10-Q 1 form10q.htm FORM 10-Q Filed by sedaredgar.com - Northport Capital Inc. - Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

Commission File Number: #000-52728

NORTHPORT NETWORK SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)

Washington
(State or other jurisdiction of incorporation or organization)

76-0674579
(IRS Employer Identification Number)

Suite #4200, 601 Union Street, Seattle, Washington 98101
(Address of principal executive offices)(Zip Code)

(206) 652-3451
(Registrant's telephone no., including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]    No [X]

The number of shares of the Company's common stock issued and outstanding on March 31, 2009 was 32,700,012.

Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check One):

Large accelerated filer [   ]      Accelerated filer [   ]      Non-accelerated filer [   ]      Smaller reporting company [X]

Table of Contents

 PART I FINANCIAL INFORMATION
  Item 1 – Financial Statements - Unaudited
  Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations
  Item 3—Quanitative and Qualitative Disclosure about Market Risk
  Item 4 – Controls and Procedures
   
 PART II OTHER INFORMATION
  Item 1 – Legal Proceedings
  Item 1A – Risk Factors
  Item 2 – Unregistered Sales of Equity Securities
  Item 3 – Exhibits
  Item 4 – Submission of Matters to a Vote of Security Holders
  Item 5 – Other Information
  Item 6 – Exhibits and Filings on Form 8-K

PART I – FINANCIAL INFORMATION

Item 1.              Financial Statements- Unaudited

 

 

 

 

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 (UNAUDITED)

 

 

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES

CONTENTS

Pages

Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008 (Audited) 1
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2009 and 2008 (Unaudited) 2
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (Unaudited) 3
   
Notes to Condensed Consolidated Financial Statements as of March 31, 2009 (Unaudited) 4 - 8

1

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES (“NNWS”)
CONDENSED CONSOLIDATED BALANCE SHEETS

    March 31,     December 31,  
    2009     2008  
    (Unaudited)     (Audited)  
                                                                                                                       ASSETS            
CURRENT ASSETS            
     Cash and cash equivalents $  352,008   $  440,226  
     Accounts receivable, net   626,639     448,547  
     Prepaid expenses and other current assets   416,238     439,277  
             Total Current Assets   1,394,885     1,328,050  
             
PROPERTY AND EQUIPMENT, NET   409,027     419,840  
GOODWILL   3,114,938     3,114,938  
TOTAL ASSETS $  4,918,850   $  4,862,828  
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY             
             
CURRENT LIABILITIES            
     Accounts payable $  46,471   $  138,455  
     Other payables and accrued liabilities   1,221,342     1,291,120  
     Due to stockholders   263,137     173,432  
     Income and other taxes payable   166,271     94,298  
     Deferred revenue   5,030     5,023  
TOTAL LIABILITIES   1,702,251     1,702,328  
             
COMMITMENTS AND CONTINGENCIES   -     -  
             
EQUITY            
     NNWS Stockholders' Equity            
     Preferred stock, $0.001 par value, 100,000,000 shares authorized            
             nil share issued and outstanding   -     -  
     Common stock, $0.001 par value, 100,000,000 shares authorized,            
             30,000,012 shares issued and outstanding   30,000     30,000  
     Common stock, 2,700,000 shares to be issued   2,700     2,700  
     Additional paid-in capital   4,729,503     4,727,465  
     Retained earnings (Accumulated deficit)            
         Unappropriated   (1,899,745 )   (1,861,946 )
         Appropriated   146,648     146,648  
     Accumulated other comprehensive loss   (86,171 )   (85,368 )
             Total NNWS Stockholders' Equity   2,922,935     2,959,499  
             
     Noncontrolling interests   293,664     201,001  
TOTAL EQUITY   3,216,599     3,160,500  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $  4,918,850   $  4,862,828  

The accompanying notes are an integral part of these condensed consolidated financial statements

2

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)

    For the three months ended  
    March 31,  
             
    2009     2008  
             
NET SALES            
     Provision of platform for electronic filing of tax returns $  1,891   $  36,977  
     Color photo printing   2,440     1,534  
     Air-ticketing agency services   471,429     -  
                   Total net sales   475,760     38,511  
             
COST OF SALES            
     Provision of platform for electronic filing of tax returns   (9,770 )   (22,547 )
     Color photo printing   (12,708 )   (13,760 )
     Air-ticketing agency services   (156,550 )   -  
                   Total cost of sales   (179,028 )   (36,307 )
             
GROSS PROFIT   296,732     2,204  
             
OPERATING EXPENSES            
     Selling, general and administrative   164,499     85,839  
     Research and development expenses   25,098     24,616  
     Depreciation   5,256     4,108  
                   Total Operating Expenses   194,853     114,563  
             
INCOME (LOSS) FROM OPERATIONS   101,879     (112,359 )
             
OTHER INCOME (EXPENSES)            
     Other income   17,604     26  
     Interest income   1,083     14  
     Imputed interest expenses on amount due to stockholders   (2,038 )   (10,866 )
     Interest expense   (917 )   -  
     Other expenses   (163 )   -  
                   Total Other Income (Expenses), net   15,569     (10,826 )
             
INCOME (LOSS) BEFORE INCOME TAXES   117,448     (123,185 )
     Income tax expense   (62,853 )   -  
NET INCOME (LOSS)   54,595     (123,185 )
     Less: net income attributable to noncontrolling interests   (92,394 )   -  
NET LOSS ATTRIBUTABLE TO NNWS COMMON STOCKHOLDERS   (37,799 )   (123,185 )
             
OTHER COMPREHENSIVE LOSS            
     Total other comprehensive loss   (534 )   (26,203 )
     Less: foreign currency gain attributable to noncontrolling interests   (269 )   -  
     Foreign currency translation loss attributable to NNWS common stockholders   (803 )   (26,203 )
             
COMPREHENSIVE LOSS ATTRIBUTABLE TO NNWS COMMON STOCKHOLDERS $  (38,602 ) $  (149,388 )
             
Net loss per share-basic and diluted $  (0.00 ) $  (0.01 )
             
Weighted average number of shares outstanding            
     during the period-basic and diluted   32,700,012     26,895,604  

The accompanying notes are an integral part of these condensed consolidated financial statements

3

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

    Three months ended March 31,  
             
    2009     2008  
CASH FLOWS FROM OPERATING ACTIVITIES            
     Net loss $  (37,799 )   (123,185 )
     Adjusted to reconcile net loss to cash used in            
           operating activities:            
           Depreciation - cost of sales   7,267     7,635  
           Depreciation   5,256     4,108  
           Stocks issued for services   -     1,000  
           Imputed interest expenses on due to stockholders   2,038     10,866  
           Noncontrolling interests   92,394     -  
     Changes in operating assets and liabilities            
           Decrease (Increase) in:            
           Accounts receivable   (177,503 )   -  
           Prepaid expenses and other current assets   23,587     93  
           (Decrease) Increase in:            
           Accounts payable   (92,145 )   22  
           Other payables and accrued liabilities   (71,390 )   13,673  
           Deferred revenue   1     (20,384 )
           Income and other taxes payable   71,844     (642 )
           Net cash used in operating activities   (176,450 )   (106,814 )
             
CASH FLOWS FROM INVESTING ACTIVITIES            
     Purchase of property and equipment   (1,710 )   (14,370 )
           Net cash used in investing activities   (1,710 )   (14,370 )
             
CASH FLOWS FROM FINANCING ACTIVITIES            
     Due to stockholders   89,474     167,144  
           Net cash provided by financing activities   89,474     167,144  
             
EFFECT OF EXCHANGE RATES ON CASH   468     (36,084 )
             
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   (88,218 )   9,876  
             
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   440,226     13,934  
             
CASH AND CASH EQUIVALENTS AT END OF PERIOD $  352,008   $  23,810  
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
Cash paid for interest $  917   $  -  

The accompanying notes are an integral part of these condensed consolidated financial statements

1

NORTHPORT NETWORK SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF MARCH 31, 2009 (UNAUDITED)

NOTE 1 BASIS OF PRESENTATION
 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Company's consolidated financial position at March 31, 2009, the consolidated results of operations and comprehensive loss for the three months ended March 31, 2009 and 2008, and consolidated cash flows for the three months ended March 31, 2009 and 2008. The consolidated results for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2009. These financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008, previously filed with the Securities and Exchange Commission on April 14, 2009.

 

NOTE 2

GENERAL ORGANIZATION AND BUSINESS

 

Northport Network Systems, Inc. (“Northport Network”) was incorporated under the laws of the State of Colorado on July 25, 2000 as Dotcom-netmgmt.com Inc. (“Dotcom”). The name was changed from Dotcom to Northport Capital Inc. on April 28, 2004. On October 9, 2008, the stockholders approved in the annual general meeting : (i) a plan of merger for the re-incorporation of the Company from Colorado to Washington State, and change of the name of the Company to “Northport Network Systems, Inc.” which became effective on November 7, 2008; (ii) the authorization of one hundred million (100,000,000) shares of preferred stock with a par value of $.001 in connection with the re- incorporation merger; and (iii) the Company’s 2008 Stock Option Plan authorizing the issuance of two million seven hundred fifty thousand (2,750,000) shares of common stock of the Company. Northport Network is an investment holding company.

 

Dalian Beigang Information Industry Development Company Limited (“Dalian Beigang”) was incorporated in the People’s Republic of China (“PRC”) on June 20, 1997 with its principal place of business in Dalian, PRC.

 

Dalian Beigang is principally engaged in the provision of platforms, among other things, to customers in Dalian for electronic filing of tax returns and payment of taxes and color photo printing business in the PRC. The Company owns a trade name “Colorstar” which was registered with the China State Administration for Industry and Commerce in China as well as a Chinese patent which was applied for on the color photo printing technology. In accordance with the business permit, the Company’s right of operation expires on June 20, 2026 and is renewable.

 

On June 23, 2005, Northport Network entered into a definitive agreement with the stockholders of Dalian Beigang in which Northport Network exchanged 100% of the registered and fully paid up capital of Dalian Beigang for $150,000 satisfied by the issue of 1,500,000 shares of common stock of $0.001 par value to the stockholders of Dalian Beigang. As both companies are under common management, the exchange of shares has been accounted for as a reorganization of entities under common control.

 

On October 9, 2008, Dalian Beigang entered into a definitive agreement with the stockholders of Shenyang Ling Xiao Aviation Services Co., Ltd (“Ling Xiao”) to acquire 51% equity interest of Ling Xiao for 2,700,000 treasury shares of common stock of the Company. Ling Xiao is engaged in air-ticketing agency services.

 

Northport Network, Dalian Beigang, Ling Xiao are hereafter referred to as (“the Company”).



NOTE 3 PRINCIPLES OF CONSOLIDATION
   

The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2009 consolidate the unaudited financial statements of Northport Network and its wholly owned subsidiary company, Dalian Beigang and 51% equity interest owned subsidiary, Ling Xiao. The controlling interests represent the minority stockholders’ 49% share of the results of Ling Xiao.

 

The accompanying unaudited condensed consolidated financial statements fo the three months ended March 31, 2008 consolidate the unaudited financial statements of Northport Network and its wholly owned subsidiary company, Dalian Beigang.

 

All significant inter-company accounts and transactions have been eliminated in consolidation.

 

NOTE 4

GOODWILL

 

Goodwill represents the excess purchase price of net tangible and intangible assets acquired in the acquisition of 51% equity interest of Ling Xiao over their estimated fair value. The Company accounts for goodwill in accordance with SFAS No. 142 and SFAS No. 141, “Business Combinations” (“SFAS No. 141”). SFAS No. 142 requires goodwill to be tested for impairment on an annual basis or more frequently, if impairment indicators arise, and written down when impaired. In accordance with SFAS No. 142, the Company tests goodwill for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events. The annual test of goodwill impairment is performed in the fourth quarter using a two-step process in accordance with SFAS No. 142. First, the Company determines if the carrying amount of its reporting unit exceeds the fair value of the reporting unit, which would indicate that goodwill may be impaired. If the Company determines that goodwill may be impaired, the Company compares the implied fair value of the goodwill, as defined by SFAS No. 142, to its carrying amount to determine if there is an impairment loss. There was no goodwill impairment recorded by the Company during the three months ended March 31, 2009.

 

NOTE 5

NET LOSS PER SHARE

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):

      Three months ended March 31,  
      2009     2008  
  Numerator:            
       Net loss used in computing basic and diluted net loss per share $  (38 ) $  (123 )
               
  Denominator:            
       Shares used in computation of basic and diluted net loss per share            
               Weighted average number of issued common stock outstanding   30,000     26,896  
               Weighted average number of common stock to be issued   2,700     -  
      32,700     26,896  
  Basic and diluted net loss per share $  (0.00 ) $  (0.01 )

NOTE 6 COMMITMENTS AND CONTINGENCIES
   
  (A) Commitments

The Company leases office spaces from certain third parties under nine operating leases which expire on dates between April 5, 2009 and September 30, 2013 at monthly rentals of between $58 and $2,922.

As of March 31, 2009, the Company has outstanding commitments of with respect to the above operating leases, which are due as follows:


  2009 $  42,925  
  2010   45,041  
  2011   35,059  
  2012   35,059  
  2013   17,530  
    $  175,614  

(B) Capital Commitments

On October 24, 2007, the registered capital of Dalian Beigang was increased from $144,928 (Rmb1.2 million) to $30,144,928 (Rmb220 million) to allow for new investment of foreign capital either in the form of equity or debt. According to the amended Articles of Association of Dalian Beigang, the Company has to fulfill registered capital contribution of $30 million. As of March 31, 2009, the Company has outstanding capital contribution of $30 million which is payable on or before January 16, 2010. If the Company is unable to fully contribute to the increased capital of $30 million by January 16, 2010, the registered capital of Dalian Beigang will become the actual capital contribution as of that date.

(C) Contingent consideration

On October 9, 2008, the Company acquired 51% equity interest of Ling Xiao for 2,700,000 shares of treasury stock of the Company at a fair value of $3,240,000 based on the closing price of the Company’s common stock as quoted on the Over-the-Counter Bulletin Board as of the date of the closing of the transaction. According to the terms of the definitive agreement, the consideration amount is determined on the basis of a formula of 51% of 5 times of the estimated Ling Xiao’s net earnings for the year ended March 31, 2009 and additional treasury shares will be issued if the actual net earnings are in excess of the net earnings projected in the formula. The unaudited financial statements of Ling Xiao as of March 31, 2009 shows that the net earnings are below the projected net earnings and, therefore, the management considers no additional contingent purchase consideration will be paid.

NOTE 7  STOCKHOLDERS’ EQUITY
   
  Changes in Equity
   

The following table summarizes the changes in equity for the three months ended March 31, 2009 (in thousands):


      NNWS Common     Noncontrolling        
      Stockholders     Interests     Total  
                     
  Total equity as of December 31, 2008 $  2,960   $  201   $  3,161  
  Additional paid-in capital   2     -     2  
  Net income (loss)   (38 )   92     54  
  Other comprehensive loss   (1 )   -     (1 )
  Total equity as of March 31, 2009 $  2,923   $  293   $  3,216  

NOTE 8 RELATED PARTY TRANSACTIONS
   

As of March 31, 2009, a stockholder loaned $263,137 to the Company as an unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand.

 

Total imputed interest expenses recorded as additional paid-in capital amounted to $2,038 for the three months ended March 31, 2009.

 

NOTE 9

CONCENTRATIONS AND RISKS

 

During 2009, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from companies located in the city of Dalian and Shenyang which are both located in the PRC.

 

The Company has a diversified base of customers. No individual customer contributed to more than 10% of total revenues for the three months ended March 31, 2009. No individual customer accounted for more than 10% of accounts receivable as of March 31, 2009.


The business of the Company’s newly acquired subsidiary, Ling Xiao is subject to certain risks and concentrations including dependence on relationships with travel industry suppliers, primarily airlines and exposure to risks associated with online commerce security. Agency commission from an airline accounted for 69% of the Company’s total revenues for the three months ended March 31, 2009. As of March 31, 2009, accounts receivable from this airline was $355,131.

NOTE 10 SEGMENTS

The Company operates in three reportable segments; provision of platforms for electronic filing of tax returns and payment of taxes, color photo printing and air-ticketing agency services. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on income from operations. All inter-company transactions between segments have been eliminated. As a result, the components of operating income for one segment may not be comparable to another segment. The following is a summary of the Company’s segment information for the three months ended March 31, 2009 and 2008:

      Provision of platform                    
      for electronic filing of     Color photo     Air-ticketing        
      tax returns     printing     agency     Total  
  2009                        
  Revenues $  1,891   $  2,440   $  471,429   $  475,760  
  Gross profit (loss)   (7,879 )   (10,268 )   314,879     296,732  
  Net profit (loss) from operations   (17,649 )   (107,014 )   78,667     (45,996 )
  Total assets   2,987     443,991     1,362,421     1,809,399  
  Depreciation and amortization   1,208     7,065     4,250     12,523  
                           
  2008                        
  Revenues $  36,977   $  1,534   $  -   $ 38,511  
  Gross profit (loss)   14,430     (12,226 )   -     2,204  
  Net loss from operations   (54,803 )   (51,523 )   -     (106,326 )
  Total assets   82,370     312,123     -     394,493  
  Depreciation and amortization   5,772     5,971     -     11,743  

A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.

      Three months ended March 31,  
      2009     2008  
               
  Total net loss for reportable segments $  (45,996 ) $  (106,326 )
  Unallocated amounts relating to corporate operations:            
     Legal and professional fees   (4,000 )   (4,752 )
     Others   12,197     (12,107 )
    $  (37,799 ) $  (123,185 )

NOTE 11 THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective beginning January 1, 2009. The adoption of this statement did not have a material impact on the Company’s financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests (previously referred to as minority interests) in subsidiaries. SFAS No. 160 requires that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity, rather than as a liability. SFAS No. 160 was effective for the Company on January 1, 2009, and is being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption of this statement did not have a material impact on the Company’s financial position and results of operations.


NOTE 12 GOING CONCERN

As reflected in the accompanying financial statements, the Company has an accumulated deficit of $1,899,745 at March 31, 2009. The Company’s current liabilities also exceed its current assets by $307,366 and the Company used cash in operations of $176,450. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent up the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management has taken steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is now pursuing additional funding and potential merger or acquisition candidates, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year.

Item 2.               Management’s Discussion and Analysis of Financial Conditions and Results of Operation

The following Management’s Discussion and Analysis or Plan of Operations is intended to help the reader understand our operations and our present business environment. The following discussion of our plans, results of operations and financial condition as at and for the three month period ended March 31, 2009 should be read in conjunction with our unaudited interim financial statements and related notes for the three month period ended March 31, 2009 included in this quarterly report.

As used in this quarterly report: (i) the terms “we”, “us”, “our” and the “Company” mean Northport Capital, Inc.; and all dollar amounts refer to United States dollars unless otherwise indicated.

Critical Accounting Policies

Our significant accounting policies are discussed in the notes to the unaudited interim financial statements included in Item 1. Financial Statements. Please also refer to our annual report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (“SEC”) on April 14, 2009 for a more detailed discussion of our critical accounting estimates.

These policies have been consistently applied in all material respects and address such matters as revenue recognition and depreciation methods. The preparation of the financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. The accounting treatment of a particular transaction is specifically dictated by accounting principles, generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any viable alternative would not produce a materially different result.

Overview

We conduct business in North America under the name of Northport Network Systems, Inc. We own a Chinese company, Dalian Beigang Information Industry Development Company Limited (“Dalian Beigang”), that operates three separate businesses- (1) TENET (or “Tenet”), a tax filing and preparation service for federal commercial taxpayers in Dalian, Liaoning Province in the People’s Republic of China (“PRC”). Tenet, developed and designed by Dalian Beigang, and further engineered through collaboration with the Dalian National Tax Bureau beginning in January of 1999, is geared only towards Chinese commercial business owners and not individual tax filers; and (2) the Company has developed a digital photo processing kiosk technology, which operates under the trade name “Colorstar”, and which business is now ready to be fully commercialized in China. The technology has been developed on a “platform” basis and this initial application is presented in a kiosk format. This application is presented as a stand-alone, digital photo processing kiosk, allowing users to select and print standard size photos for a fee. Other applications are currently being developed.; and (3) Dalian Beigang owns a 51% equity interest in Shenyang Ling Xiao Aviation Service Company Limited, (“Ling Xiao”), which operates online and call center travel booking operations in the Chinese cities of Dalian and Shenyang and which will use a terminal version of the Colorstar platform in their travel booking locations.

Corporate History

We were originally incorporated in Colorado as dotcom.netmgmt.com Inc. on July 25, 2000. The authorized number of common shares was set at 25,000,000 at a par value of $0.001 with no preferred shares authorized.

The original planned business was an Internet website designed to assist small business owners. From formation until 2004, we engaged in no significant operations other than organizational activities. We received no revenues during this period.

On April 28, 2004, we held a special shareholder’s meeting at which our authorized capital was increased from 25,000,000 common shares, $0.001 par value to 100,000,000 common shares, $0.001 par value. At the same meeting the two original directors and officers resigned and Zhao Yan, Zhong Bo Jia and James Wang were elected as new directors. Zhao Yan was appointed president and James Wang appointed as secretary/treasurer. At the same meeting the issued common shares of 6,250,000 were split on a four to one basis resulting in a new total of 25,000,000 issued common shares and retained the same par value of $.001. At the same meeting our name was changed from dotcom-netmgmt.com Inc to Northport Capital Inc.

We entered into an agreement dated June 23, 2005, to acquire 100% of Dalian Beigang, an existing Chinese tax software and data processing business. The June 23, 2005 agreement required Company shareholder approval as well as PRC government approval by way of the issuance of a business license for the revised corporate structure, which would be a Wholly Owned Foreign Enterprise (“WOFE”). Pursuant to Chinese laws, within one year after approval of a business license for a WOFE by the Chinese government, the Purchaser must pay the full purchase price to the Sellers.

The Chinese government approved the business license for the WOFE on May 17, 2006, at which time the acquisition closed. A total of 1,500,000 treasury shares of the Company were issued as the purchase price for the acquisition. Subsequently on January 10, 2008, 1,000,000 restricted, common shares were authorized to be issued to Xiao Jun, an employee of the Company and the original developer of the Company’s Colorstar digital photo technology, as an employment incentive. We registered certain of our shares by way of a Form SB2 filing which was declared effective by the Securities and Exchange Commission (the “SEC”) on July 13, 2007. Our common shares began trading on the OTCBB on January 16, 2008 under the symbol NPCA.

On October 9, 2008 at our annual shareholders meeting held in Dalian, China, our shareholders approved the election of our existing three directors and also approved:

-a plan of merger for the reincorporation of the Company from the State of Colorado to the State of Washington and the change of the name of the Company to Northport Network Systems, Inc.;
- the authorization of 100,000,000 shares of preferred stock with a par value of $.001 to be adopted in the Articles of Incorporation, governed by the Washington Business Corporation Act in connection with the reincorporation merger;
- the requirement that not less than 25% of all the votes entitled to be cast on an issue will have the right to call a special meeting of the shareholders by submitting a written demand to the Company;
-the Company’s proposed 2008 Stock Option Plan authorizing the amount of 2,750,000 shares of common stock; and
-ratified the appointment of Jimmy C.H. Cheung & Co as the Company’s independent registered public accountants for the fiscal year ending December 31, 2008.

Approval of these issues was disclosed on Form 8K filed on November 17, 2008. Our original trading symbol was revised to NNWS upon approval of our corporate name change in Washington State to Northport Network Systems, Inc. in November 2008.

Our authorized capital stock now consists of 100,000,000 shares of common stock, $0.001 par value per share, of which 30,000,012 shares have been issued and outstanding, fully paid and non-assessable as of March 31, 2009. We also have an additional 2,700,000 shares which have not yet been issued to the shareholder of Ling Xiao in payment for the 51% equity interest in Ling Xiao acquired by the Company.We also have 100,000,000 preferred shares authorized at a par value of $.001 of which none are currently issued. There are no outstanding options, warrants or calls pursuant to which any person has the right to purchase any of our authorized and unissued common or other securities.

Throughout this Form 10Q report, we have used an exchange rate of $1.00 US = 6.96 Rmb (Chinese yuan) for all conversions except those taken directly from our audited financial statements which may vary marginally from this rate. The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, and significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$ reporting.

Dalian Beigang is duly organized, validly existing and in good standing under the laws of the People’s Republic of China. The original business enterprise was incorporated in the PRC on June 20, 1997. The original business license issued to Dalian Beigang ended on June 19, 2007 and has been renewed until June 8, 2026.

On October 9, 2008, the Company acquired 51% equity interest of Ling Xiao for 2,700,000 shares of treasury stock of the Company at a fair value of $3,240,000 based on the closing price of the Company’s common stock as quoted on the Over-the-Counter Bulletin Board as of the date of the closing of the transaction. According to the terms of the definitive agreement, the consideration amount is determined on the basis of a formula of 51% of 5 times of the estimated Ling Xiao’s net earnings for the year ended March 31, 2009 and additional treasury shares will be issued if the actual net earnings are in excess of the net earnings projected in the formula. The unaudited financial statements of Ling Xiao as of March 31, 2009 shows that the net earnings are below the

projected net earnings and, therefore, the management considers no additional contingent purchase consideration will be paid.

Facilities

The Company maintains its primary office in North America at #4200, 601 Union Street, Seattle, Washington, 98101. The telephone numbers used at the location are 206-508-3689, 206-652-3451 and the facsimile number is 206-652-3205. The lease is a month-to month arrangement with the option to increase space as needs require. The current monthly rent is $225.

The Company’s Dalian Colorstar and Tenet business operates from an office facility located at Suite #512, A. No. 1 Huoju Road Qixianlinq Industrial Base – High-Tech Zone in Dalian, China. The Company leases office space therein from certain third parties under nine operating leases which expire on dates between April 5, 2009 and September 30, 2013 at monthly rentals of between $58 and $2,922.

As of March 31, 2009, the Company has outstanding commitments of with respect to the above operating leases, which are due as follows:

2009 $  42,925  
2010   45,041  
2011   35,059  
2012   35,059  
2013   17,530  
  $  175,614  

The Ling Xiao business in Dalian operates from leased office space in the central area of Dalian at Rooms 2704, 2705, 2706, and 1101 in the Yue Xiu Building, No.82 Xin Kai Road, Xi Gang District, Dalian, China

Ling Xiao in Shenyang operates from office and dormitory facilities located at No. 109- 6-1 Nanjing North Street, Peace District, Shenyang, China

.China Operations

Principal Products

       (A.)        Tenet tax filing software

The State Administration of Taxation governs the national tax bureaus in different Chinese provincial capital cities, which are responsible for the national tax bureau offices as well as local tax bureaus in different cities in their province. With the upgrade of these offices complete, the shift now moves to getting its users, the commercial taxpayers, filing and paying taxes online with software systems that are compatible with the Federal system. National tax bureaus handle all aspects of federal taxes as compared to local taxes payable to, and collected by, local city tax bureaus. The business of the National tax bureau covers (product) transaction value added taxes, business income tax, with the tax collected to be handed to the national treasury directly, constituting national fiscal income.

The business of the local tax bureaus covers enterprise business and personal income tax, with the tax collected handed in part to the national treasury and the rest kept as local fiscal income.

Management of Dalian Beigang was advised that their Tenet tax reporting and payment system was China’s first online federal tax reporting/tax payment system. The “Tenet” system is an intranet based online tax filing and payment transfer system, which has been approved by the National Tax Bureau. Only those business users

having an agreement for Tenet use with Dalian Beigang can access that system. Revenue flows from subscription agreements with commercial taxpayers.

In late 2008, the China State Administration of Taxation installed a systematic black box on its website, designed to guarantee network safety for the system. As a result, Dalian Beigang is now unable to upgrade its TENET tax filing system. We are currently negotiating with representatives of the Federal Administration of Taxation in the Dalian Office on how to deal with the problems that have risen as a result.

As of March 31, 2009, there were approximately 8243 subscribers in Dalian (of approximately 35,000 available businesses in total) and an additional 886 subscribers in Yingkou, Liaoning province, which business is operated under a cooperation agreement between Dalian Beigang and Lenovo Corporation. Management opted to launch its first city operation of Tenet outside of Dalian in Yingkou, the nearest large city, and only 200 km from Dalian. The local partner in Yingkou is Yingkou City Beigang Network Information Industry Service Co., Ltd., a wholly owned subsidiary of Lenovo Corporation, a Chinese computer manufacturer and retailer. Lenovo Yingkou is a large computer dealer and service provider in Yingkou maintaining a good relationship with the national tax bureau there. The “Cooperation Agreement,” in its English version, dated September 18, 2002 is Exhibit 10.1 in our SB-2 filing. As stated above, we are not currently generating any revenues from any of these subscribers pending resolution of our discussions with the Federal Administration of Taxation offices in Dalian

We are currently negotiating with representatives of the Federal Administration of Taxation in the Dalian Office on how to deal with the problem of access. Because we are currently unable to update the Tenet system for our subscribers, we are not billing for services or access- thus not currently generating any Tenet revenues. If we are unable to resolve this issue, we will have no option but to discontinue Tenet operations during second quarter 2009.

       (B.)        Graphic Printing Technology

In mid 2005, management of Dalian Beigang was introduced to a digital photo processing technology being developed by a Beijing engineer. The project required funding and the Company’s management approved a decision to invest funds to develop the technology to a level where it could be commercially analyzed. Key aspects of the technology that differentiate it from other kiosk digital photo systems include silver halide print technology instead of thermal print processes, reduced print times and lower cost per processed photo- this allowing for lower price points. A trade name of Colorstar was registered with the China State Administration for Industry and Commerce in China as well as a Chinese patent applied for on the technology. Total expenditures on research and development undertaken by Dalian Beigang on this project were charged to general and administrative expenses for the three month periods ended March 31, 2008 and 2009, and such expenditures amounted to $24,616 and $25,098, respectively.

The research and development on Colorstar has been undertaken separate from the original Tenet tax software business of the Company.

The project has involved the development of a digital “platform” with an initial application to be a user-operated, stand alone, digital photo developing and printing network operating system controlled through a proprietary network server with terminals and self serve digital photo developing printers- with user interfaces contained in a kiosk format. The stand-alone devices provide users with print images equivalent to regular photographic pictures.

Currently the system network and self-serve digital printer design are at a commercial stage. All intellectual property rights are reserved in the name of Dalian Beigang.

Over the past two years various test units were developed and installed in commercial locations in Dalian so as to generate consumer response and also to measure unit operating characteristics. Twelve units of the latest test model have been installed in various locations in and around Dalian since June 2007, including malls, hotels, telephone retail shops, etc and were in operation as at December 31, 2007.

Dalian Beigang entered into an agreement on March 1, 2008 to supply a total of 542 Colorstar units to various Internet cafe locations and also retail telephone store locations in Liaoning Province in China. The agreement partner was China Netcom, a significant Chinese landline and broadband supplier with annual revenues in excess of $1.0 billion US. The agreement called for monthly service fees to be paid to China Netcom and revenues to be divided on an 85-15 percent basis between Dalian Beigang and China Netcom. A detailed Form 8K was filed on March 6, 2008 which provided details of the agreement. To date, a total of only 24 units have been produced. The delays were directly attributed to the Company’s lack of working capital required to

manufacture Colorstar kiosks at a contracted manufacturing facility located in Dalian. An enhanced version of the kiosk design has been completed but commercial production awaits availability of funding to cover manufacturing costs.

Shortly after the original China Netcom contract was signed, the China Netcom Network system was closed and did not accept any new business from May 1st to October 30, 2008 for the sake of ensuring the safety of the Beijing Olympic Games. The network system was opened again in November 2008, but China Netcom and its planned merger partner China Unicom commenced a re-structure program, including a name change to China Unicom. Our agreement with China Netcom terminated on February 1, 2009 and we are in negotiations with them to renew. Given the current re-structure focus of China Unicom. management is unclear as to the likelihood of renewal of this agreement. Meanwhile management is actively in discussion with other retail groups in China with respect to similar agreement arrangements.

The design and manufacture of the network and the self-help digital photo-developing printer are the most important components of the project, and various test machines were developed. The original model, although capable of operation, had no promotion value; a second model was unusable because of low output speed and long waiting times; and a third model machine realized all design functions but because of large volume requirements, high cost and questionable intellectual property rights, it was not suitable for commercial development. The fourth design has proved successful and is the current commercial model. The network management server is fully developed and capable of meeting any and all necessary management and control functions. The Company`s core expertise of online security systems as developed for Tenet, has been instrumental in ensuring trouble free development of the Colorstar financial controls systems.

The Digital Photo Processing Market in Northeast China

Dalian Beigang retained the services of independent research companies in northeast China in order to assist management in determining the present status of the northeast China digital printing market as well as determination of possible market acceptance and development of the Colorstar project.

The research was undertaken in Beijing, Shenyang and Dalian and included sampling from consumers (local citizens, tourists and professionals), imaging shop proprietors (color film processing shops and photo-printing collection agencies), as well as convenience stores, lottery shops and advertising agencies and companies.

Management determined that the Chinese market is in a stage of rapid increase of sales of digital cameras. Since the end of 2005, increases of 30% to 50% in demand for digital printing have been shown in larger cities – in fact, higher than for traditional film printing. In addition, there are now a total of over 550 million cellular telephones in use in China, of which 70% of these mobile phones come with a camera function. Colorstar units allow for print operations from Cellular telephones.

Traditional digital color printing shops in the Chinese domestic market utilize equipment technology of one of four brands including Kodak, Fuji, Konica and Lucky. Kiosk models in use in China include those developed by Kodak and Sony, both models that have been introduced in the North American marketplace as well.

Fuji digital printing machine technology has also been in a leading position in the China industry, enjoying the capability for producing stand alone devices and establishing network platforms, as well as providing customer financing. Doli, a China domestic manufacturer of production-type digital printing machines, has good quality equipment but has little strength in providing additional functions and network operating management platforms.

Analysis of data collected showed that both the operational mode and technological advantages of the Colorstar project were recognized by the China market. However, the project needed to improve its technological level, perfect its equipment quality, and also establish and implement detailed and effective marketing plans, in order for it to be commercially viable. Dalian Beigang has now completed these.

Colorstar Manufacturing

Currently Dalian Beigang subcontracts manufacture of the various components of Colorstar units and assembles the finished units at the Company`s facilities in Dalian. Dedicated circuit board manufacturers are well-suited to the assembly of circuit boards with the complexity found in the Colorstar design. Dedicated board manufacturers can spread the extensive capital equipment costs of circuit board assembly among multiple projects and customers. Such manufacturers also have the volume to enable the frequent upgrades necessary for

new, state-of-the-art equipment. We have identified multiple suppliers who meet our quality, cost, and performance criteria. We intend to use more than one source for circuit board assembly to ensure a reliable supply over time. Dalian Beigang contracts manufacture and fabrication of Colorstar components to a number of local Dalian companies as well as approximately 40 separate suppliers located throughout China in cities such as Shanghai, Shenzhen, Beijing and others.

The Colorstar manufacturing process involves a controlled process of parts ordering, quality control review of incoming components, fabrication/assembly of the various key elements such as paper roll container, paper feeder, water/chemical container, feeder frame, paper dryer, paper outflow mechanism, electrical components addition and kiosk frame assembly. Upon final assembly completion, each unit is tested and checked by quality control personnel again prior to units being readied for shipment.

Colorstar Operations

In China, management has entered into negotiations with a number of large organizations that operate retail facilities. Agreement relationships are planned to entail Dalian Beigang manufacturing and installing kiosk units in partner locations and revenues split on an 85/15 percentage basis between the partners. A typical agreement is expected to be initially two years in length and renewable if agreed to by both parties. All Colorstar units will remain in the ownership of the Company. All unit operations, repairs, maintenance, cash handling and accounting functions are handled by Dalian Beigang. The kiosk design currently produces only a 4 inch by 6 inch size photo.

Based on results of test units installed in various retail locations in Dalian city, average usage has been 35% and each user averages 20 photos per session. Average retail purchase pricing has been set at $.085 per photo. The current design has an initial processing period for each user order followed by a much faster production time for the individual photos. Each 20 photo order takes approximately 8 minutes to complete after adding times for selection, payment and production.

To date, units have had a Company staff person in attendance at all times to ensure customer familiarity with Colorstar operational features and to explain questions or issues that users may have. The plan is for these attendant functions to be handled by the retail partner staff after an initial operating period, likely 90 days. Since each unit is always connected to the Colorstar central server, management will always be able to identify maintenance, usage numbers or repair issues that arise for each individual unit.

Revenue from the sale of color photo printing services is derived from our own and affiliate operations, which consist of franchise agency and licensing program. The Company follows the guidance of Emerging Issues Task Force (EITF) 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent", for its presentation of revenue and direct costs. This guidance requires the Company to assess whether it acts as a principal in the transaction or as an agent acting on behalf of others. Where the Company is the principal in the transaction and has the risks and rewards of ownership, the transactions are recorded gross in the statements of income. Revenue and related costs of services generated by the franchise agents are included as part of the Company's consolidated revenue and costs of services, respectively, since the Company has the direct contractual relationships with the customers, holds title to the related customer receivables and is the legal employer of the employees.

The franchise agent acts as the Company's agent in a similar manner as a branch manager in the Company-owned locations. In the franchise arrangement, the Company has the direct contractual relationships with its customers and contracts with customers are binding to the Company. The Company is also obligated for the employee payroll, electricity and related overheads regardless of customer acceptance of the services. These factors, among others, designate the Company as principal with respect to its franchise agent operations.

The Company also has a licensing program whereby the licensee had the direct contractual relationships with the customers, held title to the related customer receivables and was the legal employer of the employees. Accordingly, net sales and costs of services generated by the license operation are included in the Company's consolidated financial statements. Fees are paid to the Company based on a fixed price for each of the photo printed and such license fees are recorded by the Company as revenue.

For sale from its own operation, revenue is recognized after the photos are printed and delivered to the customers and cash has been collected.

In late 2007, two completed Colorstar units were shipped to Vancouver Canada for purposes of analysis to determine what modifications, if any, will be needed in order to introduce the technology and Colorstar units into the North American market places. Once that analysis has been completed, we intend to complete our North American business

plan and begin introduction of the technology in the US and in Canada. We expect that such analysis will be completed by the end of second quarter 2009.

Sales and Marketing

In China, marketing of Colorstar to date has involved a team of four people making direct sales calls to major potential joint venture partners such as China Netcom and others. In addition, there are a number of potential franchise-type relationships being discussed with individuals in Dalian city itself. These franchise-type arrangements await completion of formal documentation and availability of manufacturing financing. Initial test units have been installed at locations under an informal franchise arrangement. Agreements with other potential partners await various approvals.

       (C.)        Ling Xiao Aviation Booking Operations

Ling Xiao was registered with the Shenyang Industrial and Commercial Administration on September 26, 2007 and its business term is approved until September 2017. Ling Xiao is principally engaged in the air-ticketing agency business. In addition to its operation in the city of Shenyang, Liaoning Province in the PRC, Ling Xiao assumed all of the business operations of Dalian Ling Xiao Aviation Service Co., Ltd (“Dalian Ling Xiao”) on October 10, 2008. Dalian Ling Xiao is owned by the stockholders of Ling Xiao and is principally engaged in an air-ticketing agency business in the City of Dalian.

Since we provide travel-related services through our website, we are subject to all of the PRC laws and regulations relating to the telecommunications industry and Internet, and regulated by various government authorities, including the Ministry of Information Industry and the State General Administration of Industry and Commerce.

The travel industry in China is subject to the supervision of the China National Tourism Administration and local tourism administrations. The principal regulatory regulations governing travel agencies in China include: - Administration of Travel Agencies Regulations (1996), as amended; -Telecommunications Regulations (2000); -The Administrative Measures for Telecommunications Business Operating Licenses (2001)

Under these regulations, a travel agency must obtain a license from the China National Tourism Administration to conduct cross-border travel business, and a license from the provincial-level tourism administration to conduct domestic travel agency business.

In China, the business of air ticket bookings being conducted online still remains in its early stages. Currently, it is only promoted in the larger cities and not in medium and smaller cities. Published statistics show that in 2008, there were some 192 million passenger flights that were booked online in China, among them 8.22 million in Dalian and 6.80 million in Shenyang. The quantity of booking air ticket online in Liaoning Province accounted for 7.82% of total China bookings. To start up an online booking service in a particular city, it is necessary to obtain a business license and a franchise license (or special permits) issued by the China Air Transportation Association. Typically the business license is valid for 10 years and the franchise license is valid for 1 year, after which the enterprise must pass a rigid evaluation and examination. If successful, a new license will be issued.

Ling Xiao is a leading retailer of air tickets in northeast China. We aggregate information on flights and enable our customers to make informed and cost-effective flight bookings. We also sell charter flight seating. We target our services primarily at business and individual travelers in our area of focus in northeast China. We act as agent in substantially all of our transactions. We derive our air-ticketing revenues mainly through commissions. During the period ended March 31, 2009, Ling Xiao generated net revenue of $471,429 which was generated from air ticket bookings incurred during the quarter of 91,469,820.22 Yuan ($13,142,215).

The business of Ling Xiao is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and exposure to risks associated with online commerce security.

We believe that we are the largest air ticket booking facility in Dalian in terms of the number of air tickets booked and sold and are rapidly expanding our business in Shenyang. Once established there, we intend to expand elsewhere in other northeast China urban areas. Our airline ticket suppliers include all major Chinese airlines and many international airlines that operate flights originating from China. We are among the few airline ticket booking entities in China that maintain a centralized reservation system and ticket fulfillment infrastructure. Our customers can make flight reservations on their chosen routes and arrange ticket payment and delivery through us directly or third-party agencies located in northeast China.

We offer our services to customers through an advanced transaction and service platform consisting of our centralized toll-free, 24 hour customer service center and website. To date in 2009, transactions effected through our customer service center accounted for over 90% of our transaction volume.

We sell air tickets for all major domestic Chinese airlines, including Air China, China Eastern Airlines, China Southern Airlines, Hainan Airlines and Shanghai Airlines and a number of international airlines operating flights that originate from cities in China.

In air-ticketing transactions, a customer generally pays the ticket delivery agent upon delivery of the ticket. The customer has the option of picking up a ticket at a Ling Xiao ticketing office or obtaining an electronic ticket. In 2008, China mandated full scale use of electronic ticketing, or E-ticketing, systems for all air travel. We believe that E-ticketing allows us to execute air-ticketing transactions more efficiently. E-ticketing also makes our business expansion into other northeastern China cities easier and more efficient. The airline industry, including airline ticket pricing, is regulated. Therefore, we have no discretion in offering discounts on the air tickets we sell. Our commission rate per ticket usually increases as the total number of tickets we sell for an airline increases.

Transaction and Service Platform

Our customers can reach us for their travel-related needs through either our toll-free customer service center or our website.

Our centralized toll-free customer service center is located in Dalian, China and is operated 24 hours a day and seven days a week. Customers can call our toll free number to consult with customer service representatives, receive flight information and make travel bookings. As of March 31, 2009, we employed approximately 90 customer service representatives, all of whom participated in formal training programs before commencing work.

We have a Chinese-language website located at www.lingxiao.net.

Employees and Staffing

We have 152 full-time employees as of March 31, 2009. Our employees are not covered by any collective bargaining agreement and we have never experienced a work stoppage. We believe that our relations with our employees are good. The Company currently operates with a staff of 54 in Dalian and 2 in Yingkou. The Ling Xiao subsidiary operates with 80 staff in Dalian and 15 in Shenyang. A director of the Company represents and operates from North American offices located in Seattle, Washington.

All of our management personnel have university degrees. Customer support personnel require a junior college or technical college degree. Software engineers require a minimum of a computer science degree.

The 152 current staff members of Northport and Dalian Beigang are employed as follows:

Management 9
Accounting 8
Marketing 6
Tenet tax filing systems 9
Software Design/R and D 11
Colorstar Operations 11
Yingkou Office 2
Ling Xiao Dalian 80
Ling Xiao Shenyang 15
North American Seattle Office 1
   
Total 152

Risks and Uncertainties

An investment on our common stock involves a number of very significant risks. Prospective investors should refer to the risk factors disclosed in our Form SB2 which was declared effective by the SEC on July 13, 2007 and also the risk factors disclosed in our most recent Form 10K filed with the SEC on April 14, 2009.

There are a number of known material risks and uncertainties that are reasonably likely to have a material impact on our revenues, operations, liquidity and income over the short and long term. The primary risk that we face in respect to our Tenet business is our ability to obtain access to the tax bureau system so as to allow us to update our system for our subscribers. We are hopeful that we will obtain such access. If not, we will be forced to shut down Tenet operations.

The Company is currently assessing the costs and benefits of continuing the Tenet division or shutting it down. A decision on this will be made by the end of second quarter 2009. We are also in negotiations with a manufacturer capable of full, turnkey provision of Colorstar units to our specifications. If these discussions prove successful, then we will attempt to raise capital to finance additional kiosk construction and sales therof.

Chinese government policies could have potential negative impacts on our business. Our business may be adversely affected by the relationship between the United States and China. This may impede our ability to operate in China. Likewise, our business may be adversely affected by internal Chinese issues such as boycotts, strikes, protests and government sanctions which may impede our ability to operate our business in China. Additionally, Chinese laws and regulations could have a potential negative impact on us.

We rely on key members of our management team and the loss of any of their services would have a material adverse effect on our success and development. The majority of our directors and officers are non-residents of the United States and could be beyond reach in the event of litigation. In addition, the lack of availability in China of business liability insurance could materially affect our business.

Since our primary business operates in China, a re-evaluation of the Chinese Renminbi versus the US Dollar could have a negative effect on our financial results.

Resistance by users towards acceptance of our products could negatively affect our revenues and profits. Likewise, additional and unexpected competition could have a materially adverse effect on our business.

Results of Operations

SELECTED FINANCIAL INFORMATION

The Company operates in three reportable segments; provision of platforms for electronic filing of tax returns and payment of taxes, color photo printing and air-ticketing agency services. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on income from operations. All inter-company transactions between segments have been eliminated. As a result, the components of operating income for one segment may not be comparable to another segment. The following is a summary of the Company’s segment information for the three months ended March 31, 2009 and 2008:

      Provision of platform                    
      for electronic filing of     Color photo     Air-ticketing        
      tax returns     printing     agency     Total  
  2009                        
  Revenues $  1,891   $  2,440   $  471,429   $  475,760  
  Gross profit (loss)   (7,879 )   (10,268 )   314,879     296,732  
  Net loss from operations   (17,649 )   (107,014 )   78,667     (45,996 )
  Total assets   2,987     443,991     1,362,421     1,809,399  
  Depreciation and amortization   1,208     7,065     4,250     12,523  
                           
  2008                        
  Revenues $  36,977   $  1,534   $  -   $  38,511  
  Gross profit (loss)   14,430     (12,226 )   -     2,204  
  Net loss from operations   (54,803 )   (51,523 )   -     (106,326 )
  Total assets   82,370     312,123     -     394,493  
  Depreciation and amortization   5,772     5,971     -     11,743  

A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.


    Three months ended March 31,  
    2009     2008  
             
Total net loss for reportable segments $  (45,996 ) $  (106,326 )
Unallocated amounts relating to corporate operations:            
   Legal and professional fees   (4,000 )   (4,752 )
   Others   12,197     (12,107 )
  $  (37,799 ) $  (123,185 )

Revenues

Revenues for Tenet take the form of annual fees paid by new and renewing subscribers. We provide services to our customers based on fixed-price contracts. We recognize services-based revenue from all of our contracts when the service has been performed, the customer has approved the completion of services and an invoice has been issued and collectability is reasonably assured. Revenue received by us for future services not yet performed is deferred.

In late 2008, the China State Administration of Taxation installed a systematic black box on its website, designed to guarantee network safety for the system. As a result, Dalian Beigang is now unable to upgrade its TENET tax filing system. We are currently negotiating with representatives of the Federal Administration of Taxation in the Dalian Office on how to deal with the problems that have risen as a result. Because we are currently unable to update the Tenet system for our subscribers, we are not billing for services or access- thus not currently generating any Tenet revenues. As at March 31, 2009, Dalian Beigang had a total of 8,243 subscribers in Dalian.

In Yingkou as at March 31, 2009, the Yinkou Lenovo Tenet operation had 886 subscribers, compared to 948 as at March 31, 2008. Fees charged to subscribers in Yingkou are similar to those in Dalian. Dalian Beigang will receive 30% of fee revenues from the Yingkou operations, once subscribers exceed 1,000 in total.

Revenues are recognized upon subscription sign-on dates. Contract revenues, where the subscription terms extend beyond our year-end, are recognized under the percentage-of-completion method. The percentage of completion is determined by computing the percentage of the subscription period completed. As at March 31, 2009, a total of $5,030 was classified as deferred revenue, as compared to $5,023 classified as deferred revenue at December 31, 2008.

During the quarter, we generated only $1,891 in Tenet revenues as compared to $36,977 in the similar period of 2008. If we are unable to resolve this access issue, we will have no option but to discontinue Tenet operations during second quarter 2009.

Revenues from Colorstar installations take the form of a revenue charge to users of the kiosks, and such revenues are typically split between the Company and the retail location on an 85/15 basis. As of March 31, 2009, there were a total of 12 Colorstar kiosks in operation and Colorstar related revenues during the three month period were $2,440 as compared to Colorstar revenues of $1,534 during the similar period in 2008.

During the period ended March 31, 2009, Ling Xiao generated net revenue of $471,429 which was generated from air ticket bookings incurred of 99,517,732 Yuan ($14,298,524). The majority of revenues originated from air ticket bookings with other income totalling less than $30,000 during the period.

The business of the Company’s newly acquired subsidiary, Ling Xiao is subject to certain risks and concentrations including dependence on relationships with travel suppliers, primarily airlines and exposure to risks associated with online commerce security. Agency commissions from one airline alone accounted for 69% of the Company’s total revenues for the three months ended March 31, 2009. As of March 31, 2009, accounts receivable from this airline was $355,131.

Results of the Three Month Period Ended March 31, 2009

Total revenues for the quarter ended March 31, 2009, were $475,760 as compared to $38,511 in the similar period in 2008. Gross profit for the period was $296,732 and the income from operations was $101,879. The overall net loss for the quarter was $37,799. The gross profit for the similar period in 2008 was $2,204 and loss from operations for that period was $112,359. The overall net loss for the 2008 comparable period was $123,185.

Because we are currently unable to update the Tenet system for our subscribers, we are not billing for services or access- thus not currently generating any Tenet revenues. If we are unable to resolve this issue, we will have no option but to discontinue Tenet operations during second quarter 2009.

During the three month period, a total of 12 Colorstar kiosks were operational. Revenues received from user operations of such kiosks were $2,440.

Selling, general and administrative expenses were $164,499 for the quarter ended March 31, 2009 as compared to $85,839 in the comparable 2008 period. Although our expenses increased during this most recent quarter, these were primarily based on Ling Xiao operations and redesign of Colorstar manufacturing designs. We have instituted cost savings and expense review actions with the intent to reduce our expenses to a break even basis and so as to maintain continued service level capabilities. A total of $25,098 was expended on research on the Colorstar digital photo technology during the quarter.

Ling Xiao cost of sales was $156,550 during the quarter which entailed ticket booking, call center and related expenses.

Liquidity and Capital Resources

For the three months ended March 31, 2009, our cash and cash equivalents decreased by $88,218 to $352,008. The decrease in cash was due primarily to a significant write off of accounts receivable of $177,503 and partially offset by an increase in shareholder loans of $89,474. As at March 31, 2009, our cash resources were such that we had a negative working capital position of $307,366.

As of March 31, 2009, a stockholder loaned $263,137 to the Company as an unsecured loan and imputed interest is computed at 5% per annum on the amount due. The balance is repayable on demand.

Total imputed interest expenses recorded as additional paid-in capital amounted to $2,038 for the three months ended March 31, 2009.

As reflected in the accompanying financial statements, the Company has a total accumulated deficit of $1,899,745 at March 31, 2009. The Company’s current liabilities also exceed its current assets by $307,366 and the Company used cash in operations of $176,450 during the quarter. These factors raise substantial doubt about our ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent up the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management has taken steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is now pursuing additional funding and potential merger or acquisition candidates, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year. The Company has also developed an online e-Commerce website which may have potential in the China market. The site, to be known as UrMart, is expected to become operational during June 2009. The potential of this site in terms of revenue generating capability is currently unknown.

Management believes that receipt of additional shareholder loans, combined with expense reduction programs being initiated, will allow us to continue operations for the remainder of 2009. The Company is actively pursuing a number of private placement fundings which would further ensure continued operations.

Trends and Uncertainties That May Affect Future Results

For the three months ended March 31, 2009, our cash and cash equivalents decreased by $88,218 to $352,008. The decrease in cash was due primarily to a significant write off of accounts receivable of $177,503 and partially offset by an increase in shareholder loans of $89,474.

As reflected in the accompanying financial statements, we had a total accumulated deficit of $ 1,899,745 at March 31, 2009. Our current liabilities exceed our current assets by $307,366 and during the three month period, we used net cash in operations of $176,450.

In view of the matters described above, continued operation of the Company is dependent upon the Company’s ability to raise additional capital, reduce its operating expenses, obtain financing and succeed in its future operations. Management is taking steps to revise our operating and financial requirements, which we believe will be sufficient to provide us with the ability to continue as a going concern. Management believes that the above actions will allow us to continue operations through this fiscal year.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective beginning January 1, 2009. The adoption of this statement did not have a material impact on the Company’s financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests (previously referred to as minority interests) in subsidiaries. SFAS No. 160 requires that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent’s equity, rather than as a liability. SFAS No. 160 was effective for the Company on January 1, 2009, and is being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption of this statement did not have a material impact on the Company’s financial position and results of operations.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative market risks are discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

Item 4.        Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”) we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as at March 31, 2009. This evaluation was carried out under the supervision and with the participation of our Chief Executive and Chief Financial Officer. Based upon that evaluation, our Chief Executive and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to them to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, and not absolute assurance, of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Changes in internal control over financial reporting.

There was no significant change in our internal control over financial reporting that occurred during the three months ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Nor were there any significant deficiencies or material weaknesses in our internal controls requiring corrective actions.

PART II – OTHER INFORMATION

Item 1.               Legal Proceedings

We currently are not a party to any material legal proceedings and, to our knowledge, no such proceedings are threatened or contemplated.

Item 1A.            Risk Factors

There have not been any material changes in the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2008 filed with the SEC on April 14, 2009.

Item 2.               Unregistered Sales of Equity Security and Use of Proceeds

None.

Item 3.               Defaults Upon Senior Securities

None.

Item 4.               Submission of Matters to a Vote of Security Holders

None.

Item 5.               Other Information

None.

Item 6.               Exhibits and Filings on Form 8-K

       (a) The following exhibits are filed with this Quarterly Report on Form 10-Q:

Exhibit    
Number   Description of Exhibit
     
31.1   Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer
     
31.2   Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer
     
32.1   18 U.S.C. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

Filings on Form 8-K during the Period

None

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NORTHPORT CAPITAL INC.

Per: /s/ Zhao Yan  
  Zhao Yan  
  President, Chief Executive Officer, Principal Executive Officer and a director  
  Date: May 19, 2009