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SMARTPAY EXPRESS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Period from January 1, 2009 to September 30, 2009

 

The accompanying financial statements present the financial position of the Company as of September 30, 2009 and December 31, 2008, and its results of operations for the three-month and nine-month periods ended September 30, 2009 and 2008 and cash flows for the nine months ended September 30, 2009 and 2008. All inter-company accounts and transactions have been eliminated on consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

 

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

1.       ORGANIZATION

 

The unaudited condensed consolidated financial statements include the accounts of SmartPay Express, Inc. ("SPYE") (formerly known as Axiom III, Inc. (“AXIO”)) and its subsidiaries (collectively referred to as the “Company”).

 

On October 10, 2007, AXIO entered into a share exchange agreement with, among others, the shareholders of Eastern Concept Development Limited (“Eastern Concept”) pursuant to which AXIO acquired 100% of the issued and outstanding share capital of Eastern Concept in exchange for 35,351,667 shares of common stock of AXIO, or 70.7% of the total 50,000,000 issued and outstanding shares of common stock of AXIO after giving effect to the share exchange. On October 18, 2007, AXIO entered into a stock purchase agreement with Northeast Nominee Trust, the then major shareholder of AXIO, to dispose of its 100% interest in Axiom First Corporation, the only asset of AXIO just before the share exchange on October 10, 2007, at a consideration of US$1. Since then, AXIO entirely ceased its prior business operations.

 

For financial reporting purposes, the acquisition of Eastern Concept by AXIO has been treated as a reverse acquisition whereby Eastern Concept is considered as the acquirer, i.e. the surviving entity. On this basis, the historical financial information prior to October 10, 2007 represents that of Eastern Concept.

 

SPYE has five subsidiaries: Eastern Concept, Eastern Concept Corporate Consulting (Shenzhen) Limited, Guangdong Wanzhi Electron S&T Company Limited (formerly Foshan Wanzhi Electron S&T Company Limited) (“Wanzhi”), Foshan Information Technology Company Limited (“Foshan Company”) and Foshan JinCheng Information Technology Company Limited (“JinCheng”). Except for Eastern Concept which is incorporated in Hong Kong, all subsidiaries are established in the People’s Republic of China (the “PRC”).

 

The Company entered into an agreement with a third party individual on March 28, 2009 to dispose of its entire 51% equity interests in JinCheng (the “Disposal”) at a consideration of approximately US$370,000 (see note 4). Up to the date of this report, the Disposal has not been completed.

 

The Company is principally engaged in the provision of smartcard system and other value-added services in Guangdong province, the PRC. During the nine-month period ended September 30, 2009, the Company carried out a transaction for sale and purchase of mobile phones with costs and revenue of US$891,180 and US$929,785 respectively. This transaction was introduced by a business partner for provision of smart card services to schools, which is a telecom service provider in the PRC. Although such kind of transactions may continue to occur in the future as a result of the business relationship with the business partner, the Company considers that those transactions are auxiliary to its core business and they would not become the Company’s principal activities.

 

 

SMARTPAY EXPRESS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Period from January 1, 2009 to September 30, 2009 

 

2.       RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND STANDARDS

 

Adoption of Recently Issued Accounting Pronouncements

 

Effective 1 July 2009, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 105, “the FASB Accounting Standards Codification” (“Codification”) (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168). Codification will become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. Once the Codification is in effect, all of its content will carry the same level of authority. The adoption of this Statement does not have a material effect on the Company's financial statements. However, because the Codification completely replaces existing standards, it will affect the way US GAAP is referenced within the unaudited condensed consolidated financial statements and accounting policies.

 

Effective January 1, 2009, the Company adopted ASC Topic 805, “Business Combinations” (formerly SFAS No. 141) which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interests in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies and research and development. The adoption of this Statement does not have a material effect on the Company's financial statements.

 

Effective January 1, 2009, the Company adopted ASC Topic 260, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (formerly SFAS No. 141). ASC Topic 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. The adoption of this Statement does not have a material effect on the Company's financial statements.

 

Effective January 1, 2009, the Company adopted ASC Topic 810, “Noncontrolling Interests in Consolidated Financial Statements” (formerly SFAS No. 160). ASC Topic 810 establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. Consolidated net income should include the net income for both the parent and the noncontrolling interests with disclosure of both amounts on the consolidated statement of operations. ASC Topic 810 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. ASC Topic 810 is to be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. As a result, the condensed consolidated balance sheets have been adjusted to reflect the reclassification of noncontrolling interests to equity, the condensed consolidated statements of operations have been adjusted to include the net income attributable to the noncontrolling interests. Other than the change in presentation of noncontrolling interests, the adoption of this Statement does not have a material effect on the Company's financial statements.

 

Effective January 1, 2009, the Company adopted ASC Topic 815, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (formerly SFAS No. 161). ASC Topic 815 seeks qualitative disclosures about the objectives and strategies for using derivatives; quantitative data about the fair value of, and gains and losses on, derivative contracts; and details of credit-risk-related contingent features in hedged positions. ASC Topic 815 also seeks enhanced disclosure around derivative instruments in financial statements, accounted for under ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities” (formerly SFAS No. 133), and how hedges affect an entity’s financial position, financial performance and cash flows. The adoption of this Statement does not have a material effect on the Company's financial statements.

 

Effective April 1, 2009, the Company adopted (i) ASC Topic 320, “Recognition of Presentation of Other-Than-Temporary Impairments” (formerly FASB Staff Positions (“FSP”) FAS No. 115-2 and FAS No. 124-2), (ii) ASC Topic 825, “Interim Disclosures about Fair Value of Financial Instruments” (formerly FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1), and (iii) ASC Topic 820, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (formerly FSP FAS No. 157-4).

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(b)           Assets and liabilities held for sale

The Company has also reclassified the major classes of assets and liabilities of JinCheng as held for sale in the Condensed Consolidated Balance Sheet in accordance with ASC Topic 360 as follows:

 

 

		As of September 30, 2009
		US$
		(Unaudited)
Current assets
Prepayments and deposits		7,585
Other debtors			3,657
Amount due from an associate			80,882
Inventories			720
Cash and cash equivalents			156
Total current assets held for sale			93,000
Non-current assets
Property, plant and equipment, net			27,843
Intangible assets, net			248,203
Interest in an associate			260
Total non-current assets held for sale			276,306
Total assets held for sale			369,306
Current liabilities
Accrued charges and other payables			656
Total current liabilities held for sale			656
Total liabilities held for sale			656
Net assets held for sale			368,650
Less: Noncontrolling interests			(180,639	)
			188,011

 

 

SMARTPAY EXPRESS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Period from January 1, 2009 to September 30, 2009

 

5.       RELATED PARTY TRANSACTIONS

In addition to the transactions / information disclosed elsewhere in these financial statements, the Company had the following transactions with related parties.

(a)	Name and relationship of related parties
	Name	Existing relationships with the Company
	Li Xing Hao	A director of Wanzhi and a major stockholder of SPYE
	Guangdong Chigo Air Conditioning Company Limited ("Chigo") *	A company in which Li Xing Hao has control and beneficial interest
	Tang Jin Cheng	A director of JinCheng
	Foshan JinCheng Technology Company Limited *	Minority shareholder of JinCheng
	Foshan Shancheng JiaXun Technology Services Centre *	Minority shareholder of JiaXun
	Foshan KaiEr Information Technology Company Limited ("KaiEr") *	An associate of JinCheng

*  The official names are in Chinese and the English names are translation for reference only.

(b)	Balances with related parties

 

     (i)        Trade receivable from a related party

 

		As of
		September 30, 2009				December 31, 2008
		US$				US$
		(Unaudited)
Chigo			5,821				24,148

The amount due is unsecured, interest-free and has no fixed repayment term.

(ii)        Amounts due from related parties

		As of
		September 30, 2009				December 31, 2008
		US$				US$
		(Unaudited)
Tang Jin Cheng			14,706				14,493
KaiEr			14,706				79,711
			29,412				94,204

 

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SMARTPAY EXPRESS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Period from January 1, 2009 to September 30, 2009

 

 

5.       RELATED PARTY TRANSACTIONS (CONTINUED)

 

(b)	Balances with related parties (Continued)

As of September 30, 2009 and December 31, 2008, the amounts due are unsecured, interest-free and have no fixed repayment term except for the amount due from Tang Jin Cheng which is interest-bearing at US$99 per month and repayable on October 31, 2009.

 

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THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2009 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2008.

 

OPERATING REVENUES

 

Since inception in June 2007, the Company has been engaged in the provision of smartcard payment system and related value-added services primarily in Guangdong province, the PRC.  The Company generated a total of approximately $441,907 service income as operating revenues for the three-month period ended September 30, 2009, as compared to approximately $77,157 for the three-month period ended September 30, 2008, an increase of 472.74%. Approximately 37% was generated from the Nanhai project and schools smartcard system for the period ended September 30, 2009, as compared to 21% for the period ended September 30, 2008. The increase was due to the change of business model. In the past, the Company collected proceeds from students directly and paid subcontracting and charges to other service providers. Commencing from last quarter, the telecom service provider collects service fees from the students and pays the Company for its entitlement. At present, there are approximately 21,000 students in Nanhai city and approximately 14,500 students in other cities (5,000 in Maoming, 4,000 in Shangwei, 3,500 in Qingyuan and 2,000 in Shunde) who are using our services. We anticipate that more operating revenues would be generated as we expand our services to more students in these cities and other cities within Guangdong province.

 

SUBCONTRACTING AND OTHER CHARGES

 

Subcontracting and other charges increased 341.00% to approximately $92,310 for the period ended September 30, 2009, as compared to approximately $20,932 for the period ended September 30, 2008.

 

A significant portion of these charges, approximately 80.01% and 36.24% for the periods ended September 30, 2009 and 2008, respectively, was related to the Nanhai project and schools smartcard system. The increase was a result of the increase in operating revenue from the Nanhai project and schools smartcard system.

 

STAFF COSTS

 

The total staff costs for the period ended September 30, 2009 approximated $19,554 as compared to $69,170 for the period ended September 30, 2008, a decrease of 71.73% because the reduction of our headcounts and the termination of customer hotline services that we used to provide for Guangdong Chigo Air Conditioning Company Limited. Currently, the Company employs 2 card equipment and software development staff members, 13 marketing personnel, 4 finance personnel, 3 business and customer service personnel.

 

DEPRECIATION EXPENSES

 

Depreciation expenses for the period ended September 30, 2009 amounted to $3,530, as compared to $2,954 for the period ended September 30, 2008, an increase of 19.50%.  These expenses were related to the depreciation charged on office equipment and computers.

 

AMORTIZATION OF INTANGIBLE ASSETS

 

Amortization charges of intangible assets for the period ended September 30, 2009 approximated $51,359, as compared to $47,841 for the period ended September 30, 2008, an increase of 7.35%.  These amortization charges were resulted from the operating rights of the Nanhai project and the computer software relating to the Nanhai project. As of September 30, 2009, the carrying value of the operating right of the Nanhai project was approximately $1,068,338 and the carrying value of the intangible asset of the computer software was approximately $276,260. 

 

OTHER GENERAL AND ADMINISTRATIVE EXPENSES

 

Other general and administrative expenses for the period ended September 30, 2009 were $89,831, as compared to $175,885 for the period ended September 30, 2008, a decrease of 48.93%. The decrease in other general and administrative expenses was mainly due to less consulting and professional fees paid for in connection with our filing obligations as a reporting company after their contracts expired.

 

INTEREST INCOME

 

There would be no interest income for the period ended September 30, 2009, but it had $1,314 for the period ended September 30, 2008. The decrease in interest income was due to less interests received from the bank for two deposits after their expiration dates.

 

AMORTIZATION OF LOANS FROM A RELATED PARTY

 

Amortization of loans from a related party for the period ended September 30, 2009 was $Nil, as compared to $13,282 for the period ended September 30, 2008. The decrease was mainly attributable to the decrease in the carrying amount of the loans as a result of partial settlements made during the year ended December 31, 2008 and the rearrangement of loans from a related party on April 30, 2009.

 

INTEREST EXPENSES

 

Following the rearrangement of loans from a related party on April 30, 2009, the loans are interest-bearing at 1% per month, resulted in interest expenses of $23,065 during the period ended September 30, 2009 but no such interest was incurred in the corresponding period of last year.

 

INCOME TAXES

 

The Company is subject to PRC Enterprise Income Taxes ("EIT") on an entity basis on income arising in and derived from the PRC. The applicable EIT rate is 25% in year 2009 and 2008. 

 

Since the estimated assessable profits of the Company's PRC established subsidiaries were wholly absorbed by unrelieved tax losses brought forward from previous periods for the period ended September 30, 2009, no provision for EIT has been made.

 

NET INCOME

 

The Company incurred a net income of $163,963 for the period ended September 30, 2009, as compared to a net loss of $245,597 for the same period in 2008, an increase of 166.76%. The increase in net income was primarily due to increase in service income and decrease in other general and administrative expenses and staff costs.  

 

DISCONTINUED OPERATIONS OF THE JINCHENG PROJECT

 

The proposed disposal of JinCheng and the relevant discontinued operations and assets and liabilities held for sales which are separately disclosed in the notes to our financial statements.  

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SIGNATURES

 

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.

November 20, 2009	Smartpay Express, Inc.
	By:	/s/ Ping Tang
		Ping Tang
		Chairman and Chief Executive Officer

 

 

November 20, 2009	Smartpay Express, Inc.
	By:	/s/ Chunlin Zhang
		Chunlin Zhang
		Vice President and Chief Financial Officer