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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2011

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from _________ to _________


Commission file number 000- 52579

SMARTPAY EXPRESS, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
 
    20 - 1204606
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
1315 Lawrence Avenue, East, Suite 520
Toronto Ontario, Canada M3A3R3
 (Address of principal executive offices)

(416) 510-8351
(Issuer's telephone number)

(Former name, address and fiscal year, if changed since last report)
 
Securities registered under Section 12(b) of the Exchange Act: None
 
Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.001 per share
(Title of Class)
 
 
 
 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
   
Check whether the issuer: (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act of 1934 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.    Yes x   No 
 
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Large accelerated filer o                               Accelerated filer o
  
Non-accelerated filer o                        Smaller reporting companyx
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x
 
Issuer's revenues for its most recent fiscal year were $1,015,993
 
As of June 30, 2011, which was the last business day of the registrant most recent second fiscal quarter, the aggregate market value of the registrant Common Stock held by non-affiliates of the registrant was $171,587.15 based on the closing sale price of $0.35 per share on that date.
 
As of the date of this report, there were outstanding 1,292,166 shares of the issuer's common stock, par value $.001.
 
 
 
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TABLE OF CONTENTS

   
Page Number
 
Part I
 
     
Item
   
     
1.
Business
4
     
2.
Properties
14
     
3.
Legal Proceedings
14
     
4.
Mine Safety Disclosures
14
     
 
Part II
 
     
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
     
6.
Selected Financial Data
17
     
7.
 Management's Discussion and Analysis of Financial Condition and Results of Operations
17
     
7A.
Quantitative and Qualitative Disclosures About Market Risk
24
     
8.
Financial Statements and Supplementary Data
25
     
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
45
     
9A.
Controls and Procedures
45
     
9A(T).
Controls and Procedures – Internal Control Over Financial Reporting
46
     
9B.
Other Information
46
     
 
Part III
 
     
10.
Directors, Executive Officers and Corporate Governance
46
     
11.
Executive Compensation
49
     
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
51
     
13.
Certain Relationships and Related Transactions, and Director Independence
53
     
14.
Principal Accountant Fees and Services
53
     
 
Part IV
 
     
15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
54
     
 
Signature Page
56
 
 

 
 
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 PART I

 Item 1 .          Business
 
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

The discussion contained in this 10-K under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussion under "Description of Business," including the "Risk Factors" described in that section, and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them.

History of Our Company

Description of SmartPay Express’s Business

SmartPay Express, Inc., a Nevada corporation (“SPYE”) was originally incorporated in June 2004 under the name of Axiom III, Inc. (“AXIO”).  AXIO was originally incorporated in Massachusetts as Axiom First Corporation on May 22, 2003. Northeast Nominee Trust owned 100% of Axiom First Corporation. AXIO also created a second corporation, Axiom Second Corporation, which was also incorporated in Massachusetts on May 22, 2003. Axiom First Corporation owned, and continues to own, 100% of its subsidiary, Axiom Second Corporation. The next month, on June 12, 2003 Duane Bennett, the Chief Executive Officer and sole Director of AXIO (“Bennett”) deeded to Axiom Second Corporation an apartment building located in Chicopee, Massachusetts. In June 2004, AXIO redomiciled from Massachusetts to Nevada by incorporating Axiom III, Inc. in Nevada, and then by agreement dated June 30, 2004 the Northeast Nominee Trust entered into a share exchange with Axiom III, Inc., in which the Trust exchanged its 100% ownership in Axiom First Corporation for 2,500,000 shares of Axiom III, Inc.  Thus, Axiom III, Inc. assumed 100% ownership of Axiom First Corporation and its subsidiary, completing the redomicile to Nevada. On October 18, 2007, AXIO entered into a stock purchase agreement with Northeast Nominee Trust to dispose of a 100% equity interest in Axiom First Corporation, the only asset of AXIO just before the share exchange on October 10, 2007 (See "Description of Eastern Concept Business" below). Since then, AXIO entirely ceased its prior business operations.

AXIO was a development stage company and owned one apartment building in Chicopee, Massachusetts. It had planned to continue in this line of business for the foreseeable future. However, the opportunity arose to consummate a reverse merger with Eastern Concept Development Ltd., a corporation organized and existing under the laws of the Hong Kong Special Administrative Region of the People’s Republic of China (“Eastern Concept”), and the sole Director of AXIO deemed this to be in the best interests of shareholders.  Eastern Concept’s business will be described in greater detail in the next section below.

In connection with this reverse merger, on or about November 30, 2007, AXIO’s shareholders voted to change its name to SmartPay Express, Inc. and increase its authorized common stock to 300,000,000 shares of $.001 par value.  The name change and increase in authorized capital were effective on January 8, 2008 upon filing with the State of Nevada.

SPYE is currently authorized to issue 300,000,000 shares of common stock and 5,000,000 shares of preferred stock. It currently has 1,292,166 shares of common stock, and no shares of preferred stock issued and outstanding.
 
Description of Eastern Concept’s Business

Pursuant to a Share Exchange Agreement, dated October 10, 2007 (the “Agreement”), between and among AXIO, Bennett, Eastern Concept, Mr. Benny Lee, the sole shareholder of Eastern Concept (“Eastern Concept Shareholder”), Foshan Wanzhi Electron S&T Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“Foshan”),and Jun Chen, the representative of the shareholders of Foshan (“Foshan Shareholders”), the Eastern Concept Shareholder exchanged all of the share capital of Eastern Concept 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.  As additional consideration, the Eastern Concept Shareholder agreed to pay $262,500 to the North East Nominee Trust, which is the majority shareholder of AXIO. Bennett is the trustee of the North East Nominee Trust, whose corpus is held for the benefit of his children. The Agreement was attached as exhibit 2.1 to a Form 8-K filed with the Commission on October 24, 2007, and is incorporated by reference herein.
 
 
 
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Subsequently, Eastern Concept Corporate Consulting (Shenzhen) Limited, a company organized and existing under the laws of the People’s Republic of China (the "PRC") and a wholly owned subsidiary of Eastern Concept (“Eastern Concept Consulting”), entered into a Share Exchange Agreement, dated November 6, 2007, with the shareholders of Foshan pursuant to which the shareholders of Foshan agreed to exchange 100% of the share capital of Foshan for a purchase price of approximately $1.3 million. The share exchange transaction was consummated on November 9, 2007, and, as a result, Foshan became a wholly owned subsidiary of Eastern Concept Consulting. The Share Exchange Agreement was attached as exhibit 2.2 to a Form 8-K filed with the Commission on November 9, 2007, and is incorporated by reference hereby.

Pursuant to the Agreement, the Eastern Concept Shareholder exchanged 100% of the share capital of Eastern Concept for 35,351,667 shares of common stock of AXIO, thus causing Eastern Concept to become a wholly owned subsidiary of AXIO. Its sole asset was approximately $1.3 million in cash which was to be used to acquire Foshan. A so-called Super 8-K was filed with the Commission within four business days of the closing of this first step share exchange. In the second step, pursuant to a Share Exchange Agreement, a subsidiary of Eastern Concept acquired all of the outstanding share capital of Foshan for a purchase price of $1.3 million. Again, a so-called Super 8-K was filed with the Commission within four days of the closing of the second step acquisition of Foshan.

In addition, pursuant to the terms and conditions of the Agreement:

The parties to the Agreement agreed that AXIO shall not consummate a reverse stock split or any similar reclassification or combination of its common stock for a period of one year from October 1, 2007.
Bennett and the Northeast Nominee Trust agreed to execute and deliver to Eastern Concept a Leak-Out Agreement which limits the ability of Bennett and the Northeast Nominee Trust to sell any portion of the 1,000,000 share block of AXIO common stock retained by Bennett as part of the transaction for a period of one year from the date thereof in excess of 10,000 shares per day.
On the Closing Date, the Registrant paid and satisfied all of its “liabilities” as such term is defined by U.S. GAAP as of the closing.
 
 
 
 
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As a result of the exchange of a majority of AXIO’s common stock for all of the share capital of Eastern Concept, the Eastern Concept Shareholder and his designee acquired majority control of the outstanding common stock of AXIO and appointed their candidate to the Board of Directors at closing. Bennett continued to serve until the ten day period required by Rule 14f-1 expired, and then he resigned. As a result, Benny Lee was appointed as a Director, Chief Executive Officer, Chief Financial Officer and Secretary of AXIO.

On or about November 30, 2007, AXIO’s shareholders voted to change the Company’s name to SmartPay Express, Inc. (“SPYE”), and this name change became effective on or about January 8, 2008, when the name change documents were filed with the Nevada Secretary of State.  SPYE now owns and operates the business of Eastern Concept and its wholly-owned subsidiary, Foshan.

Eastern Concept is a holding company, with audited and pro forma financials presented in the Form 8-K that was filed on October 24, 2007, whose sole purpose was to effect the reverse merger with AXIO and later consummate an acquisition of the share capital of Foshan from its shareholders for approximately $1.3 million. Foshan is principally engaged in providing AIOMS smart card payment systems and related value-added services mainly in the Guangdong Province of the People’s Republic of China. Foshan is a “non-bank” card issuer/operator with support from the municipal government and approval from the People’s Bank of China to collect deposits as prepayment stored in the chip embedded in the cards that it issues.

In October 2007, Foshan Information Technology Company Limited ("Foshan Company") and third parties established two subsidiaries, Foshan JiaXun Information Technology Company Limited (“JiaXun”) and Foshan JinCheng Information Technology Company Limited ("JinCheng"), in the PRC with registered capital of RMB3,000,000 (US$410,959) and RMB4,000,000 (US$547,945), respectively.  Foshan Company owns 51% of the registered capital of each of JiaXun and JinCheng.  The principal activity of JiaXun is the provision of information system and network services while JinCheng owns an operating right in respect of certain equipment for a smartcard system to be installed in schools located in the ShanCheng District, Foshan, the PRC.

In February 2008, Foshan disposed of a 45% equity interest in Foshan Company at a consideration of US$410,961 (the “Disposal”). As a result of the Disposal. SPYE held a 55% equity interest in Foshan Company through Foshan.

In April 2008, JinCheng acquired a 30% equity interest in Foshan KaiEr Information Technology Company Limited (“KaiEr”), a company incorporated in the People’s Republic of China and engaged in the development of technology for networks and computers and business advisory service, at a consideration of US$18,362.

In September 2008, Foshan Company disposed of its entire 51% equity interest in JiaXun at a consideration of US$221,739, which resulted in a gain of US$658 which was recorded in the condensed consolidated statements of operations of SPYE.

In March 2009, Foshan Company entered into an agreement to dispose of its entire 51% equity interest in JinCheng at a consideration of US$365,217. In December 2009, Foshan Company agreed with the Purchaser to terminate the disposal as the Purchaser was unable to settle consideration as scheduled.

On February 2, 2010, Foshan acquired an additional 35% equity interest in Foshan Company at a cash consideration of US$294,118, resulting in an increase of the Company’s shareholding in Foshan Company from 55% to 90%.
 
In May 2010, Foshan disposed of its entire 90% equity interest in Foshan Company at a consideration of US$817,647, resulted in a gain of US$607,525 as recorded in the consolidated statements of operations.
 
SPYE currently has three subsidiaries: Eastern Concept, Eastern Concept Consulting and Foshan.  Except for Eastern Concept which is incorporated in Hong Kong, all subsidiaries are established in the People’s Republic of China (the “PRC”).
 
SPYE and its subsidiaries are collectively referred to as the “Company”.
 
The following organizational chart shows the relationship of these entities and their owners as of December 31, 2011:
 
 
 
- 6 -

 

   
Introduction to the Business of Eastern Concept

Eastern Concept was incorporated in Hong Kong with limited liability on June 29, 2007 with 10,000 authorized shares with a par value of HK$1. On incorporation, one share of HK$1 each was issued at par for cash to provide initial working capital for Eastern Concept. Eastern Concept was capitalized at $1.36 million in cash and cash equivalents for the purpose of making the acquisition of Foshan.

Eastern Concept, through its wholly owned subsidiary, Eastern Concept Consulting, has consummated an agreement to acquire 100% of the share capital of Foshan from the Foshan Shareholders.   Eastern Concept is a holding company, with audited and pro forma financials presented in the Form 8-K that was filed on October 24, 2007, whose sole purpose was to effect the reverse merger with AXIO and later acquire the share capital of Foshan from its shareholders for approximately $1.3 million.

Introduction to the Business of Foshan and its Subsidiaries (hereafter "Foshan" refers to Foshan Wanzhi Electron S&T Company Limited and its subsidiaries)

Foshan is principally engaged in providing smart card payment systems and related value-added services mainly in the Guangdong province of the People’s Republic of China. Foshan is a “non-bank” card issuer/operator with support from the municipal government and approval from the People’s Bank of China to collect deposits as prepayments stored in the chip embedded in the smart card.

Foshan was founded in 2005 by Mr. Li Xinghao, an entrepreneur from Foshan, Guangdong Province in the People’s Republic of China. He is committed to integrated smart card business operations with the AIOMS Card. Foshan’s mission is to provide people with a lifestyle of convenience, applicability and point accumulation loyalty programs. The management team at Foshan is determined to build its operations into one of the leaders in the AIOMS Card market.

Foshan is a successful operator of All-in-One Municipal Service Cards (the AIOMS Card). The AIOMS Card has a built-in microchip containing an electronic purse and other applications which can accurately record the holder’s transaction details. Examples of AIOMS Card uses include, but are not limited to, the following: VIP shopping cards, prepaid phone cards, municipal travel cards, student security cards, corporate employee cards and lottery sales cards.
 
Foshan has opened branches in the city of Foshan in Guangdong Province. It currently has 2 card equipment and software development staff members, 10 marketing personnel, 2 finance personnel, 3 business and customer service personnel.

Since its establishment, Foshan has experienced significant growth in the market. With rising demand for its products and services, Foshan intends to expand its business scope further throughout China.
 
 
 
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Detail of Foshan’s Operations

Foshan is principally engaged in providing smart card payment systems and related value-added services through the operation of the AIOMS Card. Each AIOMS card has a built-in microchip containing an Electron S&T purse and other applications which can accurately record the holder’s transactions details. The government issues unique operating licenses of the all-in-one municipal cards for the operator of each major city. Based on the current operating license of the AIOMS card in the city of Foshan, Foshan aims to build a clearance payment and management system for the AIOMS cards as well as to offer value added services including the fixed and mobile information channels.

Foshan generates revenue from merchant discounts offering; prepaid card fees; and interest on stored value of the AIOMS cards. The AIOMS cards consist of 5 major operating areas of products and services, they include:

Government services: offer payment services of social security; medical; government reimbursement and transfer for applicable government services;
Municipal utilities services: offer payment services of public transportation; library and cultural facilities; and other public services;
E-money services:  offer petty Electron S&T payment services for expenditures in merchant stores; fast food stores; and other available member merchants;
Data providing services:  offer database of services and consumption patterns of users for analyzing effective consumer behaviors; offer information distribution services such as SMS; email; website information to targeted users according to businesses and institutions’ preferences.
Value-added services: offer specific services such as employee cards which allow internal wage settlement, shopping payment and remote remittance; student cards which stores student academic results as well as government subsidized assistances; and sales agent which includes prepaid phone cards, game cards, and lottery tickets.
 
As of December 31, 2011, the Company has been mainly engaged in the provision of school smartcard system and related value-added services primarily in Guangdong province, the PRC.  Approximately 95 % of the total service income of $1,015,993 was generated from Nanhai project and the New Schools Smartcard System for the year ended December 31, 2011, as compared to 86% for the year ended December 31, 2010.  The remaining 5% and 14% of income in 2011 and 2010, respectively, mainly represented sales of IC cards and equipments to a third party.  Foshan considers that those transactions are auxiliary to its core business and they would not become the principal activities of Foshan.
 
 

 

 
 
- 8 -

 
 
How Much Foshan Sells

Our net sales to unaffiliated customers for the period from January 1, 2011 to December 31, 2011 were approximately $1,015,933. All operating revenues were generated from providing our smart card system and other services to various third parties.

Where Foshan Does Business

Currently, Foshan operates its AIOMS card payment system and related value-added services from its headquarters in Nanhai District, Foshan City, Guangdong Province, the PRC, with population of over 7 million. There are several smart card operators in China and the government intends to designate one operator in each of the major cities.  Existing operators include the ones in the cities of Guangzhou; Zhuhai; Shanghai and Beijing.

Where Foshan is Headed

Our strategies for achieving continued success include:

Acquire operating licenses for other AIOMS card from the government in other major cities with no current operators, including targeted city of Dongguan;
Merge and acquire existing AIOMS card businesses from current operators, including the Guangzhou operator; and
Acquire related value-added services businesses so as to provide turnkey services for card users.

Foshan’s sources of revenues

The revenues of our AIOMS Cards operations will come from increased card usage and the development of new types of cards for sale. Additional sources including the following:

Commissions from petty payment and settlement for the citizen cards;
Monthly maintenance fees from the student cards;
Commissions from shopping and transfer services from the employee cards;
Commissions from petty payment and settlement for the municipal travel cards;
Commissions from consumption activities of the VIP merchant cards; and
Income from providing database of consumption patterns to businesses and institutions.

Factors that affect sales volumes for AIOMS cards include:

World gross domestic product growth
Number of AIOMS card operators acquired and
Development of additional value-added services

Factors that affect the prices for AIOMS cards include:

World economic environment
Relative strength of the Chinese RMB
Quality of services provided
Abundance of services provided
 

 
 
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Analysis of the Markets for Smart Cards and AIOMS Cards

Smart cards, which are intended primarily for electronic payment and identification purposes, are being used in a wide range of fields, particularly the public transportation sector, and have become an important hi-tech means to facilitate the development of urban transportation fee collections and management of municipal infrastructure service sectors. Thanks to superb capabilities in moving object identification and processing of non-contact integrated circuit cards (“IC card”), the all-in-one public transportation card system has become the largest application of non-contact cards. With the continued development of technologies, standards and applications/products, the all-in-one public transportation card system, primarily through the means of non-contact cards, has been thriving in China.
 
In early 1998, the non-contact IC card based (including magnetic cards) automatic ticket checking system was employed in the number 1 and 2 subway line in Shanghai. This proved to be a successful application of non-contact IC cards in the urban rail transportation sector. In the same year, the LEGIC non-contact IC traffic system was deployed in Shenzhen and resulted in similar successes.
 
 
 
- 10 -

 
 
In view of the characteristics of the municipal traffic management systems in China and the applications of non-contact IC cards, the Chinese government has made great efforts to integrate resources for public transportation infrastructure development, construction, operation and management sectors. As a matter of fact, the real purpose of municipal all-in-one cards is to allow reasonable allocation and integration of the valuable resources in the public transportation management and operation sectors, and to keep the public transportation IC card payment system under the macro-control of the government. While trying to do more with less, it is seeking to allow citizens (i.e., the end users) to share the benefits of the all-in-one card system with the lowest possible cost. The deployment of all-in-one card systems can also comprehensively improve the management and service standards of the public transportation sector.

So far, all-in-one municipal transportation card systems, also known as AIOMS cards, have been deployed or are being deployed in a number of major cities, including Shanghai, Beijing, Guangzhou, Shenzhen, Dalian, Wuhan, Nanjing, Tianjin, Shenyang and Foshan. There are also many smaller cities that are planning to deploy or have deployed the AIOMS Card. Notably, with approximately 6 million cards issued and with coverage across all public transportation, subway, taxi and ferry sectors, the AIOMS Card in Shanghai represents the most significant application of this technology in China’s cities.

One well regarded system is the Octopus system operating in Hong Kong, which has proven to be a very successful case for the application, operation and management of AIOMS card systems. In Hong Kong, 13 million cards have been issued, totaling an annual transaction volume of HKD 25 billion. The system is extensively used for payment of fares and petty expenses in the urban railway and public transportation sectors. The Octopus system is today the primary payment means of Hong Kong citizens for public transportation services. At the same time, the extensive use of pre-paid cards (over 70% in the urban rail traffic sector) has greatly reduced the use of one-way tickets, substantially saving operation and management costs for the system.

Worldwide, all-in-one municipal transportation card systems have been deployed in Singapore, London, Rome, Seoul/Pusan, Tokyo and a number of other cities. Particularly in Singapore and Seoul/Pusan, the all-in-one municipal transportation card system is being used on extremely large scales. The Octopus system and other successful AIOMS Card systems around the world all share many similarities, including: 1) they all started in the urban rail transportation sector and later expanded into the public transportation system; 2) they all attached significant importance to the settlement system, card issuance, pre-payment deposit system and, particularly, the service functions of the all-in-one card systems; and 3) they have been able to achieve an overall balance of economic and social benefits for owners and operators of the systems through market-oriented measures.

Competition

The competition of the all-in-one municipal card industry in China is mainly derived from the ability of acquiring operation licenses and attracting of clients of value-added services. Currently in the Chinese market, the management believes that there is no other company implementing a similar AIOMS Card operation model as that of Foshan. However, a number of larger players are beginning to experiment in the sector, and competitors are thus emerging, including:

1)   AIOMS Card operator -- Yangchengtong
Yangchengtong in Guangzhou is engaged in the all-in-one public transportation card business and its most distinct advantage is its large user base. However, it has notable vulnerabilities due to limitation of historical corporate infrastructure, which results in an inability to transform its citizen cards into inscribed cards for intra-industry operation.  The company has experienced weak performance in the past and is unable to make a desirable profit.

2)    Jiaxiaotong operators
While electronic payment is stymied by a number of challenges in the municipal service sector that is dominated by “all-in-one public transportation cards,” the “all-in-one education card”-dominated education payment sector is on the fast track, due mainly to the support of government policies and market demands. There are a large number of such operators nationwide. Most of these operators are derived from companies formerly engaged in developing the IT structure of the education sector, and they maintain their advantages in terms of experience in the education industry. However, with a vision limited to their existing industry, they have not been able to obtain AIOMS Card operation licenses, not to mention crossing over the threshold of the overall capability needed for the operation of the AIOMS Card.  Currently, most of these operators are still making losses or are barely profitable.  In view of their scales and resources, no integrated operator with a similar communication, financial and payment operation to that of Foshan is in the market or is expected to emerge in the near future. This situation provides Foshan with abundant user resources and valuable market opportunities.

 
 
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3)    Industry leaders
With the expansion of the “all-in-one education card” in the municipal service card sector, many industry leaders are incorporating the service into their core business through cooperation programs. The service development experienced by Foshan shows that China Mobile, China Telecom and China Unicom have approved “all-in-one education card" operators as the key content providers for their SMS services.  In the meantime, mainstream operators in both the telecom and the cable broadband industries have accepted the “all-in-one education card” as their key content provider partners. Industrial and Commercial Bank of China and Bank of China view the smart student card operators in the “all-in-one education card” sector as their core industrial partners. After the implementation of pilot projects in initial stages, these industrial leaders have found their own vulnerabilities in terms of industrial experience and resource restrictions, and are turning towards cooperation with industrial chains. They therefore pose little competitive threat.

Competitive Advantages and Strategy

The Company believes that its product formulations, price points, relationships, infrastructure, proven quality control standards, and reputation represent substantial competitive advantages. In particular, as compared with existing rival products and services in the market, Foshan’s products have a number of advantages:

1)  
Industrial advantages: in addition to using the same municipal card license that many companies in the industries hold, Foshan also has card application development and services experience, which have differentiated Foshan from its rivals.  In addition to the petty payment settlement platform, Foshan also offers a portfolio of educational, medical, business, and merchant service products, which most of its rivals do not.  In general, Foshan holds distinct advantages in terms of card management and operation, value-added services, and comprehensive product series.

2)  
Service advantages: By leveraging the global service structure of Chigo Group which has established an extensive service network that guarantees long-term stable operations.

3)  
Current partners advantages:

Chigo Group (based in Guangdong Province): a well-known brand in the home electrical appliance industry, with a well-established after-sales service network across China and other countries; the core partner of Foshan; and
China Mobile: our quality service provider

 
In comparison to Chinese competitors, the Company believes it possesses superior technological expertise, products, marketing knowledge, and global relationships.

Growth Strategy

The Company’s vision is to become one of the market leaders in the AIOMS Card Industry which offers superior value-added services for card users. Management intends to grow the Company’s business by pursuing the following strategies:

Grow capacity and capabilities in line with market demand increases.
Enhance leading-edge technology through continuous innovation, research and study.
Continue to improve operational efficiencies and use of nearly all technical advantages.
Further expand into higher value-added segments of the smart card industry.
Build a strong market reputation to foster and capture future growth in China.

Existing Facilities

The Company’s principal executive office is located at  1315 Lawrence Avenue, East, Suite 520 Toronto Ontario, Canada M3A3R3.

 
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Sales and Marketing

Foshan has a current sales and marketing force of 10 personnel, who report to Foshan’s headquarters in Nanhai District, Foshan City and are assigned to our consumers’ offices from time to time for after-sales support. Foshan’s marketing strategy is to explore applications for specific regions and industries as follows:

1)  
In the education industry, Foshan is going to leverage the government policy in favor of all-in-one education cards and adopt a low-profit-margin business model to supply and provide free equipment as well as equity investment to expand our customer base in the all-in-one education card sector.  Correlating with the new curriculum reform and the college enrollment examination system reform, we are going to cooperate with industrial leaders to a) expand our portfolios with applications for student performance assessment and general performance assessment, b) increase the scope of education services and improve the loyalty program of all-in-one education card users; and c) solidify our leadership in the all-in-one education card sector;

2)  
Foshan will then build on its base of existing operations in the education industry to expand its business into a number of other sectors, including transportation, retail, cultural and medical, and to promote the development and operation of AIOMS Cards through building up of industrial applications;

Intellectual Property

Foshan owns the operating right from the Chinese government for the all-in-one municipal smart card system in Nanhai district of Foshan City, Guangdong Province, the People’s Republic of China.

Customers

From January 1, 2011 to December 31, 2011, the Company achieved revenues of $1,015,933. During the same period, sales to one (1) customer contributed $753,029 in revenues as set forth in the following table.
 
Name of Customer
 
Sales
 
% of
Total Sales
China Mobile Foshan Branch
 
$
753,029
 
74%
TOTALS
 
$
753,029
 
74%
 
 
Regulation

The Company is subject to regulation by both the PRC central government and by local government agencies. Since its inception, the Company has been in compliance with applicable regulations.

All all-in-one municipal smart card operators are required to have operating licenses for the right to operate in designated cities in the People’s Republic of China.

Employees

The Company currently employs a total of 28 employees, including 9 card equipment and software development staff members, 14 marketing personnel, 2 finance personnel, 3 business and customer service personnel. 

 
 
- 13 -

 

Forward-Looking Statements

This Report on Form 10-K contains forward-looking statements. To the extent that any statements made in this Report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” believes,” “should,” “intends,” “estimates,” and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements.  Such risks and uncertainties are outlined in “Risk Factors” and include, without limitation, SPYE’s ability to raise additional capital to finance its activities; the effectiveness, profitability, and the marketability of its products; legal and regulatory risks associated with the Agreement; the future trading of the common stock of SPYE; the ability of SPYE to operate as a public company; its ability to protect its proprietary information; general economic and business conditions; the volatility its operating results and financial condition; its ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in its filings with the SEC, or otherwise.

Information regarding market and industry statistics contained in this Report is included based on information available to SPYE that it believes is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. SPYE has not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. SPYE does not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.

 Item 2 .      Properties

The Company does not own any real property. The Company’s  executive office is located at 1315 Lawrence Avenue, East, Suite 520, Toronto Ontario, Canada M3A3R3.

Item 3 .      Legal Proceedings

We are not aware of any pending or threatened legal proceedings in which the Company or its subsidiaries are involved. In addition, we are not aware of any pending or threatened legal proceedings in which entities affiliated with our officers, directors or beneficial owners are involved.

 Item 4.     Mine Safety Disclosures
 
Not Applicable.
PART II
 
 
Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information

Our common stock is currently quoted on a limited basis on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “SPYE”. The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists.  We cannot predict whether a more active market for our common stock will develop in the future.  In the absence of an active trading market:

(1) Investors may have difficulty buying and selling or obtaining market quotations;
(2) Market visibility for our common stock may be limited; and
(3) A lack of visibility of our common stock may have a depressive effect on the market price for our common stock.
 
 
 
- 14 -

 

The following table sets forth the range of high and low prices of our common stock as quoted on the OTCBB during the periods indicated. The prices reported represent prices between dealers, do not include markups, markdowns or commissions and do not necessarily represent actual transactions.

   
High
   
Low
 
             
2011
First Quarter
0.35
   
0.02
 
 
Second Quarter
0.35
   
0.35
 
 
Third Quarter
0.51
   
0.35
 
 
Fourth Quarter
0.51
   
0.51
 
             
2010
First Quarter
0.15
   
0.15
 
 
Second Quarter
0.15
   
0.15
 
 
Third Quarter 
0.15
   
0.15
 
 
Fourth Quarter
0.02
   
0.02
 
 
 
 
 
- 15 -

 
 
The transfer agent for our common stock is Guardian Registrar & Transfer, Inc., 7951 Southwest 6th Street, Suite 216, Plantation, FL 33324, Attn: Elson Soto, Jr. Tel: (954) 915-0105.

As of December 31, 2011, there were 146 holders of record of 1,292,166 outstanding shares of common stock of the Company.

Dividends

We have not previously paid any cash dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. It is the present intention of management to retain any earnings to provide funds for the operation and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operation, financial condition, contractual and legal restrictions and other factors the board of directors deem relevant.

Equity Compensation Plans

As of December 31, 2011, we did not have any equity compensation plans.

Recent Sales of Unregistered Securities

During the year ended December 31, 2011, we did not sell any unregistered securities. 
 
Purchases of Equity Securities by Issuer and Affiliated Purchasers

We have not repurchased any of our common stock and have no publicly announced repurchase plans or programs as of December 31, 2011.


 
 
- 16 -

 
 
Item 6.  Selected Financial Data

Not applicable.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This discussion contains forward-looking statements. The reader should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the company. Although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the company's results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the company or any other person that the objectives or plans of the company will be achieved.

OVERVIEW

We were incorporated in the State of Nevada in June 2004 to engage in any lawful undertaking.  We were a development stage company indirectly owning one apartment building in Chicopee, Massachusetts.  Pursuant to a share exchange agreement, dated October 10, 2007, the shareholders of Eastern Concept Development Limited exchanged all of its share capital for 35,351,667 shares of Common Stock of SPYE, or 70.7% of the total then 50,000,000 issued and outstanding shares of common stock of SPYE after giving effect to the share exchange.  Subsequently, on December 17, 2007, we filed a Schedule 14C for the adoption of the Company’s name of SmartPay Express, Inc. and the increase of our authorized capital to 300,000,000 shares of common stock, authorized capital shares of preferred stock remains the same as 5,000,000 shares. On November 21, 2008, we completed the one-for-fifty reverse stock split. As a result of the reverse stock split, the total number of our outstanding shares was reduced from 64,607,460 to 1,292,166.

Through its indirectly wholly-owned subsidiary, Foshan Wanzhi Electron S&T Co., Ltd. (“Foshan”), SPYE is principally engaged in providing smart card payment systems and related value-added services mainly in the Guangdong Province of the People’s Republic of China.  We are an operator of All-in-One Municipal Service Cards (“AIOMS Card”).  The AIOMS Card has a built-in microchip containing an electronic purse and other applications which can accurately record the holder’s transaction details.  Examples of the usages of AIOMS Cards include, but are not limited to, the following:  VIP shopping cards, prepaid phone cards, municipal travel cards, student cards, corporate employee cards and lottery sales cards. We have opened a branch in the city of Foshan, in Guangdong Province. The Company currently has 2 card equipment and software development staff members, 10 marketing personnel, 2 finance personnel, 3 business and customer service personnel.

The main business of the Company is all-in-one education cards system.  The service income was derived from the provision of telephone and SMS services to the parents of the students (collectively the “participants”), in various cities in Guangdong Province of the People’s Republic of China including Foshan, Maoming, Qingyuan, Shanwei, Jieyang and Shunde. The Company provides a communication platform between the students and the parents of the students.  Each participated student is assigned with one “all-in-one education” smartcard which contains a built-in microchip with Electron S&T purse and other applications which can accurately record the holder’s transactions details.  When the students arrive at and leave schools, they are required to present their smartcards to the card readers, the parents of the students would then receive a SMS message.  The smartcard system enables schools and parents to check progress and information of students, and also allows them to be notified of their attendance record and examination results, etc. through short messages from mobile or fixed-line phones. The development of the Company’s all-in-one education cards system can be described by two stages in terms of different mode of operation and method of collection.

At the first stage, the all-in-one education cards system was initially named as “Nanhai project” as its operation is only in Nanhai district of Foshan in Guangdong Province.  The normal business cycle of this stage of business can be described in following sequence:
 
a.)  
On June 22, 2006, the Company entered into a co-operative agreement with Education Authority in the Nanhai District, Foshan to obtain the operating right for the provision of the all-in-one education card service in Nanhai district for a period of 10 years from July 1, 2006 to June 30, 2016.  As there was no operation for the first year of 2006, the operating right is amortised over its useful life of 9 years in the accounts since the year ended December 31, 2007;


 
- 17 -

 
 
b.)  
The Company adopted a low-profit-margin business model by supplying and provisioning of free equipment to the schools in Nanhai district to expand its customer base in the all-in-one education card sector and to exchange for the operating right as mentioned in a.) above.  The cost of the computer equipment and software provided to schools in respect of the Nanhai project is capitalized and accounted for as intangible assets on the Company’s balance sheets.

c.)  
Each participant is first assigned with one “all-in-one education” smartcard and is required to pay a refundable deposit of RMB25 for each smartcard.  The deposit received from the participant is recorded in “deposits for smartcards” in the balance sheets.

d.)  
The service fee income is fixed at RMB10 per month per student for the service period stated in the return slip signed by the participants. Under this arrangement, the participant is required to pay the service fee in advance to the Company at a lump sum payment for each school year (10 months).  The Company recognises this service income over the service period stated in the return slip and service income received in advance is recorded in “temporary receipts” in the balance sheets.

e.)  
The cost of Nanhai project represented (i) rebate of 10% of its service fee income to the representatives of the Company to co-ordinate with schools, (ii) rebate to participants by way of consumption value of a smartcard payment system in Foshan amounting to 50% of the service fee income plus a travel coupon, and (iii) cost of purchase of SMS service from SMS service operator.  As a result, 60% of service income in total was provided as the cost of the project while the cost of purchase of SMS service was recognized when incurred from the commencement of operation through to August 2009.  Since September 2009, we have discontinued the promotional  rebates of consumption value of a smartcard payment system in Foshan and travel coupon, while the rebate to the Company’s representative remains the same.  As a result, from September 2009 onwards, the cost of Nanhai project comprises 10% of service income payable to the representatives of the Company and the cost of purchase of SMS service.

f.)  
The Company adopted a low-profit-margin business model by supplying and provisioning of free equipment to the schools in Nanhai district to expand its customer base in the all-in-one education card sector and to exchange for the operating right as mentioned in a.) above.  The cost of the computer equipment and software provided to schools in respect of the Nanhai project is capitalized and accounted for as intangible assets on the Company’s balance sheets.

g.)  
Each participant is first assigned with one “all-in-one education” smartcard and is required to pay a refundable deposit of RMB25 for each smartcard.  The deposit received from the participant is recorded in “deposits for smartcards” in the balance sheets.

h.)  
The service fee income is fixed at RMB10 per month per student for the service period stated in the return slip signed by the participants. Under this arrangement, the participant is required to pay the service fee in advance to the Company at a lump sum payment for each school year (10 months).  The Company recognizes this service income over the service period stated in the return slip and service income received in advance is recorded in “temporary receipts” in the balance sheets.
 
 
 
- 18 -

 

 
i.)  
The cost of Nanhai project represented (i) rebate of 10% of its service fee income to the representatives of the Company to co-ordinate with schools, (ii) rebate to participants by way of consumption value of a smartcard payment system in Foshan amounting to 50% of the service fee income plus a travel coupon, and (iii) cost of purchase of SMS service from SMS service operator.  As a result, 60% of service income in total was provided as the cost of the project while the cost of purchase of SMS service was recognized when incurred from the commencement of operation through to August 2009.  Since September 2009, we have discontinued the promotional  rebates of consumption value of a smartcard payment system in Foshan and travel coupon, while the rebate to the Company’s representative remains the same.  As a result, from September 2009 onwards, the cost of Nanhai project comprises 10% of service income payable to the representatives of the Company and the cost of purchase of SMS service.

Beginning in September 2009, the Company has introduced a new mode of operation and collection of service income namely as “New School Smartcard System ” (“new system”), although the operations of the Nanhai project as described in above still remain in effect for certain participants in the Nanhai district.  Under the new system, the Company entered into a service agreement with the Foshan branch of China Mobile, a major telecom service operator in PRC, to form a platform to provide telephone and SMS service to the participants and also provide a better way to collect the service income indirectly from China Mobile.  The normal business cycle of this new system can be described in following sequence:

a.)  
To expand the scale of services to more cities of Guangdong Province, the Company entered into service agreements with each branch of China Mobile in various cities of Guangdong Province setting out the rights and obligations of each party, amount and method of collection of service income;

b.)  
At the same time, the Company sought for participants from kindergartens and primary schools in order to expand the services in those contracted cities.  Under this new system, the Company is responsible for notifying China Mobile the communication details of the participants and providing telephone and SMS service to the participants. As the Company provides the SMS service through the existing mobile phone card of China Mobile, the participants are not required to replace the mobile sim card.

c.)  
Under this new system, the monthly service fee for each participant remains at RMB10.  China Mobile is responsible for collecting the whole amount of service fee from the participants and is entitled to 50% of the service fee. Then China Mobile would pay 30% of the service fee to the party who is responsible for setup and maintenance of machines, which may or may not be the Company which differs for different locations. The remaining 20% of the service fee is paid to the Company as a provider of operating platform of the smartcard system.  
 
RESULTS OF OPERATIONS
 
The following table shows selected financial data of the consolidated statements of operations of the Company and its subsidiaries for the years ended December 31, 2011 and 2010.  The data should be read in conjunction with the audited consolidated financial statements of the Company and related notes thereto.
 
 
- 19 -

 

 
( In US$ thousands except per share data)
 
Year Ended
 
% of
   
Year Ended
   
% of
 
   
Dec 31, 2011
   
Revenue
   
Dec 31, 2010
   
Revenue
 
Continuing operations
                           
                             
Operating revenues
                           
    Service Income
 
1015
   
100%
     
1,462
     
100.0
 
    Sale of mobile phones
 
       -
 
 
-
     
 - 
     
-
 
                             
Operating expenses
                           
    Subcontracting and other service costs
 
(510)
 
 
(50.2)
     
(913
)
   
(62.5
)
    Purchase of mobile phones
 
  -
   
  -
     
-
     
-
 
    Staff costs
 
(109)
   
(10.7)
     
(186
)
   
(12.7
)
    Depreciation expenses
 
( 18)
   
(  1.8)
     
(19
)
   
(1.3
)
    Amortization of intangible assets
 
(123)
   
(12.1)
     
(206
)
   
(14.1
)
    Impartment loss of intangible assets
 
  (66)
    (6.6)      
 (441
   
 (30.1
    Allowance for doubtful accounts on inventories, trade
    receivables, prepayments, other receivables and amounts
    due from related parties
 
  -
           
(49
   
 (3.4
)
    Other general and administrative expenses
 
(528)
   
(52.0)
     
(237
)
   
(16.2
)
                             
Total Operating expenses
 
(1,354)
   
(126.8)
     
(2,051
)
   
 (140.3
)
                             
Loss from operations
 
(339)
   
(33.4)
     
(589
)
   
(40.3
)
                             
Non-operating income (expenses)
                           
    Interest income
 
      1
   
  -
     
4
     
0.3
 
    Others
 
   76
   
  7.5
     
12
     
0.8
 
Total Other Income
 
   77
   
  7.5
     
           16
     
         1.1
 
Loss before income tax and noncontrolling interests
 
 (262)
   
(16.9)
     
(573
)
   
(39.2
)
    Income tax expense
 
 ( 60)
   
(  6.0)
     
-
     
-
 
                             
Discontinued operations
                           
Income (Loss) from discontinued operations
 
    -
   
   -
     
599
     
41.0
 
                             
Income (Loss) before noncontrolling interests
 
 (322)
   
( 32.2)
     
26
     
1.8
 
                             
Noncontrolling interests
 
   -
   
   -
     
1
     
-
 
                             
Net Income (Net loss)
 
  (322)
   
(32.2)
     
27
     
1.8
 
                             
Loss per share
                           
    Basic and diluted
   (0.25)
         
$
(0.02)
         
 
 
 
- 20 -

 
 
FISCAL YEAR ENDED DECEMBER 31, 2011 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2010.

OPERATING REVENUE

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 $1,015,933 service income as operating revenue for the year ended December 31, 2011, as compared to $1,462,296 for the year ended December 31, 2010, a decrease of 31%. The decrease was due to schools in Maoming city, Qingyuan city and Shanwei city in the Guangdong Province not renewing their contracts with us as of December 31, 2010. In the past, the Company collected proceeds from students directly and paid subcontracting and other charges to service providers. Commencing from September 2009, the telecom service provider collects service fees from the students and pays the Company for its entitlement. 
 
During the year ended December 31, 2011, the Company generated its revenues from cities including Foshan, Nanhai and Shunde.  The Company anticipates less revenue will be generated in 2012 because some cities had terminated their agreements with us.
 
SUBCONTRACTING AND OTHER SERVICE COSTS
 
Subcontracting and other service costs mainly represented cost for provision of services under the old system of Nanhai project and the new system, and the cost of sales of IC cards and equipments which are considered auxiliary to the Company’s core business.

In respect of Nanhai project, the subcontracting and other services costs mainly represented (i) the rebate of 10% of its service fee income to the representative of the Company to co-ordinate with schools, (ii) rebate to participants by way of consumption value of a smartcard payment system in Foshan amounting to 50% of the service fee income plus a travel coupon, (iii) cost of purchase of SMS service from SMS service operator and (iv) 5% business tax. Since September 2009, the rebates of consumption value of a smartcard payment system in Foshan and travel coupon as a mean of promotion have ceased while the rebate to the Company’s representative remains the same. As a result, from September 2009 onwards, the cost of Nanhai project comprises 10% of service income payable to the representatives of the Company and the cost of purchase of SMS service.

The subcontracting and other service costs under the new system mainly represented (i) the service charge to co-ordinators paid through China Mobile, (ii) cost to service/equipment providers in relation to the service income in certain districts, and (iii) 5% business tax.
 
Total subcontracting and other service costs decreased 44% to $509,810 for the year ended December 31, 2011, as compared to $912,661 for the year ended December 31, 2010.

The decrease was a result of a decrease in the use of subcontracting and other services incurred during the year ended December 31, 2011.
 
STAFF COSTS

The total staff costs for the year ended December 31, 2011 amounted to $109,407 as compared to $186,416 for the year end December 31, 2010, a decrease of 41%. The decrease in staff costs was due to the decrease in the average number of personnel during the year ended December 31, 2011. Currently the Company employs a total of 28 employees, including 9 card equipment and software development staff members, 14 marketing personnel, 2 finance personnel, 3 business and customer service personnel. 


 
- 21 -

 
 
 
DEPRECIATION EXPENSES

Depreciation expenses for the year ended December 31, 2011 amounted to $18,266, as compared to $18,593 for the year ended December 31, 2010, a decrease of 2%, which was due to certain fixed assets being fully depreciated in 2011.   These expenses were related to the depreciation charged on office equipment and computers.
 
AMORTIZATION OF INTANGIBLE ASSETS

Amortization charges of intangible assets for year ended December 31, 2011 amounted to $122,991, as compared to $205,651 for the year ended December 31, 2010 a decrease of 40%.  The decrease in amortization charges on the operating rights of the Nanhai project and computer software relating to the Nanhai project was due to the write down of the value for the computer software and operating rights.   As of December 31, 2011 the carrying value of the operating rights of the Nanhai project was $389,179 and the carrying value of the intangible asset of the computer software was $114,193.
 
IMPAIRMENT LOSS OF INTANGIBLE ASSETS
 
The management has prepared a cash flow forecast for the impairment assessment of the intangible assets in relation to the operating rights and computer software in respect of the Nanhai project.  As a result of the impairment test, the management considers that the carrying amount of the intangible assets exceeds its fair value, so an impairment loss of $66,621 and $441,176 was made in the financial statements during the years ended December 31, 2011 and December 31, 2010, respectively.
 
OTHER GENERAL AND ADMINISTRATIVE EXPENSES

Other general and administrative expenses for the year end December 31, 2011 were $528,343, as compared to $237,797 for the year ended December 31, 2010, an increase of 122%. The increase in other general and administrative expenses was mainly due to an increase in legal, accounting and consulting costs.
 
INTEREST INCOME

Interest income for the year ended December 31, 2011 was $1,189, as compared to $3,969 for the year ended December 31, 2010, a decrease of 70%.  This income was the interest earned on cash in bank deposit.  The change was due to the decrease in average balance of bank deposits in 2011.
 
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 years 2011 and 2010.

The Company’s PRC established subsidiaries incurred losses for the year ended December 31, 2010, so no provision for EIT has been made yet.

NET INCOME (LOSS)
 
The Company had generated net loss for the year ended December 31, 2011, of $321,654 as compared to net income of $27,004 for the year ended December 31, 2010, which was primarily due to the decrease in service income and the increase in general and administrative expenses.
 

 
 
- 22 -

 

 
LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2011, cash and cash equivalents totaled $866,342.  This cash position was the result of a combination of net cash provided by financing activities in the amount of $658,552, net cash provided by operating activities in the amount of $6513 and net cash provided by investing activities of $0.00. The cash provided by financing activities was primarily due to advances from related parties.  The net cash provided by operating activities was mainly due to cash generated from revenue derived from sales of smartcard payment system and related value-added services.  We believe that the level of financial resources is a significant factor for our future development, and accordingly we may choose at any time to raise capital through private debt or equity financing to strengthen our financial position, facilitate growth and provide us with additional flexibility to take advantage of business opportunities.  However, we do not have any immediate plans for a private offering of our common stock.
 
CRITICAL ACCOUNTING POLICIES

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policy,” the Company identified the most critical accounting principles upon which its financial status depends. The Company determined that those critical accounting principles are related to the use of estimates, revenue recognition, income tax and impairment of intangibles and other long-lived assets. The Company presents these accounting policies in the relevant sections in this management’s discussion and analysis, including the Recently Issued Accounting Pronouncements discussed below.
 
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavourable change to current conditions, it could result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, the majority of our businesses operate in environments where we pay a fee for a service performed, and therefore the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex.
 
Valuation of Long-Lived Assets

We review our long-lived assets for impairment, including property, plant and equipment, and identifiable intangibles with finite lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of our long-lived assets, we evaluate the probability that future undiscounted net cash flows will be greater than the carrying amount of our assets. Impairment is measured based on the difference between the carrying amount of our assets and their estimated fair value.

Allowance for Doubtful Accounts

We perform ongoing credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that have been identified. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers.
 
Off-Balance Sheet Arrangements

The Company has not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. The Company has not entered into any derivative contracts that are indexed to the Company's shares and classified as shareholder’s equity or that are not reflected in the Company's financial statements. Furthermore, the Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. The Company does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to the Company or engages in leasing, hedging or research and development services with the Company.

Inflation

The Company believes that inflation has not had a material effect on its operations to date.
 
 
 
- 23 -

 
 
Income Taxes

Provision for income and other taxes has been made in accordance with the tax rates and laws in effect in the PRC.
 
Income tax is computed on the basis of pre-tax income. Deferred taxes are provided using the liability method for all significant temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. The tax consequences of those differences are classified as current or non-current based on the classification of the related assets or liabilities in the financial statements.
 
Revenue Recognition
 
The Company generally recognizes service revenues when persuasive evidence of an arrangement exists, services are rendered, the fee is fixed or determinable, and collectability is probable. Service revenues are recognized net of discounts.
 
Adoption of Recently Issued Accounting Pronouncements
 
In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-28 regarding the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance clarifies the steps to be performed to determine whether goodwill has been impaired and addresses the steps for reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2010. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011. In the period of adoption, the Company will include the required disclosures in its filings and believes the adoption will have no impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 regarding the presentation of comprehensive income. This new guidance amends the previous application of comprehensive income and the requirements regarding presentation in the financial statements. It requires the disclosure of the components of comprehensive income, which the Company currently discloses in other sections of its filings, to be presented as part of one statement of comprehensive income, or as a separate statement of comprehensive income following the statement of earnings. In December 2011, the FASB issued ASU No. 2011-12 which temporarily defers those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 regarding disclosures about offsetting assets and liabilities. This new guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
 
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Credit Risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The major concentrations of credit risk arise from the Company’s trade receivable.

Country Risks

The Company may also be exposed to the risks as a result of its principal operation being primarily in the PRC. These include risks associated with, among others, the political, economic and legal environmental and foreign currency exchange. The Company’s results may be adversely affected by change in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company’s management does not believe these risks to be significant. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.

Cash and Time Deposits

The Company mainly maintains its cash balances with various banks located in the PRC. In common with local practice, such amounts are not insured or otherwise protected should the financial institutions be unable to meet their liabilities. There has been no history of credit losses. There are neither material commitment fees nor compensating balance requirements for any outstanding loans of the Company.
 
Exchange Rate Risk

The Company cannot guarantee that the current exchange rate will remain steady; therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of the fluctuating exchange rate actually post higher or lower profit depending on exchange rate of Renminbi converted to US$ on that date. The exchange rate could fluctuate depending on changes in political and economic environments without notice.

 
 
- 24 -

 
 
Item 8.             Financial Statements

The information required by this Item follows below.


SMARTPAY EXPRESS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



 
Page Number
   
Report of Independent Registered Public Accounting Firm – HKCMCPA Company Limited
21
   
Report of Independent Registered Public Accounting Firm – Mazars CPA Limited
22
   
Consolidated Statements of Operations and Other Comprehensive (Loss) Income
23
   
Consolidated Balance Sheets
24
   
Consolidated Statements of Stockholders' Equity
25
   
Consolidated Statements of Cash Flows
26
   
Notes to Consolidated Financial Statements
27 - 39
 
 
 
- 25 -

 

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
SmartPay Express, Inc.

We have audited the accompanying consolidated balance sheet of SmartPay Express, Inc. and its subsidiaries (“the Company”) as of December 31, 2011, and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011, and the results of operations and cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred continuous losses and capital deficits, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.




/s/ HKCMCPA Company Limited

HKCMCPA Company Limited
Certified Public Accountants

Hong Kong, China
April 16, 2012


 
 
- 26 -

 
 

 
 

 
- 27 -

 
 
SMARTPAY EXPRESS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
As of December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 866,342     $ 209,304  
Trade receivables from third parties
    332,461       351,807  
Trade receivable from a related party
    6,231       5,944  
Prepayments and deposits
    6,895       6,624  
Amounts due from related parties
    -       382,834  
Income tax receivables
    -       29,489  
Inventories
    4,409       7,856  
Other debtors
    47,940       20,194  
                 
Total current assets
    1,264,278       1,014,052  
                 
Non-current assets:
               
Property, plant and equipment, net
    29,245       42,772  
Intangible assets, net
    503,372       660,000  
                 
TOTAL ASSETS
  $ 1,796,895     $ 1,716,824  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Trade payables
  $ 803,112     $ 641,080  
Accrued charges and other payables
    284,768       284,204  
Amounts due to related parties
    368,610       114,511  
Income tax payable
    10,323       -  
Temporary receipts
    8,202       57,416  
                 
Total liabilities
    1,475,015       1,097,211  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
  none issued and outstanding
    -       -  
Common stock, $0.001 par value; 300,000,000 shares authorized;
  1,292,166 shares issued and outstanding as of December 31, 2011 and 2010
    1,292       1,292  
Additional paid-in capital
    2,009,454       2,009,454  
Statutory reserve
    319       319  
Accumulated other comprehensive income
    114,250       90,329  
Accumulated deficit
    (1,803,435 )     (1,481,781 )
                 
Total stockholders’ equity
    321,880       619,613  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,796,895     $ 1,716,824  


See accompanying notes to consolidated financial statements.


 
- 28 -

 

SMARTPAY EXPRESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
Years ended December 31,
 
   
2011
   
2010
 
             
Revenues, net:
  $ 1,015,993     $ 1,462,296  
                 
Operating expenses:
               
Subcontracting and other service costs
    (509,810 )     (912,661 )
Staff costs
    (109,407 )     (186,416 )
Depreciation of property, plant and equipment
    (18,266 )     (18,593 )
Amortization of intangible assets
    (122,991 )     (205,651 )
Impairment loss of intangible assets
    (66,621 )     (441,176 )
Allowance for doubtful accounts inventories, trade receivables,
  prepayments, other receivables and amounts due from related parties
    -       (49,355 )
Other general and administrative
    (528,343 )     (237,797 )
Total operating expenses
    (1,355,438 )     (2,051,649 )
                 
LOSS FROM OPERATIONS
    (339,445 )     (589,353 )
                 
Other income (expense):
               
Interest income
    1,189       3,969  
Interest expense
    -       (44,420 )
Other income
    76,295       56,790  
                 
LOSS BEFORE INCOME TAX AND NONCONTROLLING INTERESTS
    (261,961 )     (573,014 )
                 
Income tax expense
    (59,693 )     -  
                 
Discontinued operations
               
Income from discontinued operations
    -       599,053  
                 
Net (loss) income including controlling interests
    (321,654 )     26,039  
                 
Add: net income from continuing operations attributable to noncontrolling interests
    -       834  
Add: net income from discontinued operations attributable to noncontrolling interests
    -       131  
                 
Net (loss) income attributable to SPYE common shareholders
  $ (321,654 )   $ 27,004  
                 
Other comprehensive income:
               
- Foreign currency translation adjustment
    23,921       16,274  
                 
Total comprehensive (loss) income
  $ (297,733 )   $ 43,278  
                 
Net loss per share from continuing operations
  $ (0.2489 )   $ (0.4428 )
Net (loss) income per share from discontinued operations
    -       0.4637  
Net (loss) income per share – Basic and diluted
    (0.2489 )     0.0209  
                 
Weighted average common shares outstanding – Basic and diluted
    1,292,166       1,292,166  



See accompanying notes to consolidated financial statements.
 
 
 
- 29 -

 
 
SMARTPAY EXPRESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))

   
Years ended December 31,
 
   
2011
   
2010
 
             
Cash flows from operating activities:
           
Net (loss) income including noncontrolling interests
  $ (321,654 )   $ 26,039  
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation of property, plant and equipment
    18,266       18,861  
Amortization of intangible assets
    122,991       205,651  
Gain on disposal of interest in a subsidiary
    -       (607,525 )
Impairment loss of intangible assets
    66,621       441,176  
Exchange difference
            16,412  
Change in operating assets and liabilities:
               
Trade receivables
    36,388       (152,846 )
Prepayments and deposits
    -       2,038  
Inventories
    3,828       10,163  
Other debtors
    (26,768 )     33,240  
Trade payables
    130,979       323,483  
Accrued charges and other payables
    (13,384 )     (90,201 )
Temporary receipts
    (50,566 )     (5,346 )
Income tax
    39,812       (25,052 )
Interest payable to a related party
    -       50,426  
 
Net cash provided by operating activities
    6,513       246,519  
                 
Cash flows from investing activities:
               
Payment on property, plant and equipment
    -       (17,676 )
Decrease in bank deposits, collateralized
    -       135,135  
Net cash provided by investing activities
    -       117,459  
                 
Cash flows from financing activities:
               
Repayment of short-term bank loan
    -       (127,628 )
Advance from (repayment to) a related party
    658,552       (413,625 )
 
Net cash provided by (used in) financing activities
    658,552       (541,253 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (8,027 )     7,908  
                 
Net change in cash and cash equivalents
    657,038       (169,367 )
                 
CASH AND CASH EQUIVALENT, BEGINNING OF YEAR
    209,304       378,671  
                 
CASH AND CASH EQUIVALENT, END OF YEAR
  $ 866,342     $ 209,304  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
    Interest received     1,189        3,972  
Cash paid for income taxes
  $ 19,105     $ -  
Cash paid for interest
  $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Consideration for acquisition of additional interest in a subsidiary paid by a related party
  $ -     $ 294,118  
Consideration for disposal of interest in a subsidiary settled by offsetting against the amount due to a related party
  $ -     $ 817,647  

See accompanying notes to consolidated financial statements.
 
 
 
- 30 -

 
 
SMARTPAY EXPRESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
SmartPay Express, Inc.
             
   
Common stock
   
Additional
paid-in capital
   
Statutory
reserve
   
Accumulated
other
comprehensive
income (loss)
   
Accumulated deficit
   
Non-controlling
interest
   
Total
equity
 
 
No. of shares
   
Amount
 
                                                 
Balance as of January 1, 2010
    1,292,166     $ 1,292     $ 2,009,454     $ 319     $ 74,055     $ (1,508,785 )   $ (62,225 )   $ 514,110  
                                                                 
Net income for the year
    -       -       -       -       -       27,004       -       27,004  
Acquisition of additional interest in a subsidiary
    -       -       (342,793 )     -       -       -       -       (342,793 )
Disposal of interest in a subsidiary
    -       -       342,793       -       -       -       62,225       405,018  
Foreign currency translation adjustment
    -       -       -       -       16,274       -       -       16,274  
                                                                 
Balance as of December 31, 2010
    1,292,166     $ 1,292     $ 2,009,454     $ 319     $ 90,329     $ (1,481,781 )   $ -     $ 619,613  
                                                                 
Net loss for the year
    -       -       -       -       -       (321,654 )     -       (321,654 )
Foreign currency translation adjustment
    -       -       -       -       23,921       -       -       23,921  
 
Balance as of December 31, 2011
    1,292,166     $ 1,292     $ 2,009,454     $ 319     $ 114,250     $ (1,803,435 )   $ -     $ 321,880  






See accompanying notes to consolidated financial statements.
 
 
 
- 31 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
1.   ORGANIZATION AND BUSINESS BACKGROUND

SPYE, formerly known as Axiom III, Inc. (“AXIO”), was organized under the laws of the State of Nevada in June 2004. On October 10, 2007, AXIO entered into a share exchange agreement with, among others, the stockholders 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 stockholder 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. The historical stockholders’ equity accounts of AXIO have been retroactively restated to reflect the issuance of 35,351,667 shares of common stock since inception of Eastern Concept plus the original 14,648,333 shares of common stock of AXIO immediately prior to the reverse acquisition, with corresponding adjustments to accumulated losses.

Eastern Concept was incorporated in Hong Kong with limited liability on June 29, 2007 with 10,000 authorized shares with a par value of HK$1 each. On incorporation, one share of HK$1 each was issued at par for cash. Eastern Concept is a holding company.

On August 13, 2007, Eastern Concept established a wholly-owned subsidiary, Eastern Concept Corporate Consulting (Shenzhen) Limited* (“Eastern Concept Consulting”) in the People’s Republic of China (the “PRC”). The registered capital of Eastern Concept Consulting is Rmb10,000,000 (US$1,369,863). The principal activity of Eastern Concept Consulting is provision of consultancy services on information technology and acts as a holding company.

On November 6, 2007, Eastern Concept Consulting entered into a share exchange agreement with, among others, the then stockholders of Guangdong Wanzhi Electron S&T Company Limited* (“Wanzhi”) pursuant to which Eastern Concept Consulting acquired 100% of the registered capital of Wanzhi, a company established in the PRC, at a cash consideration of Rmb10,000,000 (US$1,369,863). Details of Wanzhi are set out below:

The principal activities of Wanzhi are the provision of smartcard system and other value-added services mainly in Guangdong province, the PRC. In June 2007, Wanzhi acquired the entire equity interest in Foshan Information Technology Company Limited* (“Foshan Company”), a company established in the PRC, at a total consideration of Rmb750,000 (US$102,740). Foshan Company is principally engaged in the operation of a smartcard payment system in Foshan, Guangdong province, the PRC.

In October 2007, Foshan Company and third parties established two subsidiaries, Foshan JiaXun Information Technology Company Limited* (“JiaXun”) and Foshan JinCheng Information Technology Company Limited* (“JinCheng”), in the PRC with registered capital of Rmb3,000,000 (US$410,959) and Rmb4,000,000 (US$547,945) respectively. Foshan Company owns 51% of the registered capital of each of JiaXun and JinCheng. The principal activity of JiaXun is provision of information system and network services while JinCheng owns an operating right in respect of certain equipment for a smartcard system to be installed in schools located in the Shan Cheng District, Foshan, the PRC.

In February 2008, Wanzhi disposed of its 45% equity interest in Foshan Company.

In April 2008, Jin Cheng acquired a 30% equity interest in Foshan KaiEr Information Technology Company Limited (“KaiEr”), a company incorporated in the PRC and engaged in developing of technology for network and computer and business advisory service, at a consideration of US$18,362.
 
 
 
- 32 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
In September 2008, Foshan Company disposed of its entire 51% equity interest in JiaXun at a consideration of US$221,739, resulted in a gain of US$658 as recorded in the consolidated statements of operations for the year ended December 31, 2008.

The Company entered into an agreement with a third party individual (the “Purchaser”) on March 28, 2009 to dispose of its entire 51% equity interests in JinCheng (the “Proposed Disposal”) at a consideration of approximately US$370,000.

On December 31, 2009, the Company has agreed with the Purchaser to terminate the Proposed Disposal as the Purchaser was unable to settle the consideration as scheduled.

On February 2, 2010, Wanzhi acquired an additional 35% equity interest in Foshan Company at a cash consideration of US$294,118, resulting in an increase of the Company’s shareholding in Foshan Company from 55% to 90%.

In May 2010, Wanzhi disposed of its entire 90% equity interest in Foshan Company at a consideration of US$817,647, resulted in a gain of US$607,525 as recorded in the consolidated statements of operations.

SPYE currently has three subsidiaries: Eastern Concept, Eastern Concept Consulting and Wanzhi. Except for Eastern Concept which is incorporated in Hong Kong, all subsidiaries are established in the People’s Republic of China (the “PRC”).

SPYE and its subsidiaries are hereinafter referred to as the “Company”.

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


2.   GOING CONCERN UNCERTAINTIES

The accompanying consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

As of December 31, 2011, the Company has suffered from negative working capital of $210,737 and accumulated deficit of $1,803,435. The continuation of the Company as a going concern through December 31, 2012 is dependent upon attaining profitable operations in the future and the continued financial support from its stockholders. Management believes the existing shareholders will provide the additional cash to meet the Company’s obligations as they become due. Also, the Company is currently pursuing additional financing for its operations. However, there is no assurance that the Company will be successful in securing sufficient funds to sustain the operations.

These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

l  
Basis of presentation
 
 
 
- 33 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

l  
Use of estimates

In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.

l  
Basis of consolidation

The consolidated financial statements include the financial statements of SPYE and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation. The Company includes the results of operations of subsidiaries from the date of acquisition and up to the effective date of disposal.

l  
Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

l  
Trade receivables

Trade receivables are recorded at original invoice amount, less an estimated allowance for uncollectible accounts. Trade credit is generally granted on a short-term basis, thus trade receivables do not bear interest. Trade receivables are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Changes in the estimated collectability of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. Allowance is recorded primarily on a specific identification basis. The Company generally does not require collateral for trade receivables.

l  
Inventories
 
Inventories, mainly smartcards, are stated at the lower of cost and net realizable value. Cost, which comprises all costs of purchase and, where applicable, other costs incurred in bringing the inventories to their present location and condition, is calculated using the first-in, first-out method. Net realizable value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

l  
Property, plant and equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis (after taking into account their respective estimated residual values) over the following expected useful lives from the date on which they become fully operational:

 
Expected useful life
 
Residual value
Plant and machinery
5 years
 
5%
Furniture, fixtures and office equipment
5 years
 
5%

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

l  
Intangible assets
 
Purchased intangible assets with finite useful lives represent operating rights and related computer software, which are amortized using the straight-line method over their respective estimated economic lives. Intangible assets with indefinite useful lives are measured at cost and tested at least annually for impairment in accordance with ASC Topic 350, “ Intangible – Goodwill and other”.
 
 
 
- 34 -

 

SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
l  
Valuation of long-lived assets

In accordance with Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results.

l  
Revenue recognition

The Company recognizes its revenue in accordance with the ASC Topic 605, "Revenue Recognition", when persuasive evidence of an arrangement exists, services are rendered, the fee is fixed or determinable, and collectability is probable. Service revenues are recognized net of discounts.

l  
Comprehensive income or loss

ASC Topic 220, “Comprehensive Income” establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income or loss, as presented in the accompanying consolidated statement of stockholders’ deficit consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income or loss is not included in the computation of income tax expense or benefit.

l  
Income taxes

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

The Company did not have any unrecognized tax positions or benefits and there was no effect on the financial condition or results of operations for the years ended December 31, 2011 and 2010. The Company and its subsidiaries are subject to local and various foreign tax jurisdictions. The Company’s tax returns remain open subject to examination by major tax jurisdictions.

l  
Net loss per share

The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share”. Basic loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

l  
Foreign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
 
 
 
- 35 -

 

SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
The reporting currency of the Company is United States Dollars ("US$"). The Company’s subsidiaries operating in Hong Kong and the PRC maintained their books and records in their local currency, Renminbi Yuan (“RMB”), which are functional currencies as being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from its reporting currencies into US$1 has been made at the following exchange rates for the respective year:
 
   
2011
   
2010
 
Year-end RMB:US$1 exchange rate
    6.3523       6.6600  
Annual average RMB:US$1 exchange rate
    6.4544       6.8000  

l  
Related parties

Parties, which can be a corporation or individual, are considered to be related if the Company 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. Companies are also considered to be related if they are subject to common control or common significant influence.

l  
Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates one reportable segment in the PRC.

l  
Fair value of financial instruments

The carrying value of the Company’s financial instruments: cash and cash equivalents, prepayments and other receivables, accounts payable, amount due to a related party, other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments.

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

·
Level 1 : Observable inputs such as quoted prices in active markets;

·
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·
Level 3 : Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

l  
Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations, as follows:
 
 
 
- 36 -

 

SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-28 regarding the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance clarifies the steps to be performed to determine whether goodwill has been impaired and addresses the steps for reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2010. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011. In the period of adoption, the Company will include the required disclosures in its filings and believes the adoption will have no impact on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 regarding the presentation of comprehensive income. This new guidance amends the previous application of comprehensive income and the requirements regarding presentation in the financial statements. It requires the disclosure of the components of comprehensive income, which the Company currently discloses in other sections of its filings, to be presented as part of one statement of comprehensive income, or as a separate statement of comprehensive income following the statement of earnings. In December 2011, the FASB issued ASU No. 2011-12 which temporarily defers those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 regarding disclosures about offsetting assets and liabilities. This new guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.


4.
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 
As of December 31,
 
 
2011
   
2010
 
           
Office equipment
  $ 82,603     $ 82,603  
Computer
    23,769       16,858  
Foreign translation difference
    (3,817 )     -  
      102,555       99,461  
Less: accumulated depreciation
    (74,955 )     (56,689 )
Less: foreign translation difference
    1,645       -  
 
Property, plant and equipment, net
  $ 29,245     $ 42,772  

Depreciation expense for the years ended December 31, 2011 and 2010 was $18,266 and $18,593.
 
 
 
- 37 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
5.
INTANGIBLE ASSETS
 
Intangible assets consisted of the following:
 
 
As of December 31,
 
 
2011
   
2010
 
Operating rights:
         
Nanhai project
(a)
  $ 1,446,484     $ 1,446,484  
Less: accumulated depreciation
      (676,655 )     (569,101 )
Less: accumulated impairment
      (407,416 )     (355,908 )
Add: foreign translation difference
      26,766       -  
                   
Operating rights, net
      389,179       521,475  
                   
Computer software:
(b)
               
At cost
      363,363       363,363  
Less: accumulated depreciation
      (145,732 )     (130,295 )
Less: accumulated impairment
      (109,656 )     (94,543 )
Add: foreign translation difference
      6,218       -  
                   
Computer software, net
      114,193       138,525  
      $ 503,372     $ 660,000  

Amortization expense for the years ended December 31, 2011 and 2010 was $122,991 and $205,651.

(a)  
Nanhai project

On June 22, 2006, the Company’s operating subsidiary, Wanzhi entered into a co-operative agreement (the “Co-operative Agreement”) with other parties which include, inter alia, the Education Authority in the Nanhai District, Foshan (the “Education Authority”). Pursuant to the Co-operative Agreement, Wanzhi needs to contribute certain computer equipment and software to the Education Authority and schools in the Nanhai District in exchange for an operating right for the provision of services in respect of a smartcard system to be installed in schools located in the Nanhai District. The smartcard system enables schools and parents to check progress and information of students, and being notified of their attendance record and examination results, etc. through short messages from mobile or fixed-line phones. The operating right is granted for a period of 10 years from June 30, 2006 to June 30, 2016. The smartcard system has commenced operations in the Nanhai District since September 2008.

In 2007, Wanzhi had already satisfied with all the required contributions of computer equipment and software to the Education Authority in exchange for the operating right in accordance with the Co-operative Agreement. No further contributions were made to the Education Authority afterwards.

As a result of the impairment test, the management considers that the carrying amount of the operating right in respect of Nanhai project exceeds its fair value, so an impairment loss of $51,508 and $355,908 was made in the financial statements for the years ended December 31, 2011 and 2010.

(b)  
Computer software

The computer software is used directly in the Nanhai project.

As a result of the impairment test, the management considers that the carrying amount of the computer software in respect of Nanhai project exceeds its fair value, so an impairment loss of $15,113 and $94,543 was made in the financial statements for the years ended December 31, 2011 and 2010.

6.
ACCRUED CHARGES AND OTHER PAYABLES

Accrued charges and other payables consisted of the following:
 
 
- 38 -

 

SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
 
As of December 31,
 
 
2011
   
2010
 
           
Deposits for smartcards
  $ 43,549     $ 71,130  
Subcontracting and other service costs payable
    40,696       33,816  
Accrued charges and other payables
    195,841       109,824  
Other tax payables
    4,682       69,434  
    $ 284,768     $ 284,204  

7.
TEMPORARY RECEIPTS

Temporary receipts consisted of the following:

 
As of December 31,
 
 
2011
   
2010
 
           
Advanced receipts for Nanhai project
  $ -     $ 32,852  
Other advanced receipts
    8,202       24,564  
    $ 8,202     $ 57,416  

8.
INCOME TAXES
 
For the years ended December 31, 2011 and 2010, the local (United States) and foreign components of income (loss) before income taxes were comprised of the following:
 
   
Years ended December 31,
 
   
2011
   
2010
 
Tax jurisdictions from:
           
- Local
  $ -     $ -  
- Foreign
    (261,961 )     27,004  
 
(Loss) Income before income taxes
  $ (261,961 )   $ 27,004  

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: United States, British Virgin Island, Hong Kong and the PRC that are subject to taxes in the jurisdictions in which they operate, as follows:
 
United States of America

The Company is registered in the State of Nevada and is subject to United States current tax law. The Company has no operation in the States and no provision for income tax is required.

Hong Kong

For the years ended December 31, 2011 and 2010, no provision for Hong Kong Profits Tax is provided for, since the Company’s income neither arises in, nor is derived from Hong Kong under its applicable tax law.

The PRC

Under the Corporate Income Tax Law of the People’s Republic of China, the Company’s subsidiaries in the PRC are subject to the unified statutory income tax rate of 25%. The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2011 and 2010 is as follows:

   
Years ended December 31,
 
   
2011
   
2010
 
             
(Loss) Income before income taxes
  $ (261,961 )   $ 27,004  
Statutory income tax rate
    25 %     25 %
Income tax impact at statutory income tax rate
    (65,490 )     6,751  
Non-deductible items
    (583 )     112,785  
Non-taxable income
    76,233       (151,881
Tax adjustments
    49,533       -  
Valuation allowance for deferred tax assets
    -       32,345  
                 
Income tax expense
  $ 59,693     $ -  
 

 
 
- 39 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
As of December 31, 2011, the PRC operation incurred $287,854 of net operating losses carryforward available for income tax purposes that may be used to offset future taxable income and will begin to expire in 5 years from the year of incurrence, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $71,896 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

9.
RELATED PARTY TRANSACTIONS

(a)  
Name and relationship of related parties

Name of related parties
 
Relationships with the Company
Li Xing Hao
 
A director of Wanzhi and a major stockholder of SPYE
Qiu Bo
 
Spouse of Li Xing Hao
Guangdong Chigo Air Conditioning Company Limited (“Chigo”)
 
A company in which Li Xing Hao has control and beneficial interest
Foshan Information Technology Company Limited * (“Foshan Company”)
 
A company in which Li Xing Hao has control and beneficial interest
Foshan JinCheng Information Technology Company Limited * (“JinCheng”)
 
A company in which Li Xing Hao has control and beneficial interest
Foshan KaiEr Information Technology Company Limited (“KaiEr”)
 
An associate of JinCheng
Tang Jin Cheng
 
A director of JinCheng
Huizhou Tintong Smart Device Company Limited (“Tintong”)
 
A company in which Li Xing Hao has control and beneficial interest

(b)  
Balances with related parties

(i)  
Trade receivable from a related party included in “Trade receivables”.

 
As of December 31,
 
 
2011
 
2010
 
           
Chigo
  $ 6,231     $ 5,944  

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

(ii)  
Amounts due from related parties

 
As of December 31,
 
 
2011
   
2010
 
           
Li Xing Hao
  $ -     $ 377,451  
Jincheng
    -       5,383  
                 
    $ -     $ 382,834  

The amounts are unsecured, interest-free and have no fixed repayment term.
 
 
 
- 40 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

 
(iii)  
Amounts due to related parties

 
As of December 31,
 
 
2011
   
2010
 
           
Foshan Company
  $ 63,606     $ 60,667  
Chigo
    98,204       4,584  
KaiEr
    75,731       49,260  
Li Xing Hao
    130,577       -  
Qiu Bo
    492       -  
                 
    $ 368,610     $ 114,511  

The amounts are unsecured, interest-free and have no fixed repayment term.

(c)  
Summary of related party transactions

   
Years ended December 31,
 
   
2011
   
2010
 
             
Sundry income from KaiEr
  $ 20,100     $ 8,270  
Interest expense to Li Xing Hao
    -       43,809  
Rental expenses to Chigo
  $ 82,687     $ -  


10.   CHINA CONTRIBUTION PLAN

Under the PRC Law, full-time employees of its subsidiaries in the PRC are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. They are required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $7,389 and $13,888 for the years ended December 31, 2011 and 2010, respectively.


11.   STATUTORY RESERVES

Under the PRC Law the Company’s subsidiaries, Hua Long, New Century and Bao Sai are required to make appropriations to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.

For the years ended December 31, 2011 and 2010, the Company made no appropriations due to its cumulative operating loss.

 
12.   CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers
 
 
 
- 41 -

 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 

   
Years ended December 31,
 
   
2011
   
2010
 
             
Major customers with revenue of more than 10% of the Company’s total operating revenue
           
Revenue from major customers
  $ 753,029     $ 1,090,117  
Percentage of sales
    74 %     75 %
Number
    1       3  

(b)         Credit risk

Financial instruments that are potentially subject to credit risk consist principally of trade accounts receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

(c)         Exchange rate risk

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

(d)         Economic and political risks

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.


13.   SEGMENT INFORMATION

During the years ended December 31, 2011 and 2010, revenue of the Company represented service income from providing smart card systems and other value-added services for which the Company does not have discrete financial information. Therefore, no financial information by business segment is presented. Furthermore, as all service income is derived from the PRC, no information by geographical segment is presented.

All tangible and intangible assets are located in the PRC as of December 31, 2011 and 2010.


14.   COMMITMENTS AND CONTINGENCIES

The Company currently does not have any formal rent agreements. The Company recorded and paid rent expense at the current market fair value on a monthly basis to a related party, Chigo.
 
 
 
- 42 -

 

SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
 
Costs incurred under this operating lease are recorded as rental expense and totaled approximately $85,755 and $5,824 for the years ended December 31, 2011 and 2010, respectively.


15.   DISCONTINUED OPERATIONS

In May 2010, the Company’s subsidiary, Wanzhi disposed of its entire 90% equity interests in Foshan Company at a consideration of approximately $817,647, resulted in a gain of $607,525 as recorded in the consolidated statements of operations during the year ended December 31, 2010 (the “Disposal”). The difference between the fair value of the consideration paid and the amount of noncontrolling interest acquired previously recognized in additional paid in capital of $342,793 was released and included in the gain on disposal of interest in a subsidiary upon the disposal.

The Company concluded that the Disposal met the definition of a discontinued operation as defined in ASC Topic 360, "Property, Plant and Equipment". Accordingly, the results of operations of these businesses have been reclassified for all periods presented, which are summarized as follows:

   
Years ended December 31,
 
   
2011
   
2010
 
             
Revenues, net:
  $ -     $ -  
                 
Operating expenses:
               
Staff costs
    -       (1,576 )
Depreciation of property, plant and equipment
    -       (268 )
Other general and administrative
    -       (13 )
Interest expense
    -       (6,618 )
Interest income
    -       3  
                 
LOSS BEFORE INCOME TAX
    -       (8,472 )
Gain on disposal of interest in a subsidiary
    -       607,525  
Income tax expense
    -       -  
                 
Income from discontinued operations
  $ -     $ 599,053  


16.   ACQUISITION OF ADDITIONAL INTEREST IN A SUBSIDIARY AND DISPOSAL OF ENTIRE INTEREST IN A SUBSIDIARY

On February 2, 2010, Wanzhi acquired an additional 35% equity interest in Foshan Company at a cash consideration of $294,118, resulting in an increase of the Company’s shareholding in Foshan Company from 55% to 90%. The difference between the fair value of the consideration paid and the amount of noncontrolling interest acquired of $342,793 has been recognised in additional paid in capital. The consideration of $294,118 had been paid by Li Xing Hao on behalf of the Company and was recorded in amounts due to related parties.
 
In May 2010, Wanzhi disposed of its entire 90% equity interest in Foshan Company at a consideration of $817,647, resulted in a gain of $607,525 as recorded in the consolidated statements of operations. The difference between the fair value of the consideration paid and the amount of noncontrolling interest acquired previously recognized in additional paid in capital of $342,793 was released and included in the gain on disposal of interest in a subsidiary upon the disposal. 30% of the interest was sold to Li Xing Hao and the related consideration of $248,132 was settled by offsetting against the amount due to him. The remaining consideration of $569,515 was also settled by offsetting against the loan and interest payable to Li Xing Hao.

Details of the disposal as of December 31, 2010 are set out below.
 
 
 
- 43 -

 
 
SMARTPAY EXPRESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)

 
Net assets disposed of:
     
Property, plant and equipment
  $ 26,683  
Intangible assets
    29,412  
Prepayments and deposits
    119,877  
Other debtors
    10,593  
Amount due from related parties
    93,786  
Inventories
    23,216  
Cash and cash equivalents
    446  
Accrued charges and other payables
    (167,802 )
Amount due to related parties
    (38,544 )
Interest payable to a related party
    (24,265 )
Long term loan to a related party
    (220,588 )
Noncontrolling interests
    14,515  
         
      (132,671 )
Release of additional paid-in capital upon disposal
    342,793  
Gain on disposal of interest in a subsidiary
    607,525  
         
Total consideration
  $ 817,647  
         
Satisfied by:
       
Offsetting against amount due to Li Xing Hao
    248,132  
Offsetting against the loan and interest payable to Li Xing Hao
    569,515  
    $ 817,647  


17.   SUBSEQUENT EVENTS

In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after December 31, 2011 up through the date the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events.
 
 
 
- 44 -

 


Item 9.        Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

The Financial Statements of the Company have been audited by HKCMCPA Company Limited for the fiscal year ended December 31, 2011 and by Mazars CPA Limited for the fiscal year ended December 31, 2010.

There have been no changes in or disagreements with Mazars CPA Limited, or HKCMCPA Company Limited on accounting and financial disclosure matters at any time.

Item 9A.     Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of December 31, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures (as defined under Rule 13a-15(e) or 15d-15(e) under the Exchange Act) are effective.

(b) Management's Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company in accordance with Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions, providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements, providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
 
(c) Changes in internal controls.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the evaluation date, nor were there any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.
 
 
 
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ITEM 9AT.  CONTROLS AND PROCEDURES

(a)           The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.

(b)           This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

(c)           There were no changes in the Company's internal controls over financial reporting, known to the chief executive officer or the chief financial officer, that occurred during the fourth fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The following table sets forth the names, ages, and positions with the Company for each of the directors and officers of the Company. All executive officers are elected by the Board of Directors and hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified.
 
Name
 
Age
 
Positions
         
Michael Donaghy
 
50
 
Interim Chief Executive Officer, President, Chief Financial Officer
and Director
         
Chen Jun
 
 
 
Vice President and Director

 
 
 
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The following is information on the business experience of each director and officer.

Michael Donaghy, age 50, has been the President, Chief Executive Officer and a member of the Board of Directors of Oxford Investments Holdings Inc, a reporting company since 2000.  From February 2000 to October 2000 he served as Interim President of Zaurak Capital Corp., an e-gaming holding company.   In 1999 he formed and was named President and Chief Executive Officer of CyberGaming Inc., a company engaged in the business of Internet e-gaming sub-licensing, website creation and hosting.  Mr. Donaghy resigned as President and CEO of CyberGaming Inc. in September 2000.  Mr. Donaghy is also President of Citywebsites.com, a website design company, since March 1995.

Chen Jun,   age, ___, has been the Founder and Executive Director of EduSafety Network Co., Ltd,  since 2009.  Among other things,  he developed the school safety platform to the Education Bureau of Guangdong Province and applied in 11 cities with more than 2,000,000 active clients every month, it has also been launched in Shandong Province and is recommended to the whole country by the Chinese Education Society Safety Committee.  From 2005 to 2009 he served as the Founder and owner of Wanzhi S/T Co., Ltd., a company that developed all Chip card (contactless) products and allied with banks telecommunication carriers, city one-card management companies to build up Nanhai Education-One-Card-Tong.  From 2000 to 2005 he was the Founder and Executive Director of BCI Network Co., Ltd, a company that specialized in R&D of Chip card products and was the Sole Chinese supplier of entrance security system to InnerRange of Australia.  From 1998 to 2000, Mr. Chun served in risk management for Bank of China, in Guangzhou Branch, and Guangdong Provincial Branch successively.
 
.On November 23, 2011, Ping Tang resigned as the Chief Executive Officer and the President and Director of SmartPay the Company,  Chunlin Zhange resigned as an Officer and Director of the Company and Xianxia Wang resigned as Chief Financial Officer and Vice President of the Company.

Ms. Ping Tang, age 57, has been the general manager of Foshan Chigo Educational Technology Equipment Co., Ltd since June 2003. From July 1998 to May 2003, she was the manager of Guangzhou Huaqiao Sugar Factory. From May 1978 to June 1998, she was the director of Yian Sugar Factory in Yian, Heilongjiang province in China.

Ms. Xianxia Wang, age 28, had been the financial director of Guangzhou Historical Videos and Cultural Communications Co., Ltd. from June 2010 to April 2011. Previously, she was an accountant at Chigo Holdings, Ltd (HK: 0449) from August 2007 to April 2011. From September 2004 to May 2005, she was an accountant at Nanjing Qingye Hardware Co., Ltd. And from March 2003 to September 2004, she was an accountant at Dongguan Hongyan Industrial & Trading Co., Ltd. Ms. Wang has an associate degree in Financial Accounting.
 
Family Relationships

There are no familial relationships between or among our officers and directors.

Meetings of Our Board of Directors

The Registrant’s Board of Directors took all actions by unanimous written consent without a meeting during the fiscal years  ended December 31, 2011 and December 31, 2010.

Board Committees

Audit Committee . The Company intends to establish an audit committee of the board of directors, which will consist of soon-to-be-nominated independent directors. The audit committee’s duties would be to recommend to the Company’s Board of Directors the engagement of independent auditors to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company’s Board of Directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.

Compensation Committee. The Company intends to establish a compensation committee of the Board of Directors. The compensation committee would review and approve the Company’s salary and benefits policies, including compensation of executive officers.

Compensation of Directors
We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director.

 
 
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Significant Employees

Other than the directors and officer described above, we do not expect any other individuals to make a significant contribution to our business.

Involvement in Legal Proceedings

None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past five years:

any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court  of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities; or

being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

Code of Ethics

The Company has adopted a Code of Ethics that applies to the Company’s principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as other employees (the "Code of Ethics"), a copy of which is attached as Exhibit 14.1 to our Form 10-KSB for the fiscal year ended December 31, 2006, and is incorporated herein by reference. The Code of Ethics is designed with the intent to deter wrongdoing, and to promote the following:

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between
personal and professional relationships
Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer
files with, or submits to, the Commission and in other public communications made by the small business issuer
Compliance with applicable governmental laws, rules and regulations
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code