| — |
| 39,317 |
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Net cash used in operating activities |
| (886,385 | ) | (4,322,125 | ) |
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Cash flows from investing activities |
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Proceeds from sale of plant and equipment |
| — |
| 74,958 |
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Purchase of plant and equipment |
| — |
| (221,288 | ) |
Cash / acquired in business combination, net |
| — |
| 10,814 |
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Disposal of subsidiary companies, net |
| — |
| 23,138 |
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Increase in due from related parties and stockholders |
| (316,433 | ) | — |
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Net cash used in investing activities |
| (316,432 | ) | (112,378 | ) |
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Cash flows from financing activities |
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Issuance of common stock |
| — |
| 8,955,350 |
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Expenses incurred on issuance of common stock |
| — |
| (874,931 | ) |
Decrease in due to related parties |
| (145,510 | ) | — |
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Repayment of factoring loans |
| — |
| (54,289 | ) |
Minority interest, net |
| 262,622 |
| — |
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Net cash provided by financing activities |
| 117,112 |
| 8,026,130 |
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Net effect of exchange rate changes on consolidating subsidiaries |
| 65,000 |
| (6,024 | ) |
Net increase/(decrease) in cash and cash equivalents |
| (1,020,705 | ) | 3,585,603 |
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Cash and cash equivalents, beginning of the period |
| 2,699,949 |
| 1,373,715 |
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Cash and cash equivalents, end of the period |
| 1,679,244 |
| 4,959,318 |
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6
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We operate mainly in the women’s apparel industry where we derive the bulk of our revenue by acting as an outsourced brand management and production center for foreign apparel brands. We also possess a portfolio of media and marketing assets that we are leveraging to expand into the online brand management and e-commerce sectors for women’s apparel products. We have supporting operations in the handheld electronics sector. The Company is divided into two principal divisions: the Transactional Services Division and the Marketing & Information Services Division.
During fiscal 2008, we plan to center our business operations around our Shanghai-based apparel subsidiary, William’s Brand Administer Co. Ltd. Our business development efforts will consist of growing existing revenues in the business-to-business sector and creating new revenues in the business-to-consumer sector. Our goal here is to build China’s largest shopping community for online wholesale distribution and retail shopping.
Our activities are based predominantly in People’s Republic of China (“PRC”). Our principal operating subsidiaries include the following:
Our principal operating subsidiaries include the following:
· Sun New Media Group Limited;
· Sun Global Marketing Network Limited;
· China Tradex Limited;
· Sun New Media Holdings Limited;
· William Brand Administer Limited; and
· Beijing Trans Global Logistics.
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company, its subsidiaries and variable interest entities, or VIEs for which the Company is the primary beneficiary. All significant inter-company accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but which are less than majority owned and not otherwise controlled by the Company, are accounted for under the equity method. The Company has adopted FASB Interpretation No. 46R consolidation of Variable Interest Entities, FIN 46R, an Interpretation of Accounting Research Bulletin No. 51. FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIE’s residual returns. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
We have the following significant domestic VIEs:
7
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
· Sun China Media (Beijing) Technology Co., Ltd., a PRC company controlled through us by contract and is owned equally by Qiong Zhou and Jacob Di, both of whom are non-executive employees of the Company.
· Suizhou Focus Trading Development Co., Ltd., a PRC company controlled by us by contract and is engaged in marketing, information and technology services to beverage and electronic device distributors. It is 60% owned by Qi Yang, one of our officers and 25% and 15% owned by Bingwei Wu and Quanyi Mao respectively, two non-executive employees of the Company.
· Shanghai Shengji Technology Co., Ltd, a PRC company controlled by us by contract, and is engaged in wireless mobile services. It is 40% owned by Hui Yan, 40% owned by Min Lin and 20% owned by Kezhou Luan, each a non-executiveemployee of the Company.
· Sun China Media (Beijing) International Advertising Co. Ltd, a PRC company controlled by us by contract which is engaged in the advertising business. It is 70% owned by Qiong Zhou, and 30% owned by Guosheng Wang, both of whom are non-executive employees of the Company.
· Dragon List Co. Ltd, a PRC company controlled by us by contract and is engaged in digital publishing business. It is 70% owned by Qiong Zhou, and 30% owned by Jacob Di, both of whom are non-executive employees of the Company.
· Sun Trade Media (Beijing) Co. Ltd, a PRC company controlled by us by contract and is engaged in digital publishing business. It is 70% owned by Qiong Zhou, and 30% owned by Jacob Di, both of whom are non-executive employees of the Company.
· Sun Asia (Beijing) Investments Consultants Ltd, a PRC company controlled by us by contract and is engaged in the provision of consultancy services. It is 60% owned by Qiong Zhou, and 40% owned by Xiaoang Li, both of whom are non-executive employees of the Company.
· NextMart Technology (Beijing) Co. Ltd, a PRC company controlled by us by contract and is engaged in software development. It is 70% owned by Qiong Zhou, and 30% owned by Jacob Di, both of whom are non-executive employees of the Company.
· Wuhan Xinda Weiye Trade and Development Co. Ltd, a PRC company controlled by us by contract and engaged in trading. It is 40% owned by Jin Liu, 30% owned by Wanzhi Zhu and 30% owned by Mingde Jiang, all of whom are non-executive employees of the Company.
· Beijing Trans Global Logistics, a PRC company 80% by us by contract and engaged in trading. It is 80% owned by Qiong Zhou, 10% owned by Yong Li and 10% owned by Mianchun Wang, Qiong Zhou is a non-executive employees of the Company.
· Naixiu Exhibition (Beijing) Co. Ltd, a PRC company that is controlled by us and owned 50% Li Yong and 50% by Wang Jinghchun. Li Yong and Wang Jingchun are non-executive employees of the Company.
The capital investment in these VIEs is funded by the Company and transferred to the VIEs via contractual agreements between the Company (or its non-PRC subsidiary) and the PRC employees who own the VIEs. As of June 30, 2007, the total amount of capital investment that was transferred to the VIEs listed above was US$3,451,000. Under various contractual agreements, employee shareholders of the VIEs are required to transfer their ownership in these entities to our subsidiaries in
8
China when permitted by PRC laws and regulations or to our designees at any time for the outstanding amount of injected capital investment, and all voting rights of the VIEs are assigned to us. We have the power to appoint all directors and senior management personnel of the VIEs. Through our wholly-owned subsidiaries in China, we have also entered into exclusive technical agreements and other service agreements with the VIEs, under which these subsidiaries provide technical services.
Use of estimates
The preparation of 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 amount of revenue and expenses for the periods that the financial statements are prepared. Actual amounts could differ from these estimates.
Financial instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, marketable securities, other payable and factoring loan. The fair values of these financial instruments approximate their carrying values due to the short-term maturity of the instruments.
Business combinations
We are creating this business through the ongoing acquisition of various entities and assets. The Company accounts for its business combinations using the purchase method of accounting in line with FASB141. This method requires that the acquisition cost be allocated to the assets and liabilities the Company acquired based on their fair value. Pursuant to FAB-141, the Company recognizes intangible assets separate from goodwill if they meet one of two criteria—the contractual-legal criterion or the separability criterion. The Company makes estimates and judgments in determining the fair value of the acquired assets and liabilities, based on independent appraisal reports for material purchases as well as its experience with similar assets and liabilities in similar industries. If different judgments or assumptions were used, the amounts assigned to the individual acquired assets or liabilities could be materially different. When considering whether an acquired assets group constitutes a business, the Company used the criteria defined by EITF 98-3 determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business.
9
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Goodwill and intangible assets, net
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company’s acquisitions of interests in its subsidiaries and VIEs. Under Statement of Financial Accounting Standards,
FAS No.142, Goodwill and Other Intangible Assets, FAS 142, goodwill is no longer amortized, but tested for impairment upon first adoption and annually, thereafter, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company assesses goodwill for impairment periodically in accordance with SFAS 142.
The Company applies the criteria specified in SFAS No.141, Business Combinations to determine whether an intangible asset should be recognized separately from goodwill. Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the contractual-legal or separability criterion. Per SFAS 142, intangible assets with definite lives are amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No.144, accounting for the Impairment or Disposal of Long-lived Assets. The Company reviews the amortization methods and estimated useful lives of intangible assets at least annually or when events or changes in circumstances indicate that it might be impaired. The recoverability of an intangible asset to be held and used is evaluated by comparing the carrying amount of the intangible asset to its future net undiscounted cash flows. If the intangible asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the intangible asset exceeds the fair value of the intangible asset, calculated using a discounted future cash flow analysis. The Company uses estimates and judgments in its impairment tests, and if different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different.
Impairment of Long-lived Assets
The Company asseses the carrying value of long-lived assets in accordance with SFAS No.144, accounting for the Impairment or Disposal of Long-lived Assets. Factors considered important which could trigger this review include significant decrease in operating results, significant changes in its use of assets, competitive factors and the strategy of it business, and significant negative industry or economic trenends. The company cannot predict the occurrence of future impaiment-triggering events nor the impact such events might have on the reported asset values. Such events may include strategic decisions made in response to the ecnomic conditions relative to product lines, operations and the impact of the economic environment on our customer base. When the Company determine that the carrying value of long-lived may not be recoverable based on as assessment of future undiscounted cash flows from the use of those assets, an impairment charge to reord the assets at fair value may be recorded. Impairment is measured based on fair values utilizing estimated disounted cash flow, published thirty-party sources, and third-party offers.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with FASB No. 130, “Reporting Comprehensive Income (Loss). The components of comprehensive loss for the Company inlcude currency translation adjustments and unrealized loss on marketable securities.
Inventories
Inventories are stated at the lower of cost (first-in, first out method) or market. Certain inventory goods purchased are subject to spoilage within a short period of time while in possession of the Company. Inventory costs do not exceed net realizable value.
10
Plant and equipment
Plant and equipment are stated at cost, net of depreciation. Depreciation is computed primarily on the straight-line method for financial reporting purposes over the following estimated useful lives:
| Years |
| |
Furniture, fixtures and equipment |
| 3 - 5 |
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Motor vehicles |
| 5 |
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Leasehold buildings and improvements |
| 5 - 30 |
|
Revenue recognition
We generate revenue through the provision of marketing, information, and transactional services. The Company recognizes revenues from transaction and information services in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” when all of the following conditions exist: persuasive evidence of an arrangement exists in the form of an accepted purchase order; delivery has occurred, based on shipping terms, or services have been rendered; the Company’s price to the buyer is fixed or determinable, as documented on the accepted purchase order; and collectibility is reasonably assured.
The Transactional Services include primarily the apparels vertical business and electronics components. We recognize revenue for the transactional business when the goods have been shipped or delivered and purchase order exists. The Marketing and Information Services include newspaper and magazine business and marketing consulting services. The Company recognize revenue for the Marketing and Information Services when the services have been rendered.
11
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Cost of revenues
Cost of revenues includes the cost of product, salary and other related costs for our management services and technical support staff, as well as third-party contractor expenses. Additionally cost of revenues includes fees for hosting facilities, bandwidth costs, and equipment and related depreciation costs. Cost of revenues will vary significantly from period to period depending on whether we will take title of the product and the level of management services provided.
Trade recevible and allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers to minumize credit risk. The allowance for doubtful accounts is based on management’s estimates of the collectability of its accounts receivable after analyzing historical bad debts, customer concentrations, customer credit worthiness, and current economic trends. Specifically, the Company reviews the aged accounts receivable listing for balances that are specifically identifiable as credit risks or uncollectible, and may use judgement for calculation of allowance for doubtful accounts.
Sales to Nature’s Club International Co. Ltd. accounted for the majority of sales for the quarter ended June 30, 2007. Significant sales to a single customer expose the Company to a concentration of credit risk.
Earnings (loss) per share
Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the year. As the Company has a loss, presenting diluted net earnings (loss) per share is considered anti-dilutive and not included in the statement of operations.
Foreign currency transactions
The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”, since the functional currency of the Company is Renminbi (RMB), the foreign currency financial statements of the Company’s subsidiaries are re-measured into U.S. dollars (USD). Monetary assets and liabilities are re-measured using the foreign rate that prevailed at the balance sheet date. Revenue and expenses are translated at weighted average rates of exchange during the year and stockholders’ equity accounts and capital asset accounts are translated by using historical exchange rates. Any re-measurement gain or loss incurred is reported in the consolidated statement of operations. In 2007, we used 7.9005 RMB per U.S. USD for the weighted average rate, and we used 7.7342 RMB per USD as the balance sheet date rate.
Income taxes
The Company follows the liability method of accounting for income taxes in accordance with SFAS No. 109. Under this method, future 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 balances. Future tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is provided for deferred tax assets if it is more likely than not that the Company will not realize the future benefit, or if the future deductibility is uncertain.
12
Stock-based compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share Based Payment,”(“SFASNo.123(R)”) which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123(R). The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The statement was adopted using the modified prospective method of application which requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of adoption. There were no unvested stock options at the beginning of this reporting period therefore no compensation expense was recognized in the period. No adjustments to prior periods have been made as a result of adopting SFAS No. 123(R).
As at September 30, 2005 the Company elected to account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148. During the period from September 18, 2005 to September 30, 2005, no stock-based employee compensation arrangements have been effected and accordingly no disclosure of pro forma information is required. In accordance with SFAS No. 123 the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue
No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
13
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will have a material impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which requires that the compensation cost relating to share-based payment transactions (including the cost of all employee stock options) be recognized in the financial statements. The cost will be measured based on the estimate fair value of the equity or liability instruments issued. SFAS 123-R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements.
Also, in December 2004, the FASB issued SFAS 153, “Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions”. The amendments made by SFAS No. 153 are based on the principle that the exchange of non-monetary assets should be measured using the estimated fair market value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for non-monetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of non-monetary assets do not have commercial substance. A non-monetary exchange has “commercial substance” if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for monetary exchanges in fiscal periods beginning after June 15, 2005. Management believes the adoption of this pronouncement will not have a material effect on our consolidated financial statements.
14
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recently Issued Accounting Pronouncements (cont’d)
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term “conditional asset retirement obligation,” which as used in SFAS No. 143, “Accounting for Asset Retirement Obligations”, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The entity must record a liability for a “conditional” asset retirement obligation if the fair value of the obligation can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Management believes the adoption of this statement does not have an immediate material impact on the consolidated financial statements of the Company.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. This statement requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, “Accounting Changes”, which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. SFAS No. 154 applies to accounting changes and error corrections that are made in fiscal years beginning after December 15, 2005. Management believes the adoption of this statement will not have an immediate material impact on the consolidated financial statements of the Company.
The adoption of EITF Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations” in the first quarter of 2005 did not have a material impact on the Company’s results of operations and financial condition.
In October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R)”, which provides clarification of the concept of mutual understanding between employer and employee with respect to the grant date of a share-based payment award. This FSP provides that a mutual understanding of the key terms and conditions of an award shall be presumed to exist on the date the award is approved by management if the recipient does not have the ability to negotiate the key terms and conditions of the award and those key terms and conditions will be communicated to the individual recipient within a relatively short time period after the date of approval. This guidance shall be applied upon initial adoption of SFAS 123R. The Company does not expect the adoption of the FSP will have a material impact on its consolidated results of operations and financial condition.
In November 2005, the FASB issued FSP FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”, which provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. An entity must follow either the transition guidance for the APIC pool in SFAS 123R or the alternative transition method described in the FSP. The alternative method comprises a computational component that establishes a beginning balance of the APIC pool and a simplified method to determine the subsequent impact on the APIC pool of awards that are fully vested and outstanding upon the adoption of SFAS 123R. The impact on the APIC pool of awards partially vested upon, or granted after, the adoption of SFAS 123R should be determined in accordance with the guidance in that statement. The FSP was effective November 10, 2005. As described in the FSP, an entity will be permitted to take up to one year to determine its transition alternatives to make its one-time election. The Company does not expect the adoption of the FSP will have a material impact on its consolidated results of operations and financial condition.
15
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 — SUMMARY OF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recently Issued Accounting Pronouncements (cont’d)
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for the Impairment or Disposal of Long-Lived Assets”, to allow a qualifying special-purpose entity (“SPE”) to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier application allowed. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its consolidated results of operations and financial condition.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140.” SFAS No. 156 requires that all separately recognized servicing rights be initially measured at fair value, if practicable. In addition, this Statement permits an entity to choose between two measurement methods (amortization method or fair value measurement method) for each class of separately recognized servicing assets and liabilities. This new accounting standard is effective January 1, 2007. The adoption of SFAS 156 is expected to have no material impact on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
In June 2006, the Emerging Issues Task Force, or EITF, issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),” or EITF 06-3. EITF 06-3 provides guidance on the presentation in the income statement of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer. EITF 06-3 requires that taxes be presented in the income statement either on a gross basis (included in revenues and costs) or a net basis (excluded from revenues), and that this accounting policy decision be disclosed. EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. Adoption of EITF 06-3 did not have a material impact to our consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for years beginning after December 15, 2006. We do not believe the adoption of FIN 48 will have a material impact to our consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, or SAB 108. SAB 108 provides guidance on consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on our consolidated financial statements.
16
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements,” or SFAS 157. This statement defines fair value, establishes a fair value hierarchy to be used in generally accepted accounting principles and expands disclosures about fair value measurements. Although this statement does not require any new fair value measurements, the application could change current practice. The statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of this statement to its financial position and results of operations. FSP EITF 00-19-2. In December 2006, the FASB issued FASB Staff Position EITF 00-19-2, “Accounting for Registration Payment Arrangements,” or FSP EITF 00-19-2. FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, “Accounting for Contingencies.” A registration payment arrangement is defined in FSP EITF 00-19-2 as an arrangement with both of the following characteristics: (1) the arrangement specifies that the issuer will endeavor (a) to file a registration statement for the resale of specified financial instruments and/or for the resale of equity shares that are issuable upon exercise or conversion of specified financial instruments and for that registration statement to be declared effective by the United States Securities Exchange Commission within a specified grace period, and/or (b) to maintain the effectiveness of the registration statement for a specified period of time (or in perpetuity); and (2) the arrangement requires the issuer to transfer consideration to the counterparty if the registration statement for the resale of the financial instrument or instruments subject to the arrangement is not declared effective or if effectiveness of the registration statement is not maintained. FSP EITF 00-19-2 is effective for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP EITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The adoption of FSP EITF 00-19-2 is not expected to have an impact on our consolidated financial statements.
In February 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. It is expected to expand the use of fair value measurements which is consistent with the Financial Accounting Standards Board’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for our first fiscal year that begins after November 15, 2007, which is our fiscal year 2009 that begins in April 2008. The Company is currently evaluating the impact of this statement to its financial position and results of operations.
Related Parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.
Deferred Expenses
Payments made for future expenses were amortized over the life of service received.
Marketable securities
The Company accounts for investments in marketable securities under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Marketable equity securities are held as available for sale and are reported at fair value any unrealized gains and losses are included in accumulated other comprehensive income or loss within stockholders’ equity. The treatment of a decline in the fair value of an individual security is based on whether the decline is other-than-temporary. Significant judgment is required to assess whether the impairment is other-than-temporary, particularly for marketable equity securities that provide limited public information. Our judgment of whether impairment is other-than-temporary is based on an assessment of factors including our ability and intent to hold the individual security, severity of the impairment, expected duration of the impairment and forecasted recovery of fair value. Changes in the estimates and
17
assumptions could affect our judgment of whether an identified impairment should be recorded as an unrealized loss in the equity section of our consolidated balance sheets or as a realized loss in the consolidated statements of operations.
Convertible Notes and Notes Issued with Stock Warrants
The Company accounts for convertible notes and notes issued with stock warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. The proceeds from the issuance of convertible notes are allocated between the debt and the equity. The Company books a discount on convertible notes for the conversion feature of the notes and waarants and amortizes the discount over the life of the debt.
Segment Information
The Company accounts for segment information in accordance to FASB 131, Disclosures about Segments of an Enterprise and Related Information. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s operations segments include Transactional Services and Marketing Services.
The Transactional Services include primarily the apparels vertical business and electronics component vertical business. We recognize revenue for the transactional business when the goods have been shipped or delivered and purchase order exists. The Marketing and Information Services include our marketing and services. The Company recognizes revenue for the Marketing and Information Services when the services have been rendered.
18
NEXTMART INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 — BUSINESS COMBINATIONS
On June 25, 2007, we entered into an agreement with Asia Premium Television Group Limited (OTCBB:ATVG) to sell Sun New Media Transaction Services Limited (SNMTS), our wholly-owned subsidiary, for a consideration of $1.00. As a result of this transaction, we experienced a loss of $0.47 million.
On May 28, 2007 we entered into an agreement with Wuxi Guangxin Movie and Carton Technology Limited to form a joint venture company called Wuxi Sun Net Technology Limited. We hold 60% of the shares in the joint venture and Wuxi Guangxin Movie and Cartoon Technology Limited holds 40% of the shares. The joint venture’s main business is to develop and distribute electronic magazines for consumers to download on their personal computers.
19
SUN NEW MEDIA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 — GOODWILL AND INTANGIBLE ASSETS
The following table summarizes goodwill from the Company’s acquisitions:
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
|
|
|
|
|
|
Focus |
| 7,800 |
| 7,800 |
|
Beijing CEAC |
| 181 |
| — |
|
Accumulated amortization |
| (30 | ) | (65 | ) |
Impairment loss |
| (7,800 | ) | — |
|
|
| 151 |
| 7,735 |
|
The goodwill of $7,800,000 relates to the acquisition of China Focus Channel Development Co. Ltd pursuant to a Sale and Purchase agreement (the “Focus Purchase Agreement”) dated November 22, 2005 with Yang Qi, Mao Quan Yi and Wu Bing Wei (collectively, the “Sellers”). This goodwill was impaired in November 2006 due to the change of the market situation for the acquired business.
The following table summarizes intangible assets:
| Unaudited |
| Unaudited |
| ||
|
| June 30 2007 |
| June 30 2006 |
| |
|
| US$’000 |
| US$’000 |
| |
|
|
|
|
|
| |
Service agreements |
| 25,000 |
| 25,000 |
| |
Magazines mastheads |
| — |
| 2,562 |
| |
License |
| 24,452 |
| 23,245 |
| |
Non-compete agreements and customer relationship |
| 2,905 |
| — |
| |
Database |
| 2,500 |
| — |
| |
Program rights |
| 1,792 |
| — |
| |
Technology |
| 2,367 |
| 1,980 |
| |
Partnership agreement license |
| 1,056 |
| — |
| |
|
| 60,072 |
| 52,787 |
| |
Less: | Accumulated amortization |
| (1,514 | ) | (300 | ) |
| Sold |
| (1,208 | ) | — |
|
| Impairment loss |
| (34,505 | ) | — |
|
| Translation difference |
| 52 |
| — |
|
|
| 22,897 |
| 52,487 |
|
On April 9, 2007, we entered into an agreement with Sun Media Investment Holdings Limited (“SMIH”) pursuant to which we sold Lifestyle Magazines Publishing Pte Ltd. to SMIH. As a result of this transaction, our intangible assets (Magazine mastheads) decreased by $2,562,308 for the period ended June 30, 2007. The amortisation expenses of intangible assets and goodwill for the quarters ended June 30, 2007 and June 30, 2006 were $419,168 and $360,241, respectively.
NOTE 5 — PLANT AND EQUIPMENT, NET
Plant and equipment is summarized as follows:
20
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
Cost |
|
|
|
|
|
Motor vehicles |
| 670 |
| — |
|
Leasehold building and improvement |
| 1,968 |
| 1,506 |
|
Furniture, fixtures and equipments |
| 2,206 |
| 1,163 |
|
|
| 4,844 |
| 2,669 |
|
Accumulated depreciation |
| (1,025 | ) | (454 | ) |
|
| 3,819 |
| 2,215 |
|
Equipment includes a net book value of $1.3 million for the reverse auction purchase software purchased by the Company last year. The software is similar to the software deployed by the China state auctioning platform. It is expected to be used by the Company for online sales operations once the Company further develops its online e-commerce capabilities. Depreciation expenses for our fixed assets were $159,661 for the quarter ended June 30, 2007 and $232,843 for the quarter ended June 30, 2006.
NOTE 6 — ACCOUNT RECEIVABLES
Account receivables are summarized as follow:
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
Nature’s Club Inc. |
| 1,895 |
| — |
|
Jines International |
| 254 |
| — |
|
CEAC’s Client |
| 1,117 |
| — |
|
Others |
| 43 |
| 3,754 |
|
Bad account provision |
| (30 | ) | (68 | ) |
|
| 3,279 |
| 3,686 |
|
The majority of our account receivables are from William Brand’s clients which contribute 65% of receivables total account receivables and Beijing Trans Global Logistics’s clients which contribute 34% of total account receivables. The bad account provision is for the account receivables of Beijing Trans Global Logistics.
NOTE 7 — OTHER RECEIVABLES, PREPAYMENTS AND DEPOSITS
Other receivables, prepayments and deposits are summarized as follow:
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
Other receivables |
| 5,693 |
| 783 |
|
Staff advances |
| 34 |
| 12 |
|
Prepaid Advances for Purchase |
| 339 |
| — |
|
Prepaid Interest expense |
| 741 |
| — |
|
Deferred expenses |
| 96 |
| 2 |
|
Rental deposits |
| 42 |
| 9 |
|
Prepaid consideration for acquisitions |
| — |
| 2,375 |
|
Prepaid administrative expenses |
| 273 |
| 505 |
|
|
|
|
|
|
|
|
| 8,870 |
| 3,686 |
|
Other receivables relate to outstanding consideration for The Lexicon Group Ltd. (“TLG”)(formerly “Sun Business Network Ltd.”) shares sale transaction. Pursuant to a Sales and Purchase Agreement by and between us and Maxi Surplus Investment Limited (the Purchaser), in March 2007, the Purchaser acquired 150 million shares of TLG from us on March 26, 2007. The consideration for the purchase was approximately $5.88 million to be satisfied by way of a
21
transfer of 20 million shares in Sun 3C Media PLC (AIM:SCCC), an Ireland corporation (Consideration Shares). As of June 30, 2007, the Consideration Shares were still in the process of being transferred to the Company.
Prepaid advances for purchase represents an advance paid to Mr. Ren Huiliang for purchases of materials and products as well as contingent needs for supporting operations of William Brand Administer Limited, our apparel subsidiary. Mr. Ren Huiliang became our director in February 2007 and became our Chief Executive Officer on August 1 2007. On June 18, 2007, our subsidiary and Mr. Ren Huiliang signed an agreement pursuant to which Mr. Ren Huiliang will return the advances by way of purchasing apparel materials for our subsidiary.
Prepaid interest relates to the 1.5 million shares of our common stock prepaid as interest for the senior convertible promisory notes that we issued to certain accredited investors on March 22, 2007. The prepaid interest expense is to be amortized over the term of the respective notes.
NOTE 8 — AMOUNTS DUE FROM/ (TO) STOCKHOLDERS/ RELATED PARTIES
The amounts are non-trade, interest free and with no fixed terms of repayment.
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
Sun Business Network |
| 973 |
| 1,168 |
|
Global Women |
| 47 |
| (501 | ) |
Sun 3C Media |
| (93 | ) | 54 |
|
Sun Media Investment Holdings |
| 874 |
| 8 |
|
Sun Culture Fundation |
| 26 |
| 15 |
|
CAG |
| 63 |
| 63 |
|
Others |
| — |
| (28 | ) |
|
| 1,890 |
| 779 |
|
NOTE 9 — OTHER PAYABLES AND ACCRUALS
Other payables and accruals are summarized as follow:
| Unaudited |
| Unaudited |
| |
|
| June 30 2007 |
| June 30 2006 |
|
|
| US$’000 |
| US$’000 |
|
Other payables |
| 841 |
| 968 |
|
Accrued operating expenses |
| 1,142 |
| 6,261 |
|
Prepayment from customers |
| 389 |
| 59 |
|
|
|
|
|
|
|
|
| 2,372 |
| 7,288 |
|
Other payables mainly include $0.5 million payables for acquiring the anti-auction software. Included in accrued operating expenses were various professional fees and $0.2 million of committed investment in our subsidiary.
NOTE 10 — CONVERTIBLE NOTES WITH DETACHABLE WARRANTS
Convertible Notes with Detachable Warrants
On March 22, 2007, we executed a subscription agreement with certain accredited investors pursuant to which we agreed to issue $1,500,000 of principal amount of senior convertible promissory notes and warrants to purchase shares of our common stock. The financing was closed on March 29, 2007.
The aggregate gross proceeds from the sale of the notes and warrants was $1,500,000. The convertible notes are due three years from the date of issuance. We prepaid all interest due under the convertible notes through the issuance of 1.5 million shares of our common stock (the “Interest Shares”). The notes are initially convertible our common shares at a conversion price of $1.00 per share. After the occurrence of an event of default under the notes, the
22
conversion price shall be adjusted to eighty percent (80%) of the volume weighted average price of our common shares for the five trading days prior to a conversion date.
Commencing on the fifteenth month of the notes, we must make a payment of one-twenty first (1/21st) of the principal amount of each note, either in cash or by conversion of such amount into our common shares. If, on the payment date, the market price for our common shares are equal to or $1.00 per share, we may make this payment in our common shares at the then existing conversion rat. However, if, on the payment date, either (i) the market price for our common shares are less than $1.00 per share or (ii) the Registration Statement covering the common stock underlying the notes and warrants is not effective, then we must make this payment in cash in an amount equal to 135% of the Principal Amount component of the Monthly Amount. Subject to certain terms and conditions set forth therein, the notes are redeemable by us at a rate of between 120% to 150% of the outstanding principal amount of the notes plus interest.
The notes are being issued with Class A warrants to purchase up to 1,500,000 shares of our common stock at an exercise price of $1.00 per share and Class B warrants to purchase up to 1,500,000 shares of our common stock at an exercise price of $1.50 per share. Upon exercise of any Class A or Class B warrant, the respective warrantholder will receive a Class C warrant to purchase that number of shares for which such Class A warrant or Class B warrant is exercised at an exercise price of $2.00 per share. Accordingly, if the Class A and Class B warrants are exercised in full, we will issue Class C warrants to purchase 3,000,000 shares of our common stock.
In accordance with the guidelines of APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27, “Application of issue No. 98-5 to Certain Convertible Instruments”, the Company has determined that the above rights were issued with beneficial conversion feature. The value of the rights was calculated at the date of issue using the Black-Scholes pricing model, limited by the face amount of the note, and was booked as a discount to the convertible note. Upon conversion of all or a portion of the note, the proportionate share of unamortized discount will be charged to interest expense.
On February 1, 2007, we entered into a supplementary agreement with Barron Partners LLP (“Barron”) (the “Supplementary Agreement”) to modify the terms of their original stock purchase agreement (the “Agreement”) dated December 31, 2005.
As of the date immediately prior to the Supplementary Agreement, Barron possessed the following series of warrants to purchase our common stock (the “Warrants”):
· Warrant “A” for 1,500,000 common shares at $2.04 exercise price
· Warrant “B” for 1,500,000 common shares at $2.80 exercise price
· Warrant “C” for 4,000,000 common shares at $3.60 exercise price
· Warrant “D” for 3,445,977 common shares at $4.80 exercise price
· Warrant “E” for 1,100,000 common shares at $2.10 exercise price
Following the Supplementary Agreement, only 3 million of the original 11,545,977 million unexercised warrants remain, and Barron has agreed to limit selling of the shares underlying the warrants to 10% per month for the first 10 months following the date of the agreement.
Specifically, we and Barron made the following amendments to the Warrants held by Barron:
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| Exercise Price. The exercise price per share for 1,100,000 “E” Warrants and 900,000 “D” Warrants was reduced to $0.80. (collectively, “$0.80” Warrants). |
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| Exercise Price. The exercise price per share for 1,000,000 “D” Warrants was reduced to $0.00001. (“$0.00001” Warrants). |
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| Exercise of Warrants. |
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| Barron can exercise up to 10% of the “$0.80” Warrants in each 30 day period for the first 10 months following the date of this amendment, provided that the market price of the common stock is below $1.25 for the 30 days period proceeding the exercise date. After ten months from the date of this agreement OR if the market stock price is above $1.25 Barron can exercise the “$0.80” Warrants without limitation. |
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| Barron can exercise up to 10% of the “$0.00001” Warrants in each 30 day period for the first 10 months following the date of this amendment. These amounts shall be cumulative, so for example if Barron does not exercise any “0.00001” Warrants in the first 30 day period, Barron may exercise up to 200,000 “0.00001” Warrants in the second thirty day period. |
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| Call provisions. Call provisions have been cancelled on all warrants. |
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| Termination. All remaining warrants except for the warrants addressed above in Sections 1 and 2 have been terminated. |
During the fiscal quarter ended June 30, 2007, we issued securities to the following shareholders:
· On April 11 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On April 27, 2007, we issued 6.9 million shares of our common stock to Panpac Tech Strategic Limited, a wholly-owned subsidiary of The Lexicon Group Ltd (“TLG”)(formerly “Sun Business Network Ltd.”) to satisfy a contractual obligation to TLG relating to the Sale and Purchase Agreement (“the Agreement”) between the parties dated November 21, 2005.
· On May 10, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On June 7, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On June 29, 2007, we cancelled 6,000,000 shares of our own stock returned to us by Sun Media Investment Holdings (“SMIH”), our largest shareholder. The shares were returned to us pursuant to a Sale and Purchase Agreement dated April 9, 2007.
We did not receive any proceeds from the exercise of warrants by Barrons because the warrants were exercised on a cashless basis.
We assessed our derivative liabilities pursuant to EITF BO. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The management team has determined that we do not have derivative liabilities as of the filing date of this report.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. The Company is evaluating its disclosure controls in light of compliance with SOX 404 in its next annual report, and if necessary, will make any changes needed to comply with SOX 404.
Changes in internal control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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NOTE 11 — MARKETABLE SECURITIES
As of June 30, 2007, we own marketable securities worth an aggregate of $13,548,437 (2007: $14,158,600). Among our securities are 32,633,233 shares, representing a 6.9% interest in Sun 3C Media (AIM:SCCC), an Irish company listed on the Alternative Investment Market in London. These shares have been placed in escrow since July 2006 pursuant to an escrow agreement by and among various parties including Sun 3C Media and us. According to the escrow agreement, our shares can be released subject to the orderly market arrangements in place, which state that any decision to sell these ordinary shares within 12 months of their release must be approved by Blue Oar Securities Plc, our agent. The shares are eligible for release in two tranches; 50% of the 32,633,233 shares on June 30, 2007 and 50% of the 32,633,233 on June 30, 2008.
In the year ended March 31, 2007, we sold 150,000,000 shares, representing approximately a 16% interest in The Lexicon Group (“TLG”) (formerly “Sun Business Network Ltd.”), to Maxi Surplus Ltd, a Singaporean company. The consideration for the sale of shares was approximately $5.88 million (9 million Singaporean dollars) to be satisfied by way of a transfer of 20 million shares in Sun 3C Media PLC. As of June 30, 2007, the stated shares were still in the process of being transferred to us. We used the purchase price as the cost of the security sold. As of the date of the filing of this report, we have completed this transaction.
The Company recognised an unrealised loss for its marketable securities, calculated as the difference between the historical cost price of the securities and the current price of the securities. The securities related to public companies registered with the U.S. Securities and Exchange Commission.
NOTE 12 — FACTORING LOAN
The factoring loan was contributed by Lifestyle Magazines Publishing Pte Ltd. which the Company sold to Sun Media Investment Holdings, our largest shareholder.
NOTE 13 — SHAREHOLDERS’ EQUITY
On April 11 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
On April 27, 2007, we issued 6.9 million shares of its common stock to Panpac Tech Strategic Limited, a wholly-owned subsidiary of Sun Business Network (“SBN”) to satisfy a contractual obligation to SBN relating to the Sale and Purchase Agreement (“the Agreement”) between the parties, dated November 21, 2005.
On May 10, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
On June 7, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
On June 29, 2007, we cancelled 6,000,000 shares of paid back by Sun Media Investment Holdings, our largest shareholders pursuant to our agreement signed on April 9, 2007.
NOTE 14 — SUBSEQUENT EVENTS
The following is a list of events that occurred after the fiscal quarter ended June 30, 2007.
On August 7, 2007, we entered into an agreement with Her Shop Ltd., an affiliate of Sun Media Investment Holdings, our largest shareholder, to trade 99,629 shares of Asia Premium Television Group (OTC:ATVG) held by us for 231,939 shares of Broadcast International Inc. (OTC:BI) held by Her Shop Ltd. The approximate value of the transaction was $260,000, whereby the ATVG shares were valued at approximately $2.65 per share and the Broadcast International shares were valued at approximately $1.10 per share. The agreement is expected to close on or before September 1, 2007.
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On August 6, 2007, we entered into an agreement with Mr. Jiancai Zhou to acquire the Peeress clothing brand and the Peeress Design and Management Center (collectively, “Peeress”). Based in Shanghai, China, Peeress is an established women’s clothing brand with over 3,000 patented clothing designs. The consideration for the acquisition is $2.17 million of which $1 million is to be paid in cash and $1.17 million is to be paid with 5 million shares of Sun 3C Media Plc (AIM SCCC) held by us. We will satisfy $500,000 of the cash consideration and Sun Media Investment Holdings (“SMIH”), our largest shareholder, will satisfy the other $500,000 of the consideration on our behalf. As of the filing of this Report, this acquisition has not been completed.
On August 6, 2007, we entered into an agreement with Sun Media Investment Holdings, our largest shareholder, to grant SMIH perpetual, non-exclusive usage rights to our reverse-auction purchasing software. The consideration for this licensing agreement is a $500,000 to be satisfied through a one-time cash payment. As of the filing of this Report, this transaction has not been completed.
On August 6, 2007, we entered into a strategic partnership agreement with Shanghai Guifuren Garment Co. Ltd (“Guifuren Garment”), a producer of mature urban women’s suits in Mainland China. According to the terms of agreement, NextMart will gain from Guifuren Garment usage rights to the Guifuren 2.0 mature urban professional women’s brand and access to 1/3 of Guifuren Garment’s sales space in nearly 60 retail stores in Mainland China. As consideration, NextMart will grant Guifuren a commission on its in-store sales of NextMart product. Guifuren Garment will provide the necessary logistics and inventory support to NextMart at no cost.
On August 7, 2007, we entered into an agreement with Yang Lan Studio Ltd, an affiliate of Sun Media Investment Holdings, our largest shareholder, to sell certain non-core assets, including five used automobiles. The consideration for the arreement is $294,867.35 to be satisfied with 268,062 shares of Broadcast International (OTC BCST) valued at $1.10 per share. The agreement is expected to close on or before September 1, 2007.
On July 6, 2007, we completed the cancellation of 7.6 million Company shares that were returned to us through an agreement with Sun Culture Foundation dated March 26, 2007. Pursuant to this agreement, we gained 7.6 million Company shares held by Sun Culture in exchange for 20 million shares of Sun 3C Media Plc (AIM:SCCC) held by us.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Financial Statements and the notes thereto presented in “Item 1 — Financial Statements.” The matters discussed in this report on Form 10-QSB include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, Any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intend”, “could”, “plan”, “estimate” or “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements are identified by those words. While forward-looking statements are sometimes presented with numerical specificity, they are based on current expectations and various assumptions made by management regarding future circumstances over which we may have little or no control. These statements are inherently predictive, speculative and subject to risk and uncertainties, and it should not be assumed that they will prove to be correct. A number of important factors, including those identified under the caption “Risk Factors” in our annual report on Form 10-KSB for the period ended March 31, 2007 filed with the SEC, which is hereby incorporated by reference, as well as factors discussed elsewhere in this Form 10-QSB, could cause our actual results to differ materially from those in forward-looking statements or forward-looking financial information. Actual results may differ from forward-looking results for a number of reasons, including market acceptance of our services, adverse market conditions affecting the Internet sector, retention of major clients, competitive factors, failure to keep pace with changing technologies and failure to protect our intellectual property. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated or projected. These forward looking statements are made only as of the date hereof, and we undertake no obligation to update or revise these forward looking statements, whether as a result of new information, future events or otherwise.
Overview
Our principal focus is the expansion of our business-to-business brand and apparel production management business, which is located in Shanghai, China. Our goal is to develop into China’s largest online shopping community for wholesale distribution and retail shopping in the apparel and women’s fashion industry. We are working toward a smaller organizational structure centered around William Brand Administer Limited (“William Brand”), our key women’s apparel subsidiary and transactional service provider. In fiscal 2008, we plan to build revenues by leveraging our core competency in online marketing, design, production and channel management in the area of women’s fashion and apparel.
During the last half of fiscal year ended March 31, 2007 and continuing through the quarter ended June 30, 2007 we completed several acquisitions, and divested certain assets that are unrelated to the women’s fashion industry. We also completed initiatives that were launched in the latter half of fiscal 2007 to reduce total overhead, rationalize non-core assets or operations and reduce the number of issued and outstanding shares of our common stock. Particularly, we divested of our beverage business in the fourth quarter of fiscal year ended March 31, 2007 which we operated during the prior three fiscal quarters. We also divested certain real estate holdings and announced our intentions to move our corporate headquarters to Shanghai, China, which is expected to occur in the coming months.
As a result of these initiatives, we expect that our results of operations for future periods will be materially different and that our principal sources of revenue, operating expenses and profits will be derived from our apparel and women’s fashion business.
Because our results of operations for the quarter ended June 30, 2006 were derived from operations that have since been discontinued, we have not presented a thorough period (June 30, 2007) to period (June 30, 2006) comparison of our results of operations.
Results of Operations
Three Months Ended June 30, 2007
Revenue. Our revenue for the three months ended June 30, 2007 was $1,803,071, of which $1,790,596 (or 99.3% of total revenue) was derived from our Transactional Services and $12,475 (or 0.7% of total revenues) was derived from our Marketing and Information Services. Transactional Services revenues relate principally to income generated by our William Brand apparel subsidiary, which had revenue of $1,353,177. During the three months ended June 30, 2007, Transactional
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Services was negatively impacted by an approximate 4.46% decrease in quarter-to-quarter revenues from William Brand (William Brand’s revenue for the quarter ended March 31, 2007 was $1,416,319). This decrease in revenues is attributed to slow market conditions in the US apparel industry which affected the number of orders coming from William Brand’s main business client in the Southern United States. This business client accounts for approximately 90% of William Brand’s revenues.
Costs of Revenue. Costs of revenue for the three months ended June 30, 2007 were $1,389,073. Transactional Services costs accounted for 100% of the total cost of revenue. Cost of revenues includes purchase goods, purchase services and labor costs.
Operating Expenses. Total operating expenses for the three months ended June 30, 2007 were $1,560,884. These expenses included $748,814 in general administration expenses which includes employee salaries, entertainment, communication, and travel expenses, $48,850 in marketing and sales expenses related to our Transactional Services and Marketing and Information Service, $578,778 in depreciation and amortization expenses, and $184,442 in consulting and professional fees, which includes legal, accounting and audit fees.
Other Income (Loss). For the three months ended June 30, 2007, we experienced a gain of $5,473 relating to the sale of Sun New Media Transaction Service Limited to Asia Premium Television Group (OTCBB: ATVG); and a loss of $14,457 relating to the amortization of the discount on subordinated notes assued during the period. We also had interest income of $1,271 and interest expenses of $39,000 for the period.
Net Loss Before Taxes. Our net loss before taxes for the three months ended June 30, 2007 was 1,193,599 for the reasons discussed above.
Comprehensive Loss. For the three months ended June 30, 2007, we experienced a gain of $18,158 due to minority interest and a loss of currency adjustment of $11,147 resulting in a comprehensive loss of $1,186,588 or a loss of $0.01 per share basic.
Three Months Ended June 30, 2006
Revenue Our revenues for the quarter under review was $ 8.8 million, of which 95% were derived from our Transactional Services and the remaining 5% from our Marketing and Information Services. Prior to the quarter ended June 30, 2006 we had no revenue from either of these operations.
Costs of Revenues Cost of revenues of $0.23 million comprise mainly direct costs, such as printing costs, editorial costs and distribution costs that associated with our marketing and information services. Cost of services revenues will vary significantly from period to period depending on the whether we will take title of the product and the level of management services we provided.
Operating Expenses Total operating expenses for the three months ended June 30, 2006 were approximately $2.6 million. These include expenses related to general & administrative and marketing & sales of $1.6 million, depreciation and amortization of $0.5 million, consulting and professional fees of $0.5 million, and warrant valuation expense of $0.2 million.
Other Income Other income of $10.9 million comprise mainly $10.7 million arising from the sale of non-core business-to-consumer (“B2C”) business assets to Sun TV Shop. Of the $10.7 million, approximately 94% is attributed to the divestments of our interests in the digital mail order catalogue publishing and merchandising that we have been recently developing with two parties. On June 30, 2006, we entered into a Sale and Purchase Agreement with Sun TV Shop, Plc (“STVS”, a related party) to sell certain of our assets in exchange for 32.6 million shares in STVS. These shares account for approximately 9% of STVS’ shares outstanding and as of July 6, 2006 were valued at approximately US$11.9 million based upon the last traded price.
The remaining 6% of the recognized gain is related to the disposal of the digital publishing rights of our magazines.
Loss from discontinued operations This relates to the loss from our legacy online brokerage business which was disposed of during the quarter.
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Net Income The net income for the three months ended June 30, 2006 was approximately $14.1 million. This comprised operating income of approximately $5.9 million and other income of approximately $11.2 million with an offset of approximately $2.5 million in other expenses.
Liquidity and Capital Resources
As of June 30, 2007, we had $1,679,247 in cash, all of which was available for general working capital purposes. Our working capital as of June 30, 2007 was $26,162,613. Working capital as of June 30, 2006 was $29,119,911. The increase in working capital is due to the appreciation of our marketable securities and increases in our accounts receivable, partially offset by the loss occasioned during the recent fiscal quarter.
We anticipate needing additional liquidity over the next 12 months in order to assist the company in executing its current business plan. We anticipate raising capital through additional private placements of our equity securities, proceeds received from the exercise of outstanding warrants and options, and, if available on satisfactory terms, debt financing.
Off-Balance Sheet Arrangements
As of June 30, 2007, we had no off-balance sheet arrangements.
Capital Expenditure Commitments
As at June 30, 2007, we had no outstanding commitments for capital expenditures.
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Critical Accounting Policies and Estimates
Our unaudited financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. In preparing financial statements, management has made certain estimates and assumptions that affected the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions were made consistent with standard accounting policies and practices. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.
Revenue recognition
We generate revenue through the provision of marketing, information, and transactional services. The Company recognizes revenues from transaction and information services in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” when all of the following conditions exist: persuasive evidence of an arrangement exists in the form of an accepted purchase order; delivery has occurred, based on shipping terms, or services have been rendered; the Company’s price to the buyer is fixed or determinable, as documented on the accepted purchase order; and collectibility is reasonably assured.
The Transactional Services include primarily the apparel vertical business and electronic components business. We recognize revenue for the transactional business when the goods have been shipped or delivered and a purchase order exists. The Marketing and Information Services includes newspaper and magazine business and marketing consulting services. The Company recognize revenue for the Marketing and Information Services when the services have been rendered.
Trade receivables and allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers to minimize credit risk. The allowance for doubtful accounts is based on management’s estimates of the collectibility of its accounts receivable after analyzing historical bad debts, customer concentrations, customer credit worthiness, and current economic trends. Specifically, the Company reviews the aged accounts receivable listing for balances that are specifically identifiable as credit risks or uncollectible, and may use judgment for calculation of allowance for doubtful accounts.
Goodwill and intangible assets, net
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company’s acquisitions of interests in its subsidiaries and VIEs. Under Statement of Financial Accounting Standards, FAS No.142, Goodwill and Other Intangible Assets, FAS 142, goodwill is no longer amortized, but tested for impairment upon first adoption and annually, thereafter, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company assesses goodwill for impairment periodically in accordance with SFAS 142.
The Company applies the criteria specified in SFAS No.141, Business Combinations to determine whether an intangible asset should be recognized separately from goodwill. Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the contractual-legal or separability criterion. Per SFAS 142, intangible assets with definite lives are amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No.144, accounting for the Impairment or Disposal of Long-lived Assets. The Company reviews the amortization methods and estimated useful lives of intangible assets at least annually or when events or changes in circumstances indicate that it might be impaired. The recoverability of an intangible asset to be held and used is evaluated by comparing the carrying amount of the intangible asset to its future net undiscounted cash flows. If the intangible asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the intangible asset exceeds the fair value of the intangible asset, calculated using a discounted future cash flow analysis. The Company uses estimates and judgments in its impairment tests, and if different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different.
Impairment of Long-lived Assets
The Company assesses the carrying value of long-lived assets in accordance with SFAS No.144, accounting for the Impairment or Disposal of Long-lived Assets. Factors considered important which could trigger this review include
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significant decrease in operating results, significant changes in its use of assets, competitive factors and the strategy of it business, and significant negative industry or economic trends. The company cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on the reported asset values. Such events may include strategic decisions made in response to the economic conditions relative to product lines, operations and the impact of the economic environment on our customer base. When the Company determine that the carrying value of long-lived may not be recoverable based on as assessment of future undiscounted cash flows from the use of those assets, an impairment charge to reord the assets at fair value may be recorded. Impairment is measured based on fair values utilizing estimated discounted cash flow, published thirty-party sources, and third-party offers.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with FASB No. 130, “Reporting Comprehensive Income (Loss). The components of comprehensive loss for the Company include currency translation adjustments and unrealized loss on marketable securities.
Foreign currency transactions
The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”, since the functional currency of the Company is Renminbi, the foreign currency financial statements of the Company’s subsidiaries are re-measured into U.S. dollars. Monetary assets and liabilities are re-measured using the foreign rate that prevailed at the balance sheet date. Revenue and expenses are translated at weighted average rates of exchange during the year and stockholders’ equity accounts and capital asset accounts are translated by using historical exchange rates. Any re-measurement gain or loss incurred is reported in the consolidated statement of operations.
Marketable securities
The Company accounts for investments in marketable securities under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Marketable equity securities are held as available for sale and are reported at fair value any unrealized gains and losses are included in accumulated other comprehensive income or loss within stockholders’ equity. The treatment of a decline in the fair value of an individual security is based on whether the decline is other-than-temporary. Significant judgment is required to assess whether the impairment is other-than-temporary, particularly for marketable equity securities that provide limited public information. Our judgment of whether impairment is other-than-temporary is based on an assessment of factors including our ability and intent to hold the individual security, severity of the impairment, expected duration of the impairment and forecasted recovery of fair value. Changes in the estimates and assumptions could affect our judgment of whether an identified impairment should be recorded as an unrealized loss in the equity section of our consolidated balance sheets or as a realized loss in the consolidated statements of operations.
Stock-based compensation
Effective January 1, 2006, the company adopted SFAS No. 123 (revised 2004), “Share Based Payment,” (“SFAS No. 123(R)”) which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that all share-based payments to employees be recognized in the financial statements based on their fair values at the date of grant. The calculated fair value is recognized as expense (net of any capitalization) over the requisite service period, net of estimated forfeitures, using the straight-line method under SFAS No. 123(R). The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. The statement was adopted using the modified prospective method of application which requires compensation expense to be recognized in the financial statements for all unvested stock options beginning in the quarter of adoption. There were no unvested stock options at the beginning of this reporting period therefore no compensation expense was recognized in the period. No adjustments to prior periods have been made as a result of adopting SFAS No. 123(R).
As at September 30, 2005 the Company elected to account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB No. 25”) and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148. During the period from September 18, 2005 to September 30, 2005, no stock-based employee compensation arrangements have been effected and accordingly no disclosure of pro forma information is required. In accordance with SFAS No. 123 the
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Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force in Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF 96-18”). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18.
Item 3. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. The Company is evaluating its disclosure controls in light of compliance with SOX 404 in its next annual report, and if necessary, will make any changes needed to comply with SOX 404.
Changes in internal control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended June 30, 2007, we issued shares in the following transactions pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Act”).
· On April 11 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On April 27, 2007, we issued 6.9 million shares of our common stock to Panpac Tech Strategic Limited, a wholly-owned subsidiary of The Lexicon Group Ltd (“TLG”)(formerly “Sun Business Network Ltd.”) to satisfy a contractual obligation to TLG relating to the Sale and Purchase Agreement (“the Agreement”) between the parties dated November 21, 2005.
· On May 10, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On June 7, 2007, we issued a total of 99,998 shares to Barron Partners L.P. (“Barrons”) to satisfy a cashless exercise of 100,000 Class D Warrants held by Barron.
· On June 29, 2007, we cancelled 6,000,000 shares of our own stock returned to us by Sun Media Investment Holdings (“SMIH”), our largest shareholder. The shares were returned to us pursuant to a Sale and Purchase Agreement dated April 9, 2007.
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Item 3. Defaults Upon Senior Securities.
On March 22, 2007, we executed subscription agreements with five accredited investors (the “Selling Stockholders”) for the purchase of an aggregate of $1,500,000 of our senior convertible promissory notes (“Notes”) and Class A, Class B, and Class C common stock purchase warrants. At closing, we paid the Selling Stockholders a total of 1,500,000 shares of our common stock as full consideration of all interest due under the Notes. We have not completed our registration rights convenants in the agreement with the Selling Stockholders. As a result, we are in default under the terms of such agreement with the Selling Shareholders. We are currently in negotiations with the Selling Shareholders in an effort to remedy the situation.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Events Subsequent to the Quarter Ended June 30, 2007
The following is a list of events that occurred after the fiscal quarter ended June 30, 2007.
On August 7, 2007, we entered into an agreement with Her Shop Ltd., an affiliate of Sun Media Investment Holdings, our largest shareholder, to trade 99,629 shares of Asia Premium Television Group (OTC:ATVG) held by us for 231,939 shares of Broadcast International Inc. (OTC:BI) held by Her Shop Ltd. The approximate value of the transaction was $260,000, whereby the ATVG shares were valued at approximately $2.65 per share and the Broadcast International shares were valued at approximately $1.10 per share. The agreement is expected to close on or before September 1, 2007.
On August 6, 2007, we entered into an agreement with Mr. Jiancai Zhou to acquire the Peeress clothing brand and the Peeress Design and Management Center (collectively, “Peeress”). Based in Shanghai, China, Peeress is an established women’s clothing brand with over 3,000 patented clothing designs. The consideration for the acquisition is $2.17 million, of which $1 million is to be paid in cash and $1.17 million is to be paid with 5 million shares of Sun 3C Media Plc (AIM:SCCC) held by us. We will satisfy $500,000 of the cash consideration, and Sun Media Investment Holdings (“SMIH”), our largest shareholder, will satisfy the other $500,000 of the consideration on our behalf. As of the filing of this Report, this acquistion has not been completed.
On August 6, 2007, we entered into an agreement with Sun Media Investment Holdings, our largest shareholder, to grant SMIH perpetual, non-exclusive usage rights to our reverse-auction purchasing software. The consideration for this licensing agreement is a $500,000 to be satisfied through a one-time cash payment. As of the filing of this Report, this transaction has not been completed.
On August 6, 2007, we entered into a strategic partnership agreement with Shanghai Guifuren Garment Co. Ltd (“Guifuren Garment”), a producer of mature urban women’s suits in Mainland China. According to the terms of agreement, NextMart will gain from Guifuren Garment usage rights to the Guifuren 2.0 mature urban professional women’s brand and access to 1/3 of Guifuren Garment’s sales space in nearly 60 retail stores in Mainland China. As consideration, NextMart will grant Guifuren a commission on its in-store sales of NextMart product. Guifuren Garment will provide the necessary logistics and inventory support to NextMart at no cost.
On July 6, 2007, we completed the cancellation of 7.6 million Company shares that were returned to us through an agreement with Sun Culture Foundation dated March 26, 2007. Pursuant to this agreement, we gained 7.6 million Company shares held by Sun Culture in exchange for 20 million shares of Sun 3C Media Plc (AIM:SCCC) held by us.
Recent Developments during the Quarter Ended June 30, 2007
On June 29, 2007, we cancelled 6,000,000 shares of our own stock returned to us by Sun Media Investment Holdings (“SMIH”), our largest shareholder. The shares were returned to us pursuant to a Sale and Purchase Agreement dated April 9, 2007
On June 25, 2007, we entered into an agreement with Asia Premium Television Group Limited (OTCBB:ATVG) to sell Sun New Media Transaction Services Limited (SNMTS), our wholly-owned subsidiary, for a consideration of $1.00. As a result of this transaction, we experienced a loss of $0.47 million.
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On May 28, 2007 we entered into an agreement with Wuxi Guangxin Movie and Carton Technology Limited to form a joint venture company called Wuxi Sun Net Technology Limited. We hold 60% of the shares in the joint venture and Wuxi Guangxin Movie and Cartoon Technology Limited holds 40% of the shares. The joint venture’s main business is to develop and distribute electronic magazines for consumers to download on their personal computers.
On May 2, 2007, we reincorporated in the State of Delaware which changed our corporate domicile from Minnesota to Delaware. On that same date, we changed our name from “Sun New Media Inc.” to “NextMart, Inc.” and modified our Bylaws. These revised Bylaws are incorporated by reference in our last Proxy Statement filed on June 12, 2006 with the exception of a change to our total number of authorized shares. On May 2, 2007, we modified our Bylaws such that the total number of shares of all classes which the Corporation shall have authority to issue is Five Hundred Million (500,000,000) consisting of Three Hundred Fifty Million (350,000,000) shares of Common Stock, par value $0.01 per share (the “Common Stock”) and One Hundred Fifty Million (150,000,000) shares of Preferred Stock, par value $0.01 per share (the “Preferred Stock”). [tentatively take entire para but to check on total authorised shares]
On April 27, 2007, we issued 6.9 million shares of our common stock to Panpac Tech Strategic Limited, a wholly-owned subsidiary of The Lexicon Group Ltd (“TLG”)(formerly “Sun Business Network Ltd.”) to satisfy a contractual obligation to TLG relating to the Sale and Purchase Agreement (“the Agreement”) between the parties dated November 21, 2005. In the original Sale and Purchase Agreement, we purchased certain assets, including various on-line publishing rights, from TLG for an aggregate consideration of the issuance of 13.8 million of our shares. The consideration was to be satisfied in two installments of 6.9 million shares. The first installment was issued at the closing. This most recent issuance completes our obligations under the agreement.
On April 11, 2007, we entered into a partnership agreement with Her Village Co. Ltd (‘Her Village’), a related party of Sun Media Investment Holdings (SMIH), our largest shareholder, for certain exclusive marketing access within Her Village’s multimedia products — namely, its e-magazines. Her Village is a wholly-owned subsidiary of Yang Lan Studio Ltd., which is 100% owned and controlled by Ms. Yang Lan, the spouse of our Chairman Dr. Bruno Wu. As part of the agreement, we agreed to pay for the production of Her Village’s online multimedia products at cost, approximately $180,000 per annum and receive the revenues generated from the sale of such products, subject to the payment of a 10% sales commission to her Village on all transactions generated by Her Village. As of the filing of this Report, we have not completed this transaction.
On April 9, 2007, we entered into agreement with SMIH to sell certain non-core assets in exchange for a total consideration of $4.15 million dollars. The assets to be sold are: Two real estate properties in Beijing; a 30% investment stake in Global Woman Multimedia Co. Ltd; and 100% of the share capital of Lifestyle Magazines Publishing Co. Ltd. According to the terms of the agreement, SMIH will satisfy the $4.15 million consideration by transferring to us 1 million shares of Validian Corp. (OTCBB:VLDI)(“Validian’) and (ii) a promissory note of Validian in favor of SMIH with a principal amount of $500,000; and by returning to us 6 million of our common shares held by SMIH. As of the filing of this Report, we have not completed this transaction, however, we have already received and cancelled the 6 million shares returned to us from SMIH.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31 – Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002.
Exhibit 32 – Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K.
We filed the following reports with the Securities and Exchange Commission on Form 8-K:
1. On April 5, 2007, we filed a Report on Form 8-K to report events under Item 5.01.
2. On April 13, 2007, we filed a Report on Form 8-K to report events under Items 1.01 and 9.02.
3. On May 10, 2007, we filed a Report on Form 8-K to report events under Items 1.01, 3.02, 3.03, and 5.03.
4. On June 8, 2007, we filed a Report on Form 8-K to report events under Item 2.02.
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEXTMART, INC. |
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Date: August 20, 2007 | By: | /s/ Ren Huiliang | ||
| Ren Huiliang |
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| Chief Executive Officer |
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| By: | /s/ Ren Huiliang | ||
| Ren Huiliang |
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| Acting Chief Financial Officer |
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| Description | |
2.1 |
| Sale and Purchase Agreement dated June 30, 2006 to sell certain of the Registrant’s assets to Sun TV Shop, Plc. (incorporated by reference from our Current Report on Form 8-K filed on July 7, 2006) |
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2.2 |
| Updated letter from Moores Rowland Mazars, the Registrant’s former accountant (incorporated by reference from our Current Report on Form 8-K/A filed on July 11, 2006) |
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2.3 |
| Financials for the Sale and Purchase Agreement to Acquire Magzone Asia Pte Ltd, dated January 4, 2006 by and among Sun New Media, Inc. (the “Company”), Seeds Capital Pte Ltd, Wong Sing Lam, Tay Koon Chuan, and Wang Jian (collectively, the “Sellers”) (incorporated by reference from our Current Report on Form 8-K/A filed on July 21, 2006) |
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2.4 |
| Financials for the Sale and Purchase Agreement to acquire Lifestyle Magazines Publishing Pte. Ltd (“Lifestyle Magazine”). dated February 14, 2006 by and between Sun New Media, Inc. and United Home Limited (incorporated by reference from our Current Report on Form 8-K/A filed on August 7, 2006) |
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2.5 |
| Announcement of operating and financial results for the three months ended June 30, 2006 (incorporated by reference from our Current Report on Form 8-K filed on August 7, 2006), |
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2.6 |
| Financials for the Sale and Purchase agreement to acquire of Telefaith Holdings Ltd. dated December 8, 2005 by and among Sun New Media, Inc., Yan Hui, Lin Min, and Luan Kezhou (incorporated by reference from our Current Report on Form 8-K/A filed on August 8, 2006) |
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2.7 |
| Resignation of Mr. Qi Yang as Director of the Registrant (incorporated by reference from our Current Report on Form 8-K filed on August 24, 2006) |
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2.8 |
| Appointment of Grant Thornton HK as independent auditor for the fiscal period ending March 31, 2007 (incorporated by reference from our Current Report on Form 8-K filed on September 19, 2006) |
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2.9 |
| Appointment of Thomas A. Schuler as Chief Financial Officer (incorporated by reference from our Current Report on Form 8-K filed on September 25, 2006) |
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3.0 |
| Completion of the acquisition of William Brand Administer Limited and its subsidiary William Textiles Limited (incorporated by reference from our Current Report on Form 8-K filed on September 30, 2006) |
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3.1 |
| Resignation of Mr. Ricky Ang as CEO of the Company and Appointment of Dr. Bruno Wu as CEO of the Company (incorporated by reference from our Current Report on Form 8-K filed on October 5, 2006) |
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3.2 |
| Resignation of Dr. Herbert Kloiber as a member of the Board of Directors (incorporated by reference from our Current Report on Form 8-K filed on October 11, 2006) |
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3.3 |
| Resignation of Mr. William Adamopoulos as a member of the Board of Directors (incorporated by reference from our Current Report on Form 8-K filed on November 3, 2006) |
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3.5 |
| Sale and Purchase Agreement with the Sellers of Hubei Zhengyuan Co., Ltd, dated November 21, 2006 (incorporated by reference from our Current Report on Form 8-K filed on November 27, 2006) |
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3.6 |
| Resignation of Grant Thornton HK as independent auditor for the fiscal period ending March 31, 2007, and Reappointment of Bernstein & Pinchuk as independent auditor for the fiscal period ending March 31, 2007 (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2006) |
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3.7 |
| Appointment of Mr. Walter Beach as a member of the Board of Directors (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2006) |
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3.8 |
| Supplementary Agreement with Barron Partners LLP (“Barron”) to modify the terms of a Stock Purchase Agreement between Barron and the Company, dated December 31, 2007 (incorporated by reference from our Current Report on Form 8-K filed on February 6, 2007) |
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14.1 |
| Next Mart Code of Ethics |
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31.1 |
| Certificate of CEO as Required by Rule 13a-14(a)/15d-14 |
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31.2 |
| Certificate of CFO as Required by Rule 13a-14(a)/15d-14 |
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32.1 |
| Certificate of CEO as Required by Rule 13a-14(b) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code |
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32.2 |
| Certificate of CFO as Required by Rule 13a-14(b) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code |
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