Attached files
file | filename |
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EX-31.2 - Legend Media, Inc. | v169648_ex31-2.htm |
EX-31.1 - Legend Media, Inc. | v169648_ex31-1.htm |
EX-32.2 - Legend Media, Inc. | v169648_ex32-2.htm |
EX-32.1 - Legend Media, Inc. | v169648_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________________________ to
____________________________
Commission
file number 333-138479
LEGEND
MEDIA, INC.
(Exact
Name of Registrant as Specified in its Charter)
Nevada
|
87-0602435
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
Incorporation
or Organization)
|
Room
609, Gehua Tower A , Qinglong Hutong Building No. 1
Beijing
100007, People’S Republic Of China
(Address of Principal
Executive Offices)
(86-10)
8418 7177
(Issuer’s Telephone
Number)
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 large accelerated filer, an
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 ¨
Non-accelerated
filer ¨
|
Accelerated
filer ¨
Smaller
reporting company x
|
|
(Do
not check if a smaller reporting company)
|
||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes ¨
No x
|
Number of
shares outstanding of the registrant's common stock as of December 22,
2009:
112,813,355
shares of Common Stock, $0.001 par value per share
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
3
|
|
Item
1. Financial Statements (Unaudited)
|
3
|
|
CONSOLDIATED
BALANCE SHEETS
|
3
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
|
4
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
5
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
6
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
39
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
49
|
|
Item
4T. Controls and Procedures
|
49
|
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PART
II: OTHER INFORMATION
|
50
|
|
Item
1. Legal Proceedings
|
50
|
|
Item
1A. Risk Factors
|
50
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
50
|
|
Item
3. Defaults Upon Senior Securities
|
50
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
50
|
|
Item
5. Other Information
|
50
|
|
Item
6. Exhibits
|
50
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SIGNATURES
|
51
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2
PART
I: FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLDIATED
BALANCE SHEETS
AS OF
SEPTEMBER 30, 2009 AND JUNE 30, 2009
September 30,
|
June 30,
|
|||||||
(unaudited)
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
& cash equivalents
|
$ | 132,753 | $ | 169,343 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $206,497 and
$160,147 for September 30 and June 30, respectively
|
1,302,679 | 1,640,226 | ||||||
Vendor
deposits
|
29,672 | 111,682 | ||||||
Prepaid
expenses
|
603,046 | 165,100 | ||||||
Deferred
costs
|
1,552,784 | 1,583,115 | ||||||
Other
receivables
|
22,845 | 5,789 | ||||||
Total
current assets
|
3,643,779 | 3,675,255 | ||||||
Property
and equipment, net
|
85,704 | 113,824 | ||||||
Intangible
assets, net
|
6,991,737 | 7,294,089 | ||||||
TOTAL
ASSETS
|
$ | 10,721,220 | $ | 11,083,168 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 711,102 | $ | 1,934,080 | ||||
Accrued
liabilities
|
890,600 | 894,046 | ||||||
Accrued
interest
|
579,996 | 502,168 | ||||||
Unearned
revenue
|
605,844 | 1,130,662 | ||||||
Short
term notes payable
|
56,000 | 56,000 | ||||||
Related
party note payable
|
375,733 | 375,733 | ||||||
Related
party payables
|
2,062,933 | 1,332,524 | ||||||
Other
payables
|
294,015 | 439,958 | ||||||
Total
current liabilities
|
5,576,223 | 6,665,171 | ||||||
Commitments
and contingencies
|
- | - | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Legend
Media, Inc. stockholders' equity
|
||||||||
Series
A convertible preferred stock - 20,000,000 shares authorized, par value
$0.001, 2,083,333 shares issued and outstanding at September 30, 2009 and
June 30, 2009, respectively
|
2,083 | 2,083 | ||||||
Common
stock - 127,000,000 shares authorized, par value $0.001, 112,813,355 and
111,013,355 shares issued and outstanding at September 30, 2009 and June
30, 2009, respectively
|
112,813 | 111,013 | ||||||
Additional
paid-in capital
|
69,989,884 | 69,165,562 | ||||||
Accumulated
deficit, deemed dividends related to entities under common
control
|
(56,840,249 | ) | (56,854,346 | ) | ||||
Accumulated
deficit, from operations
|
(8,165,671 | ) | (8,030,961 | ) | ||||
Total
Accumulated deficit
|
(65,005,920 | ) | (64,885,307 | ) | ||||
Other
comprehensive income
|
46,137 | 24,646 | ||||||
Total
Legend Media, Inc stockholders' equity
|
5,144,997 | 4,417,997 | ||||||
Non-controlling
interest
|
- | - | ||||||
Total
stockholders' equity
|
5,144,997 | 4,417,997 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 10,721,220 | $ | 11,083,168 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
2009
|
2008
|
|||||||
Revenue
|
$ | 2,160,432 | $ | 2,324,491 | ||||
Cost
of revenue
|
994,927 | 1,162,682 | ||||||
Gross
profit
|
1,165,505 | 1,161,809 | ||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
757,860 | 490,642 | ||||||
General
and administrative expenses
|
1,001,000 | 947,323 | ||||||
Depreciation
and amortization expense
|
306,962 | 410,642 | ||||||
Total
operating expenses
|
2,065,822 | 1,848,607 | ||||||
Loss
from Operations
|
(900,317 | ) | (686,798 | ) | ||||
Non-operating
income (expense):
|
||||||||
Interest
income
|
248 | 183 | ||||||
Interest
expense
|
(98,060 | ) | (169,784 | ) | ||||
Related
party interest expense
|
(66,380 | ) | (95,022 | ) | ||||
Foreign
exchange gain (loss)
|
(22,246 | ) | 3,124 | |||||
Gain
on termination of variable interest entity agreements
|
997,605 | - | ||||||
Other
|
- | (17,349 | ) | |||||
Total
non-operating income (expense)
|
811,167 | (278,848 | ) | |||||
Loss
before income tax
|
(89,150 | ) | (965,646 | ) | ||||
Income
tax
|
16,876 | 177,445 | ||||||
Net
loss
|
(106,026 | ) | (1,143,091 | ) | ||||
Less:
Loss attributable to noncontrolling interest
|
- | (12,732 | ) | |||||
Net
loss attributable to Legend Media, Inc. common
shareholders
|
(106,026 | ) | (1,155,823 | ) | ||||
Other
comprehensive income
|
||||||||
Foreign
currency translation gain
|
46,137 | 33,403 | ||||||
Comprehensive
loss
|
(59,889 | ) | (1,122,420 | ) | ||||
Comprehensive
loss attributable to noncontrolling interest
|
- | 150 | ||||||
Comprehensive
losss attributable to Legend Media, Inc. common
shareholders
|
$ | (59,889 | ) | $ | (1,122,270 | ) | ||
Weighted
average shares outstanding :
|
||||||||
Basic
|
111,404,659 | 10,315,918 | ||||||
Diluted
|
111,404,659 | 10,315,918 | ||||||
Loss
per share:
|
||||||||
Basic
|
$ | (0.0010 | ) | $ | (0.1120 | ) | ||
Diluted
|
$ | (0.0010 | ) | $ | (0.1120 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss attributed to Legend Media, Inc.
|
$ | (106,026 | ) | $ | (1,155,823 | ) | ||
Adjustments
to reconcile net profit (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
306,962 | 411,873 | ||||||
Amortization
of debt discounts
|
- | 128,473 | ||||||
Warrant
expense
|
86,611 | - | ||||||
Fair
value of stock options
|
447,423 | 137,986 | ||||||
Common
stock issued for services
|
450,000 | - | ||||||
Loss
from minority interest in subsidiary
|
- | 12,732 | ||||||
Gain
on termination of variable interest entity agreements
|
(997,605 | ) | - | |||||
Change
in allowance for uncollectible accounts
|
(46,350 | ) | - | |||||
Barter
revenues
|
(844,864 | ) | (395,834 | ) | ||||
Barter
expenses
|
417,434 | 148,198 | ||||||
Changes
in operating assets and liabilities:
|
- | |||||||
Accounts
receivable
|
(35,977 | ) | (485,963 | ) | ||||
Vendor
deposits
|
82,010 | (7,115 | ) | |||||
Prepaid
expenses
|
(437,770 | ) | (343,563 | ) | ||||
Other
receivables
|
(105,389 | ) | 2,031 | |||||
Accounts
payable
|
(1,039,853 | ) | 64,306 | |||||
Accrued
liabilities
|
135,498 | 237,202 | ||||||
Other
payables
|
29,478 | 261,768 | ||||||
Related
party payables
|
1,521,905 | 204,397 | ||||||
Unearned
revenue
|
(106,610 | ) | 340,515 | |||||
Accrued
interest
|
77,828 | 6,418 | ||||||
Net
cash used in operating activities
|
(165,295 | ) | (432,399 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Long
term deposits, contract guarantees and transaction
deposits
|
- | (500,000 | ) | |||||
Purchase
of property and equipment
|
2,953 | (56,023 | ) | |||||
Cash
acquired in acquisition of variable interest entity
|
- | 286 | ||||||
Payment
on termination of variable interest entity
|
(174,239 | ) | - | |||||
Disposition
of cash balances on termination of variable interest
entities
|
(5,439 | ) | ||||||
Payment
on acquisition of Music Radio Limited
|
- | (249,990 | ) | |||||
Net
cash used in investing activities
|
(176,725 | ) | (805,727 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of notes payable
|
- | (360,000 | ) | |||||
Proceeds
from sale of convertible preferred stock
|
- | 1,500,000 | ||||||
Contributed
capital
|
300,000 | 9,366 | ||||||
Net
cash provided by financing activities
|
300,000 | 1,149,366 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
5,430 | 9,280 | ||||||
NET
DECREASE IN CASH & CASH EQUIVALENTS
|
(36,590 | ) | (79,480 | ) | ||||
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
169,343 | 3,372,499 | ||||||
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 132,753 | $ | 3,293,019 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
taxes paid
|
$ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
LEGEND
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Basis of
Presentation
Organization and Line of
Business
Legend
Media, Inc., formerly known as Noble Quests, Inc. (hereinafter referred to as
the “Company,” “Legend Media,” “we,” “us,” or “our”), was organized as a Nevada
corporation on March 16, 1998, to sell multi-media marketing and other related
services to network marketing groups. Specifically, the Company assisted network
marketers in using marketing tools such as public relations, advertising, direct
mail, collateral development, electronic communications and promotion tools to
increase product and service awareness.
On
January 31, 2008, the Company entered into a Share Exchange Agreement with Well
Chance Investments Limited (“Well Chance”) and Well Chance's sole shareholder
(the "Well Chance Shareholder"), which was recorded for as a reverse acquisition
under the purchase method because Well Chance obtained control of the Company.
Accordingly, the share exchange was recorded as a recapitalization of Well
Chance, with Well Chance being treated as the continuing entity.
Well
Chance was incorporated under the laws of the British Virgin Islands (BVI) as an
International Business Company on February 22, 2005. The Company is focused on
building a consumer advertising network in the People’s Republic of China (the
“PRC”) focused on the Chinese radio advertising industry and advertising media
that targets the consumer base of China.
On May 8,
2008, the Company and Well Chance entered into a Share Purchase Agreement (the
“Music Radio Share Purchase Agreement”) with Music Radio Limited (“MRL”), a BVI
company, and all of the shareholders of MRL (the “Music Radio Shareholders”),
for the purchase of radio advertising rights in Tianjin, PRC. Pursuant to the
Music Radio Share Purchase Agreement, Well Chance (a) issued shares of the
Company's common stock with an aggregate value of US$7,160,714 based on the
weighted average trading price of the Company's common stock for the 90 trading
days immediately preceding May 8, 2008 (1,892,559 shares), and (b) paid
US$2,000,000, in consideration for the purchase of 80% of the common stock of
Legend Media Tianjin Investment Company Limited, a BVI company and a wholly
owned subsidiary of MRL. The closing of the Music Radio Share
Purchase Agreement occurred May 30, 2008, and the Company secured effective
control of the exclusive sales contract for the Tianjin, PRC based FM 92.5 radio
channel. Tianjin, PRC is a city with a population over 11.5
million. The exclusive sales contract provides the Company with
19,710 minutes per year of advertising space. The contract is up for renewal
annually and expires December 31, 2009.
On July
21, 2008, Legend Media closed a transaction pursuant to which Well Chance
purchased 100% of the common stock of News Radio Limited, a BVI company, for (a)
shares of the Company's common stock with an aggregate value of 2,000,000
Chinese Renminbi ("RMB") ($287,728 based on the currency exchange rate on June
5, 2008) based on the weighted average trading price of the common stock for the
30 trading days immediately before June 4, 2008 (67,388 shares) payable on the
closing date, (b) RMB5,250,000 (approximately $755,287 based on the currency
exchange rate on June 5, 2008) payable 28 days after the closing date, and (c)
RMB1,600,000 (approximately $230,182 based on the currency exchange rate on June
5, 2008) payable 90 days after the closing date. The transaction occurred
pursuant to the terms of a Share Purchase Agreement (the “News Radio
Share Purchase Agreement”) the Company entered into on June 4, 2008 with Well
Chance and all of the shareholders of News Radio Limited (the “News Radio
Shareholders”). The closing gave Legend Media effective control of the PRC-based
company that has the exclusive sales contract for the Beijing, PRC based radio
channel FM 90.5.
6
On August
4, 2008, Beijing Merci International Advertising Co., Ltd., a company organized
in the PRC and an affiliate of Legend Media, entered into an Exclusive
Advertising Rights Agreement with Beijing Guo Guangrong Advertising Co., Ltd.
(the "Beijing Merci Agreement"), pursuant to which Beijing Merci International
Advertising Co., Ltd. acquired 45,990 advertising minutes per year on FM 107.1,
a news and entertainment radio station that broadcasts to the Shenzhen region of
the PRC. The Exclusive Advertising Rights Agreement closed August 31, 2008 and
expires on September 30, 2010.
On
October 28, 2008, Tianjin Yinse Lingdong Advertising Co. Ltd. (“TJ YSLD”) , a
company organized in the PRC and an affiliate of Legend Media, entered into an
Exclusive Advertising Rights Agreement with Beijing Attis Advertising Co., Ltd.,
pursuant to which TJ YSLD acquired 19,710 advertising minutes per year on FM
95.5, a music and entertainment radio station that broadcasts to the Xi’an
region of the PRC. The exclusive contract gives Legend Media an additional
19,710 minutes of radio advertising targeting Shenzhen. Effective
July 20, 2009, the Company disposed of Tianjin Yinse Lingdong Advertising Co.,
Ltd. ("TJ YSLD") through a termination of the VIE agreement, and re-assigned the
future contract rights to Beijing Yinse Lingdong Advertising Co., Ltd. ("BJ
YSLD").
Considering
the potential business opportunities available and the likelihood that certain
radio business would continue to cause negative cash flow in the near future due
to the global economic depression, the Company restructured its current business
assets and formulated a business plan in response to the global and domestic
economic changes, including (i) the disposal of FM90.5 and FM107.1 radio
business and (ii) the assignment of FM92.5 and FM95.5 radio business to BJ
YSLD.
On
November 28, 2008, the Company entered into and closed an Acquisition Agreement
(the "Music Radio Acquisition Agreement") with Well Chance, MRL, and the Music
Radio shareholders, Ju Baochun and Xue Wei (the "Music Radio Shareholders").
Pursuant to the Music Radio Acquisition Agreement, the Company acquired control
over BJ YSLD and caused the contribution of an airline magazine advertising
business of Beijing Hongtenglianguang Advertising Co., Ltd (“HTLG”), a PRC
company 100% owned by the Music Radio Shareholders, to BJ YSLD. In exchange for
the acquisition of control, the Company issued 5,033,680 shares of its
newly-created Series B convertible preferred stock ("Series B Preferred Stock")
to the Music Radio Shareholders and two warrants to purchase an aggregate of
10,000,000 shares of the Company's common stock, to Ju Baochun. The closing
gives Legend Media effective control of BJ YSLD, a PRC-based company, and BJ
YSLD’s exclusive sales contract with Xinhua Airline Magazine. The
airline magazine reaches a potential audience approaching 20 million passengers
per year. The exclusive contract with Xinhua Airline Magazine
provides 80 pages of advertising per monthly issue. The exclusive
contract expires March 31, 2010 and will be up for renewal prior to that
date.
The number of shares of Series B
Preferred Stock issued in the Music Radio Acquisition Agreement was calculated
based on an aggregate purchase price of RMB275,000,000, a currency exchange rate
of RMB6.829 to U.S. $1, and a per share issue price of 20 times the greater of
(a) 75% of the weighted average trading price of one share of common stock for
the 15 trading days ended on the third day before closing, and (b) $0.40.
Because 75% of the weighted average trading price for the common stock during
the period was $0.3440, the per share issue price used was $0.40. As more fully
described below, each share of Series B Preferred Stock was initially
convertible into 20 shares of common stock, or an aggregate of 100,673,600
shares of common stock, representing approximately 90.6% of the issued and
outstanding common stock on an as-converted basis (not including the Company's
outstanding Series A convertible preferred stock, warrants or options).
7
As a
result of the Music Radio Acquisition Agreement and the reverse merger
transaction with Well Chance, the historical financial statements presented are
those of Well Chance and BJ YSLD. At the time of the reverse merger,
Well Chance’s historical financials became those of the Company. The
subsequent Music Radio Acquisition Agreement, which gave the Company control of
BJ YSLD, was between entities under common control and, as such, accounted for
similarly to a pooling of interests.
Well
Chance conducts its business operations through its 80% owned
subsidiary, Legend (Beijing) Consulting Co., Ltd., and its wholly owned
subsidiary, Legend (Beijing) Information and Technology Co., Ltd., each of which
are incorporated under the laws of the PRC.
As of
December 15, 2009, the Company had exclusive sales rights for one
airline.
Today,
the Company is building a consumer advertising network in China focused on
reaching the affluent and mass affluent consumers in China through radio and
airline travel. Management is focused on key lifestyles of the
affluent as a strategic guide for their advertising asset development.
Management has established relationships in China that are expected to provide
access to key sales outlets and additional advertising assets. The Company
continues to develop a network of relationships that are expected to allow the
Company to expand sales efforts quickly as new inventory is
acquired.
Going
Concern
The
accompanying consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the three months ended September 30, 2009,
the Company generated net loss of $106,026, and has a working capital deficit of
$1,932,444 as of September 30, 2009. The working capital deficit
includes $2,062,933 of related party payables.
As
further described in Note 6, On January 31, 2008, in connection with the Share
Exchange Agreement discussed under Note 1, the Company entered into a
loan agreement with RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to
which the Company had the right to borrow $375,733 from RMK as a short-term
bridge loan. The due date on this loan was February 10, 2009. The full $375,733
is currently outstanding and is classified as a related party note payable. On
November 25, 2009, RMK issued notice to the Company requiring immediate
repayment of the loan. The Company is working with RMK to extend the
note, but no outcome has been reached. RMK is a fund controlled by a
shareholder who is also the CEO of ARC Investment Partners, LLC, a shareholder
of the Company. See Note 13.
As
further described in Note 1, Legend Media has effective control of BJ YSLD, a
PRC-based company. The significant portion of the Company’s revenues
are derived from BJ YSLD’s exclusive contract with Xinhua Airline
Magazine. The exclusive contract expires March 31,
2010. Mr. Ju, the Company’s CEO, is actively negotiating an extension
to the contract for at least 3 years. This extension may require
upfront payments in an amount the Company is not in a position to
pay. Mr. Ju, as the majority shareholder, is looking for solutions if
an upfront payment is required. The possible solutions include Mr. Ju
organizing a personal loan for the amount needed, by which the extension will be
held by a separate company that may or may not be under the control of Mr. Ju,
and licensed back to the Company until such time the Company has the resources
to repay the amount borrowed personally by Mr. Ju.
These
factors among others may indicate the Company may be unable to continue as a
going concern for a reasonable period of time.
In view
of these matters, realization of profitability is dependent upon the success of
its future operations and the Company's ability to meet its financial
requirements and raise additional capital. Management's plans include
negotiation with RMK to extend the note, renegotiation of the exclusive Xinhua
Airline Magazine contract, further marketing of its advertising network and the
expansion of its advertising sales for both the Chinese radio stations and the
airline magazine. If the Company is unsuccessful in these efforts and
cannot attain sufficient revenue to permit profitable operations, or if it
cannot obtain a source of funding or investment, it may be required to
substantially curtail or terminate its operations.
8
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
conformity with US GAAP. The Company’s functional currency is the Chinese Yuan
Renminbi ("RMB"), however, the accompanying consolidated financial statements
have been translated and presented in United States Dollars ($).
Note
2 - Summary of Significant Accounting Policies
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP 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 reporting period. Actual results could differ from those
estimates. Areas that require estimates and assumptions include valuation of
accounts receivable and determination of useful lives of property and
equipment.
Reclassification
Certain
prior period account descriptions were reclassified to conform to the three
months ended September 30, 2009 and 2008.
9
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of Legend
Media and its subsidiaries as follows as of September 30, 2009:
Subsidiary
|
Place
Incorporated
|
% Owned
|
||||
Well
Chance
|
United
States
|
100 | ||||
Legend
Media Investment Company Limited
|
BVI
|
80 | ||||
Two
subsidiaries of Legend Media Investment Company Limited
|
||||||
Legend
Media Tianjin HK Limited
|
Hong
Kong
|
80 | ||||
Legend
Media (Beijing) Consulting Company Limited
|
PRC
|
80 | ||||
News
Radio Limited
|
BVI
|
100 | ||||
Three
subsidiaries of News Radio Limited
|
||||||
CRI
News Radio Limited
|
Hong
Kong
|
100 | ||||
Legend
Media (Beijing) Information and Technology Co., Ltd.
|
PRC
|
100 | ||||
Beijing
Yinse Lingdong Advertising Co., Ltd.
|
PRC
|
100 | * |
*Variable
Interest Entity: See heading entitled “Variable Interest Entities”
below.
Cash and Cash
Equivalents
Cash and
cash equivalents include cash on hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves.
At times,
the Company will record receivables, which have not yet been invoiced, from
revenues on advertising contracts. These receivables are recorded in
the accompanying consolidated balance sheet and included in accounts
receivable. The unbilled accounts receivable balance at September 30,
and June 30, 2009 was $221,342 and $1,285,587, respectively
Prepaid
Expenses
Prepaid
expenses consist of prepayments for legal and consulting services. Prepaid
expenses are amortized over the period in which the services are
performed.
10
Property and
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred, and additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with estimated lives
of:
Computer
Equipment
|
3
years
|
Office
equipment and furniture
|
3
years
|
Leasehold
improvements
|
1
year
|
The
following is a summary the property and equipment as of the dates
indicated:
September 30,
|
June 30,
|
|||||||
(audited)
|
||||||||
Computer
Equipment
|
$ | 72,802 | $ | 85,026 | ||||
Office
equipment and furniture
|
50,264 | 58,820 | ||||||
Leasehold
improvements
|
- | 8,463 | ||||||
$ | 123,066 | $ | 152,309 | |||||
Less: Accumulated
depreciation
|
(37,362 | ) | (38,485 | ) | ||||
$ | 85,704 | $ | 113,824 |
Depreciation
expense for the three months ended September 30, 2009 and 2008 was $4,610 and
$3,924 respectively.
Long-Lived
Assets
The
Company applies FASB ASC 360-10, “Property, Plant, and
Equipment”, which established a “primary asset” approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Long-lived assets to
be disposed of are reported at the lower of carrying amount or fair value less
cost to sell.
In June
2009, the Company decided to terminate the exclusive sales contract for the
Beijing FM 90.5 channel which was acquired July 21, 2008. As part of
this transaction, the Company capitalized $1,016,206 as an intangible asset to
recognize the believed value of the contract. For the year ended June
30, 2009, the Company recognized an impairment of $774,528 based on the net book
value of the asset as of June 30, 2009.
The
Company recorded an impairment loss on its FM 92.5 advertising rights agreement
during the year ended June 30, 2009 as a result of management’s analysis of
future cash flows indicating that the Company will not recover the value of the
asset.
Based on
its review, the Company believes that, at September 30, 2009, there were no
other significant impairments of its long-lived assets.
11
Intangible
Assets
Intangible
assets consist of contract rights purchased in the acquisition of Legend Media
Tianjin Investment Company Limited, the entity controlling the advertising
rights to Tianjin FM 92.5, on May 30, 2008 and the acquisition of News Radio
Limited, the entity controlling the advertising rights to Beijing FM 90.5 on
July 21, 2008. In July 2009, the Company terminated the Beijing
FM 90.5 contract and during the year ended June 30, 2009 recognized an
impairment loss for the entire amount of the intangible asset. Further, the
Company recognized an impairment loss on the Tianjin FM 92.5 contract rights
(see Long-Lived Assets policy above). Intangible assets consist of
the following at the dates indicated:
September 30,
|
June 30,
|
|||||||
(audited)
|
||||||||
FM
92.5 Contract rights
|
$ | 1,422,854 | $ | 1,422,854 | ||||
Exclusivity
agreement
|
7,388,731 | 7,388,731 | ||||||
8,811,585 | 8,811,585 | |||||||
Less
Accumulated amortization
|
(1,819,848 | ) | (1,517,496 | ) | ||||
Intangibles,
net
|
$ | 6,991,737 | $ | 7,294,089 |
The FM
92.5 contract rights primarily arise from an exclusive contract acquired in
connection with the acquisition of Legend Media Tianjin Investment Company
Limited, which is amortized over 31 months, from June 1, 2008, the first day of
operations by the Company, based on the duration of the existing advertising
agreement that expired December 31, 2008 plus renewal of the advertising
agreement. The agreement was renewed January 1, 2009. The contract is
with Tianjin FM 92.5 provides exclusive rights to 54 advertising minutes per day
or 19,710 minutes per year. The channel is Beijing-based and through a relay
facility airs in Tianjin. Legend Media’s contract is with the Beijing channel’s
exclusive agent, which has a national exclusive contract with the channel. The
exclusive agent subcontracted the rights for the Tianjin market to Legend Media.
The value was derived as the net present value of the contract’s earnings before
interest, tax, depreciation and amortization (“EBITDA”) over the contract’s
expected term from May 30, 2008 through December 31, 2010, using a discount rate
of 15%. The Company determined a 15% discount rate accurately reflects the rate
of return the Company expects to earn on the contract, which resulted in a
contract value of $1,709,888. The $1,709,888 was reduced by
$201,524 on June 30, 2009 to recognize an impairment loss after forecasting the
remaining value of the agreement through December 31, 2010.
Amortization
expense on this contract for the three months ended September 30, 2009 and
2008 was $117,634 and $165,474, respectively.
The
remainder of the purchase price of $7,388,731 was allocated to an Operating
Agreement among Legend Media (Beijing) Consulting Co., Ltd., TJ YSLD and Ju
Baochun (the "Music Radio Operating Agreement"), entered into in connection with
the Music Radio Share Purchase Agreement. Mr. Baochun, through a company he owns
and operates, is the 80% owner of MRL, which is the 20% owner of the
post-acquisition variable interest entity ("VIE"), TJ YSLD. Pursuant to the
terms of the Operating Agreement, TJ YSLD and Mr. Baochun are prohibited
from:
·
|
Borrowing
money from any third party or assuming any
debt;
|
·
|
Selling
to any third party or acquiring from any third party any assets,
including, without limitation, any intellectual
rights;
|
12
·
|
Granting
any security interests for the benefit of any third party through
collateralization of TJ YSLD's
assets;
|
·
|
Assigning
to any third party the Music Radio Operating Agreement;
and
|
·
|
Selling,
transferring and disposing of any license held by TJ
YSLD.
|
Amortization
expense on this contract for the three months ended September 30, 2009 and
2008 was $184,718 and $56,526, respectively.
The FM
90.5 contract rights capitalized in July 2008 and subsequently impaired on June
30, 2009 primarily relate to an exclusive contract acquired in connection with
the acquisition of News Radio Limited which is being amortized over 48-months,
beginning July 1, 2008. The contract was with the Beijing FM 90.5 radio station
and provides 126 advertising minutes per day or 45,990 minutes per year.
Amortization expense on this contract for year ended June 30, 2009 was
$241,678 and has been included in amortization expense in the accompanying
consolidated statements of operations and other comprehensive income. See
Note 11.
Amortization
expense for the Company’s intangible assets for the three months ended September
30, 2009 and 2008 was $302,352 and $406,718, respectively.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. The Company purchases (i) advertising inventory
in the form of advertising airtime, the unit being minutes, from radio stations
and (ii) advertising pages from airline magazines. The Company then distributes
these minutes and pages under various sales agreements. The Company recognizes
advertising revenue over the term of each sales agreement, provided evidence of
an arrangement exists, the fees are fixed or determinable and collection of the
resulting receivable is reasonably assured. The Company recognizes deferred
revenue when cash has been received on a sales agreement, but the revenue has
not yet been earned. Under these policies, no revenue is recognized unless
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collection is reasonably assured. Barter
advertising revenues and the offsetting expense are recognized at the fair value
of the advertising as determined by similar cash transactions. Under PRC
regulations, the Company is required to pay certain taxes on revenues generated.
These taxes include:
|
·
|
Business
tax: 5% of revenues generated net of fees paid to advertising
agencies and media companies for services and advertising
inventory;
|
|
·
|
Construction
tax: 3% of revenues generated net of fees paid to advertising
agencies and media companies for services and advertising
inventory;
|
|
·
|
Education
tax: 7% of the business
tax;
|
|
·
|
Urban
development tax: 3% of the business tax;
and
|
13
|
·
|
Flood
insurance tax: 1% of the business
tax.
|
|
The
Company recognizes these taxes in cost of revenue in the period
incurred.
|
Cost of
Revenue
The
Company expenses advertising cost monthly according to the terms of the
underlying contracts. The entire cost of the contract is expensed evenly over
the term of the agreement starting on the date advertising is first expected to
take place. As the advertising inventory does not carry forward, all minutes are
expensed whether sold or not.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with FASB ASC
718 “Compensation-Stock
Compensation.” The Company recognizes in its statements
of operations and other comprehensive income (loss) the grant-date fair
value of stock options and other equity-based compensation issued to employees
and non-employees. As of September 30, 2009, there were outstanding options to
purchase 6,966,820 shares of common stock and warrants to purchase 11,180,294
shares of common stock.
Income
Taxes
The
Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes.” ASC 740
requires a company use the asset and liability method of accounting for income
taxes, whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion, or all of, the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
Concentration of credit
risk
Cash
includes cash on hand and demand deposits in accounts maintained within the PRC
and the United States. Certain financial instruments, which subject the Company
to concentration of credit risk, consist of cash. The Company maintains balances
at financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation (“FDIC”) insured limits for the banks located in the
Unites States. Balances at financial institutions within the PRC are not covered
by insurance. As of September 30, 2009 and June 30, 2009, the Company had
deposits in excess of federally insured limits totaling $0 and $7,907,
respectively. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
14
Foreign Currency
Transactions and Comprehensive Income
US GAAP
requires recognized revenue, expenses, gains and losses are included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of stockholders’ equity. Such items, along
with net income, are components of comprehensive income. Translation gain of
$46,137 and $24,646 at September 30, 2009 and June 30, 2009, respectively, are
classified as an item of other comprehensive income in the stockholders’ equity
section of the consolidated balance sheets.
Basic and Diluted Loss Per
Share
Earnings
per share is calculated in accordance with FASB ASC 260, “Earnings Per Share.” Basic earnings per share
is based upon the weighted average number of common shares outstanding. Diluted
earnings per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. For the three months
ended September 30, 2009, the Company generated net loss in the accompanying
consolidated statements of operations and other comprehensive loss of
$106,026. For the comparable period in 2008, the Company
incurred a net loss in the accompanying statements of operations and other
comprehensive loss of $1,155,823. Therefore, the effect of options,
warrants and convertible instruments outstanding is anti-dilutive during the
three months ended September 30, 2009 and 2008.
The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three months ended
September 30, 2009 and 2008:
September 30, 2009
|
September 30, 2008
|
|||||||||||||||
Per
Share
|
Per
Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic earnings
per share
|
111,404,659 | $ | (0.0010 | ) | 10,315,918 | $ | (0.1120 | ) | ||||||||
Effect
of dilutive stock options
|
- | - | - | - | ||||||||||||
Diluted
earnings per share
|
111,404,659 | $ | (0.0010 | ) | 10,315,918 | $ | (0.1120 | ) |
Statement of Cash
Flows
In
accordance FASB ASC 230, “Statement of Cash Flows,”
cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rates. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.
Segment
Reporting
FASB ASC
280, “Disclosure about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. The Company determined it has one operating
segment.
15
On May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, a BVI company and a wholly-owned subsidiary of MRL.
As a result of this purchase, the Company recognized initial minority interest
on its consolidated balance sheet of $15,524. The loss attributed to
minority non-controlling
interest has been separately designated in the accompanying statements
of operations and other comprehensive income.
Variable Interest
Entities
In
January 2003, the FASB issued Statement of Financial Accounting Standards Board
Interpretation FSB ASC 810-10-05-8, "Consolidation of VIEs.” ASC
810-10-05-8 states that in general, a VIE is a corporation, partnership, limited
liability corporation, trust or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
On May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, and on July 21, 2008, the Company purchased 100% of
the common stock of News Radio Limited. Additionally, on November 28, 2008, the
Company entered into and closed the Music Radio Acquisition Agreement with Well
Chance, MRL, and the Music Radio Shareholders, pursuant to which the Company
acquired control of BJ YSLD, another variable interest entity. Due to certain
restrictions imposed upon Chinese advertising companies, direct investment and
ownership of media and advertising companies in the PRC is prohibited.
Therefore, the Company acquired control of TJ YSLD and the Company acquired
control of Beijing Maihesi Advertising International Co., Ltd. (through its
purchase of News Radio Limited). The Company structured the MRL and News Radio
Limited transactions to comply with such restrictions.
The
principal regulations governing foreign ownership in the advertising industry in
China include:
|
·
|
The
Catalogue for Guiding Foreign Investment in Industry (2004);
and
|
|
·
|
The
Administrative Regulations on Foreign-invested Advertising Enterprises
(2004).
|
These
regulations set the guidelines by which foreign entities can directly invest in
the advertising industry. The regulations require foreign entities that
directly invest in the China advertising industry to have at least two years of
direct operations in the advertising industry outside of China. Further,
since December 10, 2005, 100% ownership in Chinese advertising companies is
allowed, but the foreign company must have at least three years of direct
operations in the advertising industry outside of China.
Because
the Company has not been involved in advertising outside of China for the
required number of years, the Company’s domestic PRC operating subsidiaries,
which are considered foreign-invested, are currently ineligible to apply for the
required advertising services licenses in China. The Company’s PRC
operating affiliates hold the requisite licenses to provide advertising services
in China and they are owned or controlled by PRC citizens designated by the
Company. The Company’s radio advertising business operates in China though
contractual arrangements with consolidated entities in China. Until the
July 20, 2009 termination of the VIE agreements with TJ YSLD and Beijing Maihesi
Advertising International Co., Ltd., the Company and its PRC subsidiaries
entered into contractual arrangements with TJ YSLD, Beijing Maihesi Advertising
International Co., Ltd. and BJ YSLD as well as their respective shareholders
under which:
16
|
·
|
the
Company has been able to exert significant control over significant
decisions about the activities of TJ YSLD, Beijing Maihesi
Advertising International Co., Ltd. and BJ
YSLD,
|
|
·
|
a
substantial portion of the economic benefits and risks of the operations
of TJ YSLD, Beijing Maihesi Advertising International Co., Ltd. and BJ
YSLD were transferred to the Company through a revenue assignment
agreement, and
|
|
·
|
The
equity owner of TJ YSLD, Beijing Maihesi Advertising International Co.,
Ltd. and BJ YSLD has not had the obligation to absorb the losses of TJ
YSLD Beijing Maihesi Advertising International Co., Ltd. or BJ
YSLD.
|
As the
Company has been able to exert significant control over the PRC operating
affiliates and a substantial portion of the economic benefits and risks have
been transferred to the Company, it has determined that the advertising
entities, TJ YSLD, Beijing Maihesi Advertising International Co., Ltd. and BJ
YSLD meet the definition of a VIE through July 20, 2009, and subsequent to the
July 20, 2009 termination of the TJ YSLD and Beijing Maihesi Advertising
International Co., Ltd. agreements (see Note 8), BJ YSLD meets the definition of
a VIE. Further, the Company is considered to be the primary beneficiary of the
risks and benefits of equity ownership of TJ YSLD, Beijing Maihesi Advertising
International Co., Ltd. and BJ YSLD and thus has consolidated this entity in its
accompanying financial statements through July 20, 2009 and BJ YSLD as of
September 30, 2009.
Fair Value of Financial
Instruments and Concentrations
On
January 1, 2008, the Company adopted FASB ASC 820-10, “Fair Value Measurements
and Disclosures.” ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosures requirements for fair value measures. The carrying amounts reported
in the balance sheets for receivables and current liabilities each qualify as
financial instruments and are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three levels
are defined as follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
September 30, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheets at fair value.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” now known as ASC Topic 825-10 “Financial
Instruments.” ASC Topic 825-10 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings. FASB ASC 825-10 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company adopted FASB ASC
825-10 on January 1, 2008. The Company chose not to elect the option to measure
the fair value of eligible financial assets and liabilities.
17
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. FASB
ASC 855-10-05 also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected. FASB ASC 855-10-05 is effective for interim and annual periods ending
after June 15, 2009, and accordingly, the Company adopted this pronouncement
during the year ended June 30, 2009. FASB ASC 855-10-05 requires public entities
evaluate subsequent events through the date that the financial statements are
issued.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
ASC 860, which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. FASB ASC 860 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. FASB ASC 860 is effective for fiscal years
beginning after November 15, 2009. The adoption of FASB ASC 860 is not expected
to have an impact on the Company’s financial condition, results of operations or
cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC 810-10, which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FASB ASC
810-10 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. FASB ASC 810-10 requires
an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. FASB ASC 810-10 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. FASB ASC 810-10 is effective
for fiscal years beginning after November 15, 2009. Management is currently
assessing the impact that the adoption of FASB ASC 810-10 will have on the
Company’s financial condition, results of operations or cash flows.
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles,
which establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC 105, the Company has updated references to GAAP in its
financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.
Note
3 – Prepaid Expenses
The
Company prepaid expenses at September 30, 2009 and June 30, 2009 were as
follows:
September 30
|
June 30
|
|||||||
(audited)
|
||||||||
Accounting
services
|
$ | 244 | $ | - | ||||
Capital
raising
|
60,000 | 60,000 | ||||||
Investor
relations
|
433,351 | 93,534 | ||||||
Legal
Services
|
1,642 | 1,642 | ||||||
Advances
to suppliers
|
94,482 | - | ||||||
Other
|
13,327 | 9,924 | ||||||
$ | 603,046 | $ | 165,100 |
18
Capital
raising of $60,000 relates to a retainer payment made to Susquehanna Financial
Group, LLLP (“SFG”), an investment banker who has been engaged to assist the
Company with raising additional capital. Investor relations at
September 30, 2009 and June 30, 2009 of $433,351 and $93,534, respectively,
represent prepayments made to consultants engaged to assist with the promotion
of the Company.
Note
4 - Deferred Costs and Unearned Revenues
Deferred
costs at September 30, 2009 arise from barter transactions by which the Company
received services for future period use in exchange for
advertising. Unearned revenue at September 30, 2009 arises from
both normal trade sales and barter trade sales. For barter sales,
unearned revenue arises when the Company enters into a barter sales agreement,
pursuant to which the delivery of the service crosses financial reporting
periods. For normal trade sales, unearned revenue arises when a
customer prepays for advertising to be delivered in subsequent
periods
19
Accrued
liabilities in the accompanying consolidated balance sheets at September 30,
2009 and June 30, 2009 consisted of the following:
September 30
|
June 30
|
|||||||
(audited)
|
||||||||
Compensation
|
$ | 32,500 | $ | 79,439 | ||||
Revenue
and tax levies
|
120,876 | 171,343 | ||||||
Legal
fees
|
161,303 | 161,303 | ||||||
Payroll
taxes and employee welfare expenses
|
63,552 | 12,617 | ||||||
Other
accrued expenses
|
- | 32,621 | ||||||
Rent
|
- | 4,482 | ||||||
Income
taxes (PRC)
|
504,696 | 424,574 | ||||||
Cost
of advertising media
|
7,673 | 7,667 | ||||||
$ | 890,600 | $ | 894,046 |
Note
6 - Notes Payable
RMK
Emerging Growth Opportunity Fund LP Note Agreement
On
January 31, 2008, in connection with the Share Exchange Agreement discussed
under Note 1, Well Chance entered into a loan agreement by and between Well
Chance and RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to which
Well Chance had the right to borrow $375,733 from RMK as a short-term bridge
loan. The advances on the loan occurred in February 2008, and are due one year
from the date of the initial advance along with all applicable loan fees.
Notwithstanding the foregoing, in the event of the issuance and sale of equity
or equity-linked securities by Well Chance or the Company to investors (other
than investors who are stockholders of Well Chance at the time of the loan),
which issuance and sale results in gross proceeds to Well Chance of at least
$3,000,000 prior to the maturity date, then full repayment of the loan amount,
the loan fee and any additional loan fee owed to RMK as of the closing date of
such financing (as calculated above) shall be payable by the Company to RMK no
later than five business days after the closing date of the equity financing. On
July 1, 2008, the Company raised $3,000,000 through an unregistered sale of its
Series A convertible preferred stock. As of September 30, 2009, the note had not
been repaid and the full $375,733 principal balance and $427,370 of accrued
interest is outstanding on the RMK note. The Company classified the loan as
short-term in the accompanying balance sheets.
In
addition, pursuant to the RMK loan agreement, Well Chance executed and delivered
to RMK a security agreement to secure the repayment of the loan by granting RMK
a continuing security interest in all presently existing and subsequently
acquired assets and property of Well Chance of whatever nature and wherever
located (except for any such assets for which, by the terms of any agreement in
existence on the date of the loan agreement does not permit the granting of a
security interest, in which case Well Chance shall grant to RMK a security
interest in all proceeds received by Well Chance generated by such assets). In
connection with this loan the Company issued warrants to purchase 150,294 shares
of common stock with an exercise price of $2.50 per share. On August 26, 2009,
the Company reduced the exercise price of the warrants from $2.50 per share to
$0.40 per share. See Note 9 for description of warrants.
20
The due
date on this loan was February 10, 2009. The Company worked with RMK
to extend the note, but no outcome has reached. Related party
interest expense of $66,380 and $95,022 has been included in the accompanying
statements of operations and other comprehensive loss for the three months
ended September 30, 2009 and 2008, respectively. Of the
$375,733 original loan amount, the full $375,733 is outstanding and is
classified as related party note payable of $375,333, net of debt discount of $0
in the accompanying consolidated balance sheet at September 30, 2009. RMK is a
fund controlled by a shareholder who is also the CEO of ARC Investment Partners,
LLC, a shareholder of the Company. See Note 13.
Kantor
and Blueday Loan Agreements
On March
30, 2008, the Company entered into a loan agreement (the "Kantor Loan") with
Jonathan Kantor of $100,000. In connection with the Kantor Loan, the Company
issued warrants to purchase 40,000 shares of common stock with an exercise price
of $2.50 per share. On August 26, 2009, the Company reduced the exercise price
of the warrants from $2.50 per share to $0.40 per share. See Note
9.
Also on
March 30, 2008, the Company entered into a loan agreement (the "Blueday Loan”)
with Blueday Limited ("Blueday"), of $250,000. In connection with the Blueday
Loan, the Company issued warrants to purchase 50,000 shares of common stock with
an exercise price of $2.50 per share. On August 26, 2009, the Company reduced
the exercise price of the warrants from $2.50 per share to $0.40 per share. See
Note 9.
Pursuant
to the terms of the Kantor Loan and Blueday Loan, the Company was to repay the
loans plus applicable loan fees (described below) by June 30, 2008. If the
Company had repaid the outstanding principal amount of each of the loans by
April 1, 2008, then the loan fees would have been $50,000 for the Kantor Loan
and $125,000 for the Blueday Loan. Any partial repayments delivered to Mr.
Kantor or Blueday after April 1, 2008 will be applied in accordance with a
formula set forth in the applicable loan agreement by dividing such partial
repayments between the outstanding principal amount, the outstanding loan fee,
and the applicable additional loan fee due on the date of repayment. In the
event that the Company does not pay a loan in full, including the outstanding
loan fee, on or before April 1, 2008, then, in addition to the outstanding
principal amount and loan fee due, the Company must also pay to Mr. Kantor and
Blueday, as applicable, an additional loan fee based on a percentage of the
outstanding principal amount of the loan at the time repayment is made. If the
Company does not repay a loan by April 1, 2008 but repays such loan in
full, including the outstanding loan fee, on April 2, 2008 or the 44-day period
thereafter, the applicable additional loan fee will be 10% of the outstanding
principal amount of the loan at the time repayment is made. The additional
loan fee percentage amount is an additional 10% for each 45-day period
subsequent to the initial 45-day period and will continue to accrue until the
Company pays such loan in full. In the event that the Company does not
repay a loan in full, including the outstanding loan fee and the applicable
additional loan fee, on or before June 30, 2008, then the additional loan fee
will continue to increase, and Mr. Kantor or Blueday will have the right to
terminate the applicable loan agreement and declare any amounts owed on such
loan due and payable. The Company has classified the Kantor Loan and the Blueday
Loan as short-term in the accompanying balance sheets.
21
The
following is a summary of the loan balances at September 30, 2009:
|
Original Note Balance
|
Balance as of
September 30, 2009
|
||||||
Kantor
|
$ | 100,000 | $ | 33,000 | ||||
Blueday
|
250,000 | 23,000 | ||||||
Gross
notes payable
|
$ | 350,000 | $ | 56,000 | ||||
Debt
discounts
|
- | |||||||
Notes
payable, net
|
$ | 56,000 |
Interest
expense in the accompanying statements of operations and other
comprehensive loss was $98,060 and $169,784 for the three months ended September
30, 2009 and 2008, respectively.
Following
is a summary of other payables at September 30, 2009 and June 30,
2009:
September 30
|
June 30
|
|||||||
(audited)
|
||||||||
Insurance
|
$ | 3,999 | $ | 6,455 | ||||
Office
Expenses
|
8,656 | 4,483 | ||||||
Service
commitment to provide advertising pages
|
75,008 | 74,957 | ||||||
Due
related to termination of radio contracts
|
203,585 | 168,360 | ||||||
Duties
and levies
|
2,767 | 185,703 | ||||||
$ | 294,015 | $ | 439,958 |
Note
8 - Variable Interest Entities
At June
30, 2008, the Company consolidated the balance sheets and operations of TJ YSLD,
the VIE controlled under the May 30, 2008 MRL acquisition. On July 21, 2008, the
Company completed the acquisition of News Radio Limited, and with the purchase
the Company acquired control of Beijing Maihesi Advertising International Co.,
Ltd., another VIE. On November 28, 2008, the Company entered into and closed the
Music Radio Share Purchase Agreement with Well Chance, MRL, and the Music Radio
Shareholders pursuant to which the Company acquired control of BJ YSLD, HTLG
another VIE. See Note 11 for acquisition details. TJ YSLD, BJ YSLD and HTLG have
been consolidated with the Company’s financial statements at June 30,
2009.
22
The
following is the condensed balance sheet of Beijing Maihesi Advertising
International Co., Ltd., the VIE consolidated on the Company’s balance sheet in
connection with the acquisition of News Radio Limited, as of the July 21, 2008
date of acquisition:
Book value
|
Fair value
|
|||||||
Assets:
|
||||||||
Cash
|
$ | 286 | $ | 286 | ||||
Accounts
receivable
|
11,752 | 11,752 | ||||||
Prepaid
expenses
|
6,292 | 6,292 | ||||||
Deferred
costs
|
43,064 | 43,064 | ||||||
Other
receivables
|
3,294 | 3,294 | ||||||
Fixed
assets, net
|
5,480 | 5,480 | ||||||
Contract
deposits
|
522,964 | 522,964 | ||||||
FM
90.5 Contract rights
|
- | 1,016,196 | ||||||
Total
Assets
|
$ | 593,132 | $ | 1,609,328 | ||||
Liabilities:
|
||||||||
Accounts
payable
|
$ | 6,337 | $ | 6,337 | ||||
Accrued
expenses
|
5,658 | 5,658 | ||||||
Other
payables
|
297,269 | 297,269 | ||||||
Total
Liabilities
|
309,264 | 309,264 | ||||||
Equity
|
283,868 | 1,300,064 | ||||||
Total
Liabilities and Equity
|
$ | 593,132 | $ | 1,609,328 |
The
intangible assets acquired were recorded at fair value, as required under ASC
810-10-05-8. The Company consolidated all balances in the accompanying September
30, 2009 consolidated balance sheets. The operations of the VIE for the period
from July 21, 2008 (date of acquisition) through July 26, 2009 have been
included in the Company’s consolidated statements of operations and other
comprehensive income. See Note 11 for details of the acquisition.
The
Company has accounted for the acquisition of BJ YSLD in a manner similar to a
pooling of interests due to VIE common control at the time of the transaction.
This accounting treatment requires the Company to restate its historical
consolidated financial statements from July 1, 2007 through the date of
acquisition that includes a consolidation of BJ YSLD from that date. Fair value
of the variable interest entity associated with BJ YSLD is not considered when
accounting for the acquisition in a manner similar to a pooling of interests.
The operations of the VIE for the three months ended September 30, 2009 and 2008
were included in the Company’s consolidated statements of operations and
other comprehensive income (loss). See Note 11 for required disclosures for the
acquisition of BJ YSLD.
23
Termination
Agreement with respect to the Radio Frequency FM 90.5 and
FM 107.1
On July
20, 2009, Beijing Maihesi International Advertising Co., Ltd. ("Maihesi"),
a company organized in the PRC and an affiliate of the Company, entered into an
agreement (the “Termination Agreement”) with Beijing Guoguang Guangrong
Advertising Co., Ltd. (“Guoguang”), pursuant to which Maihesi and Guoguang
terminated (i) the Exclusive Advertising Rights Agreement dated May 5, 2008 by
and between Maihesi and Guoguang, under which Maihesi was originally granted the
exclusive right to market and sell all broadcast advertising in connection with
the frequency FM 90.5 of China Radio International in Beijing (the “Beijing
Agency Agreement”), and (ii) the Exclusive Advertising Rights Agreement dated
August 4, 2008 by and between Maihesi and Guoguang, under which Maihesi was
originally granted the exclusive right to market and sell all broadcast
advertising in connection with the frequency FM 107.1 of China Radio
International in Shenzhen (the “Shenzhen Agency Agreement”, collectively
with the Beijing Agency Agreement, the “Agency Agreements”).
According
to the Termination Agreement, (i) Maihesi or its affiliate paid Guoguang
RMB1,150,000 (USD$168,335) as compensation for the early termination of the
Beijing Agency Agreement, (ii) Maihesi agreed to forsake the deposits in the
amount of RMB2,760,000 and RMB1,050,000 under the Beijing Agency Agreement and
Shenzhen Agency Agreement, respectively (which, as of September 30, 2009, was
approximately $405,720 and $154,350, respectively), (iii) Guoguang agreed to
forsake the accrued cost for the advertising minutes payable to Guoguang
(approximately RMB 3,592,323, which, as of September 30,2009, was approximately
$528,071), and (iv) both Maihesi and Guoguang agreed to waive any claims and
refrain from initiating any legal proceedings against the other party arising
from or in connection with the terminated Agency Agreements. In addition, the
Termination Agreement contains other covenants, agreements and default and
confidentiality provisions that the reader is encouraged to review.
In
connection with the termination of this VIE agreement, the Company has recorded
a net gain on disposal of VIE in the amount of $863,874 during the three months
ended September 30, 2009, which was reduced by a loss on disposal related to the
cash paid on consideration of $174,239 and loss on disposal of an account
receivable balance due from Maihesi in the amount of $1,319,826.
Business
Assignment with respect to the Radio Frequency FM95.5 and FM92.5.
On July
20, 2009, Beijing Atis Advertising Co., Ltd. (“Atis”), a company organized
in the PRC, had agreements with TJ YSLD, with respect to the exclusive
right to market and sell all broadcast advertising in connection with the
frequency FM92.5 and FM95.5 of China National Radio Station Music Radio in
Tianjin and Xi’ an, respectively. To optimize the operations of the Company and
save administrative expenses, the Company terminated the agreements
with TJ YSLD and assigned to BJ YSLD.
On July
20, 2009, BJ YSLD entered into a cooperation agreement (the “FM95.5 Agency
Agreement”) with Atis, pursuant to which (i) BJ YSLD is granted exclusive
right to market and sell all broadcast advertising in connection with the
frequency FM95.5 of China National Radio Station Music Radio in Xi’an for a term
commencing from June 16, 2009 and ending on December 31, 2010; (ii) the annual
cost for the advertising minutes in the year of 2009 and 2010 is
RMB595,835 and RMB1.1 million respectively (which, as of September 30,
2009, is equal to approximately USD87,588 and USD161,700, respectively); (iii)
BJ YSLD has the right of first refusal to renew the FM 95.5 Agency
Agreement upon expiration; and (iv) BJ YSLD deposited RMB356,667
(approximately USD52,400). In addition, the FM95.5 Agency
Agreement contains other covenants, agreements and default and
confidentiality provisions that the reader is encouraged to
review.
24
BJ YSLD
entered into a cooperation agreement (the “FM92.5 Agency Agreement”) with
Atis, pursuant to which (i) BJ YSLD is granted exclusive right to market and
sell all broadcast advertising in connection with the frequency FM 92.5 of
China National Radio Station Music Radio in Tianjin for a term commencing from
June 15, 2009 and ending on December 31, 2010; (ii) the 12-month period cost for
advertising minutes is RMB2.5 million (which, as of September 30,
2009, is equal to approximately USD367,500); (iii) BJ YSLD has the right of
first refusal to renew the FM 92.5 Agency Agreement upon expiration; and
(iv) BJ YSLD deposited RMB500,000 (approximately USD73,500). In addition, the
FM 92.5 Agency Agreement contains other covenants, agreements and
default and confidentiality provisions that the reader is encouraged to
review.
In
connection with the re-assignments of rights from TJ YSLD to BJ YSLD, the
Company disposed of the assets and liabilities of the historical TJ YSLD
business and, accordingly, recorded a net gain on disposal of $133,758 during
the three months ended September 30, 2009, which was increased by a gain on
disposal of an account payable balance due to TJ YSLD of $138,542. The remaining
assets retained by the Company and assigned to BJ YSLD after disposal is the
intangible asset associated with the FM 92.5 advertising rights and the
exclusivity agreement, as discussed in Note 2.
As a
result of the disposal of the Beijing Maihesi Advertising International Co.,
Ltd. advertising rights agreement and the re-assignment of the advertising
rights to BJ YSLD, Beijing Maihesi Advertising International Co., Ltd., TJ YSLD
and BJ YSLD have been consolidated in the Company’s financial statements
through July 20, 2009, and BJ YSLD is the only remaining VIE included in
the Company’s financial statements as of September 30, 2009.
Note
9 - Stock Options and Warrants
Stock
Options
The
Company entered into an employment agreement with Mr. Jeffrey Dash on January
31, 2008. On January 31, 2008, Mr. Dash was appointed President and Chief
Executive Officer of the Company. Pursuant to the employment agreement Mr. Dash
was granted options to purchase 400,000 shares of the Company’s common stock at
an exercise price of $2.50 per share. The options vest over 33 months, with 25%
of the options vesting after the first three months and the remaining 75% of the
options vesting equally every three months at a rate of 30,000 shares per month.
The fair value of the options was $120. The fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of three
years; (2) volatility of 100%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%. On August 26, 2009, the Company reduced the exercise price of the
options from $2.50 per share to $0.40 per share. The increase in fair value of
the options was $34,600 is to be vested over the remaining 16 months of the
option term and recognized in compensation expense accordingly. The new fair
value was computed using the Black-Scholes model under the following
assumptions: (1) expected life of three years; (2) volatility of 83%, (3) risk
free interest of 4.5% and (4) dividend rate of 0%.
On May
19, 2008, the Company entered into an employment agreement with Mr. William Lee.
Effective June 2, 2008, Mr. Lee was appointed the Chief Operating Officer of the
Company. Pursuant to the employment agreement, Mr. Lee was granted options to
purchase 400,000 shares of the Company’s common stock at an exercise price of
$3.25 per share. The options vest over 33 months, with 12.5% of the options
vesting after the first three months and the remaining 75% of the options
vesting equally every three months at a rate of 30,000 shares per three months.
The fair value of the options was $783,280. The fair value was computed using
the Black-Scholes model under the following assumptions: (1) expected life of
three years; (2) volatility of 92%, (3) risk free interest of 4.5% and (4)
dividend rate of 0%. On October 31, 2008, Mr. Lee left the Company. At that time
of his departure from the Company he held 81,820 fully vested options and
forfeited 318,180 options. The Company’s board of directors
agreed to grant Mr. Lee two years from the date of his departure to exercise the
fully vested options.
25
On March
28, 2008, the Company granted to each of two of its directors options to
purchase 80,000 shares of the Company’s common stock with an exercise price of
$2.50 per share. The options vest on a quarterly basis (in arrears) over 24
months commencing on the date of each director's appointment to the board. The
fair value of the options was $355,088. The fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of two
years; (2) volatility of 90%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%. On August 26, 2009, the Company reduced the exercise price of the
options from $2.50 per share to $0.40 per share. The increase in fair value of
the options was $6,056 and was recognized in compensation expense during the
three months ended September 30, 2009 as they are fully vested as of this date.
The new fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of two years; (2) volatility of 83%,
(3) risk free interest of 4.5% and (4) dividend rate of 0%. On November 15,
2008, Richard Vogel resigned as a director of the Company. At the
time of his resignation, he held 31,556 fully vested options and all were
forfeited.
On May
19, 2008, the Company granted options to another director to purchase 80,000
shares of the Company’s common stock with an exercise price of $3.70 per share.
The options vest on a quarterly basis (in arrears) over 24 months commencing on
the date of the director's appointment to the board. The fair value of the
options was $155,328. The fair value was computed using the Black-Scholes model
under the following assumptions: (1) expected life of two years; (2) volatility
of 96%, (3) risk free interest of 4.5% and (4) dividend rate of 0%. On August
26, 2009, the Company reduced the exercise price of the options from $3.70 per
share to $0.40 per share. The increase in fair value of the options was $6,424
and was recognized in compensation expense during the three months ended
September 30, 2009 as they are fully vested as of this date. The new fair value
was computed using the Black-Scholes model under the following assumptions: (1)
expected life of two years; (2) volatility of 83%, (3) risk free interest of
4.5% and (4) dividend rate of 0%. The fair value of the options was $155,328.
The fair value was computed using the Black-Scholes model under the following
assumptions: (1) expected life of two years; (2) volatility of 96%, (3) risk
free interest of 4.5% and (4) dividend rate of 0%.
On August
26, 2009, the Company granted options, under its stock option plan, to four
employees to purchase 6,325,000 shares of the Company’s common stock with an
exercise price of $0.20 per share. Thirty percent of the options vest
immediately, and the remaining options vest over 28 months. The fair value of
the options was $964,563. The fair value was computed using the Black-Scholes
model under the following assumptions: (1) expected life of three years; (2)
volatility of 83%, (3) risk free interest of 4.5% and (4) dividend rate of
0%.
26
Following
is a summary of the stock option activity for the three months ended September
30, 2009:
Weighted
|
Aggregate
|
|||||||||||
Number of
|
Average
|
Intrinsic
|
||||||||||
Options
|
Exercise Price
|
Value
|
||||||||||
Outstanding
as of July 1, 2009
|
641,820 | $ | 2.88 | $ | - | |||||||
Granted
|
6,325,000 | 0.20 | 316,250 | |||||||||
Forfeited
|
- | - | - | |||||||||
Exercised
|
- | - | - | |||||||||
Outstanding
as of September 30, 2009
|
6,966,820 | $ | 0.25 | $ | 474,375 | |||||||
Exercisable
options:
|
||||||||||||
June
30, 2009
|
426,153 | $ | 2.78 | - | ||||||||
September
30, 2009
|
2,481,778 | $ | 0.33 | $ | 154,172 |
Warrants
Under the
loan agreement with RMK described in Note 6 at the closing of the share exchange
agreement described in Note 1 the Company issued RMK a warrant to purchase
150,294 shares of the Company’s common stock. The warrant was exercisable upon
issuance and is exercisable until the third anniversary of the issuance date of
the warrant. The warrant exercise price is $2.50 per share. The relative fair
value of the warrants was $108,261 and was determined using the Black-Scholes
option pricing model and the following assumptions: term
of three years, a risk free interest rate of 4.5%, and a dividend
yield of 0% and volatility of 90%. Of the $375,733 proceeds from the loan,
the fair value of the warrants are recorded as debt discounts and has been
amortized over the term of the loan. On August 26, 2009, the Company reduced the
exercise price of the warrants from $2.50 per share to $0.40 per share. The
increase in fair value of the options was $9,499 and was recognized in interest
expense during the three months ended September 30, 2009. The new fair value was
computed using the Black-Scholes model under the following assumptions: (1)
expected life of 1.46 years; (2) volatility of 83%, (3) risk free interest of
4.5% and (4) dividend rate of 0%.
On March 30,
2008, and pursuant to the terms of the Kantor Loan and Blueday Loan described in
Note 6, the Company issued to Mr. Kantor and Blueday warrants to purchase 40,000
and 50,000 shares of the Company's common stock, respectively, at an exercise
price of $2.50 per share, subject to adjustments under the terms of the
warrants. The warrants are exercisable upon issuance and until the third
anniversary of the issuance date of the warrants. The warrants may be exercised
in a cashless manner. The relative fair value of the warrants issued in
connection with the Kantor Loan was $28,082 and was determined using the
Black-Scholes option pricing model and the following assumptions: (1)
term of three years, (2) a risk free interest rate of 4.5%, (3) a
dividend yield of 0% and (4) volatility of 97%. Of the $100,000 proceeds
from the loan, the fair value of the warrants is recorded as debt discounts and
has been amortized over the term of the loan. The relative fair value of the
warrants issued in connection with the Blueday Loan was $40,837 and was
determined using the Black-Scholes option pricing model and the following
assumptions: (a) term of three years, (b) a risk free interest
rate of 4.5%, (c) a dividend yield of 0% and (d) volatility of 97%. Of
the $250,000 proceeds from the Blueday note, the relative fair value of the
warrants was recorded as debt discounts and has been amortized over the term of
the loan. On August 26, 2009, the Company reduced the exercise price of the
warrants from $2.50 per share to $0.40 per share. The increase in fair value of
the options was $6,012 and was recognized in interest expense during the three
months ended September 30, 2009. The new fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of 1.59
years; (2) volatility of 83%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%.
27
On April
21, 2008, and pursuant to the terms of a loan agreement with Newport Capital
Group ("Newport"), the Company issued Newport a warrant to purchase 40,000
shares of the Company's common stock at an exercise price of $2.50 per share,
subject to adjustment under the terms of the warrant. The warrant is exercisable
upon issuance and until the third anniversary of the loan date. The warrant may
be exercised in a cashless manner. The relative fair value of the warrant was
$554,536 and was determined using the Black-Scholes option pricing model and the
following assumptions: (1) term of four years, (2) a risk free
interest rate of 0.9%, (3) a dividend yield of 0% and (4) volatility
of 96%. Of the $200,000 proceeds from the loan, the relative fair value of
the warrant is recorded as a debt discount and has been amortized over the term
of the loan. In addition, an embedded beneficial conversion feature was recorded
in accordance with FASB ASC 815 “Derivatives and Hedging.”
The relative fair value of the beneficial conversion feature was $44,626 and has
been classified in additional paid-in capital in the September 30, 2009
consolidated balance sheets.
Between
August 29, 2008 and June 23, 2009, the Company issued warrants to purchase
400,000 shares of the Company's common stock to Maoming in connection with a
preferred stock placement that took place on the same date (see Note 10) and in
connection with its preferred placement on July 1, 2008. The warrants are
immediately exercisable at an exercise price of $2.50 per share until their
expiration on August 28, 2011 and are exercisable on a cashless basis at any
time after August 29, 2009 and until August 28, 2011, if the common stock
underlying the warrants has not been registered with the SEC by such date. The
relative fair value of the 400,000 warrants issued with the Series A convertible
preferred stock was $189,670. The relative fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of 1.5
years; (2) volatility of 92%, (3) risk free interest of 2.4% and (4) dividend
rate of $0%. In addition, since this convertible preferred stock is convertible
into shares of common stock at a one to one ratio, an embedded beneficial
conversion feature would be calculated as a discount to additional paid in
capital in accordance with FASB ASC 815 “Derivatives and Hedging.”
However, the conversion price on the issuance date was greater than the stock
price on that date and thus no intrinsic value arose from the issuance of the
convertible preferred shares. Therefore, no beneficial conversion feature was
recognized on the Company’s accompanying consolidated balance
sheets.
On August
26, 2009, the Company reduced the exercise price of the warrants from $2.50 per
share to $0.40 per share. The increase in fair value of the options was $71,100
and was recognized in interest expense during the three months ended September
30, 2009. The new fair value was computed using the Black-Scholes model under
the following assumptions: (1) expected life of 1.77 years; (2) volatility of
83%, (3) risk free interest of 4.5% and (4) dividend rate of
0%.
28
On
November 28, 2008, the Company issued warrants to purchase 10,000,000 shares of
the Company's common stock to BaoChun Ju in connection with the Music Radio
Acquisition Agreement dated November 28, 2008 that gave effective control of BJ
YSLD to Legend Media, Inc. See Note 11. The warrants were issued in
two tranches of 5,000,000 warrants per tranche. Tranche 1 warrants
are immediately exercisable at an exercise price of $0.40 per share until their
expiration on November 28, 2011 and are exercisable on a cashless basis at any
time after November 28, 2009 and until November 28, 2011, if the common stock
underlying the warrants has not been registered with the SEC by such
date. The relative fair value of the 5,000,000 warrants issued
in connection with the Music Radio Acquisition Agreement was $2,123,992. The
relative fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of three years; (2) volatility of 147%,
(3) risk free interest of 4.5% and (4) dividend rate of $0%. The
Tranche 2 warrants are immediately exercisable at an exercise price of $0.80 per
share until their expiration on November 28, 2013 and are exercisable on a
cashless basis at any time after November 28, 2009 and until November 28, 2013,
if the common stock underlying the warrants has not been registered with the SEC
by such date. The relative fair value of the 5,000,000 warrants
issued with the Music Radio Acquisition Agreement was $2,263,931. The relative
fair value was computed using the Black-Scholes model under the following
assumptions: (1) expected life of five years; (2) volatility of 147%, (3) risk
free interest of 4.5% and (4) dividend rate of $0%. The Company
recorded the relative fair value of the warrants as a deemed dividend related to
pooling of subsidiary, resulting from the Music Radio Acquisition Agreement for
BJ YSLD.
Note
10 - Stockholders Equity
Unregistered
Sale of Series A Convertible Preferred Stock
On August
29, 2008, the Company sold 625,000 shares of the Company's Series A convertible
Stock preferred stock, and warrants to purchase 300,000 shares of the Company's
common stock to Maoming for gross proceeds of $1,500,000. Subsequently, on March
4, 2009, the Company sold 62,500 shares of the Company's Series A convertible
Stock preferred stock, and warrants to purchase 30,000 shares of the Company's
common stock to Maoming for gross proceeds to the Company of
$150,000. On April 14, the Company sold 104,167 shares of the
Company's Series A convertible Stock preferred stock, and warrants to purchase
50,000 shares of the Company's common stock to Maoming for gross proceeds to the
Company of $250,000. On June 23, 2009, the Company sold 41,667 shares
of the Company's Series A convertible Stock preferred stock, and warrants to
purchase 20,000 shares of the Company's common stock to Maoming for gross
proceeds to the Company of $100,000. The sale of the Series A convertible
preferred stock and warrants to Maoming occurred pursuant to the terms of a
Securities Purchase Agreement (the "Maoming Purchase Agreement") dated March 31,
2008. The Maoming Purchase Agreement closed in connection with the Company’s
previously announced acquisition of its second media advertising business
operating in the China, PRC News Radio Limited.
The
warrants issued to Maoming are immediately exercisable at an exercise price of
$2.50 per share until their expiration on August 28, 2011 and are exercisable on
a cashless basis at any time after August 29, 2009 until August 28, 2011 if the
common stock underlying the warrants has not been registered with the SEC by
such date. See Note 9. On August 26, 2009, the Company reduced the exercise
price of the warrants from $2.50 per share to $0.40 per share.
Common
Shares Issued for Investment in News Radio, Limited
On July
21, 2008, the Company closed the acquisition of News Radio Limited, under the
terms of the News Radio Share Purchase Agreement that the Company entered into
on June 4, 2008. As part of the purchase price, the Company delivered to the
News Radio Shareholders shares of the Company's common stock, with an aggregate
value of 2,000,000 RMB. On July 21, 2008, the acquisition was closed and the
amount was settled at 104,427 common shares with a value of $293,800 based on
the currency exchange rate used. See Note 11 for acquisition of News Radio
Limited.
29
Series
B Convertible Preferred Stock Issued in connection with BJ YSLD and Conversion
to Common Stock
As
consideration for the acquisition of BJ YSLD, the Company issued 5,033,680
shares of its newly created Series B convertible preferred stock to Ju Baochun,
the owner of BJ YSLD. Each share of the Series B convertible preferred stock was
initially convertible into 20 shares of common stock, or an aggregate of
100,673,600 shares of common stock, representing 90.6% of the issued and
outstanding common stock of the Company on an as-converted basis (not including
the Company’s outstanding Series A convertible preferred stock, warrants or
options). Under the terms of the Series B convertible preferred stock, all
shares of this Series B convertible preferred stock are to be automatically
converted into fully paid and non assessable shares of common stock on the date
that the Company amends its Articles of Incorporation such that there is a
sufficient number of shares of common stock authorized by the Company to allow
full conversion of all outstanding shares of the Series B convertible preferred
stock into shares of common stock. Further, the holders of the Series B
convertible preferred stock are entitled to the same voting rights as if they
were common stockholders of the Company, based on the number of shares of common
stock into which the holder’s aggregate number of shares of the Series B
convertible preferred stock are convertible. The Series B convertible preferred
stock was converted into common stock on December 21, 2008, the date that the
Company amended its Articles of Incorporation and authorized a sufficient number
of shares to satisfy the conversion. The Series B convertible
preferred stock converted into 100,673,600 shares of common stock.
Deemed
Dividend Arising from the Acquisition Agreement for the effective control of BJ
YSLD
The
Company recorded the Music Radio Acquisition Agreement, pursuant to which the
Company obtained effective control of BJ YSLD, as a deemed dividend in the
amount of $51,561,046, which represents the $51,343,536 value of the 100,673,600
shares of common stock into which the Series B Preferred Stock was convertible,
less the net book value of BJ YSLD net assets of ($217,510) on the date of
acquisition. The closing gives Legend Media effective control of BJ YSLD, a
PRC-based company that has the exclusive sales contract for Xinhua Airline
Magazine, the airline magazine for Hainan Airline Group.
Dividend
Paid to Owner for Account Balances Retained After Acquisition of BJ
YSLD
Pursuant
to the Music Radio Acquisition Agreement, the HTLG balances for cash, accounts
receivable, related party payables remained with HTLG after the HTLG airline
business became controlled by BJ YSLD on November 30, 2008. The net
debit balance of the transaction was $1,322,226 which was recorded against
retained earnings as a dividend. On March 31, 2009, the
$1,322,226 dividend was reduced by $429,957 to $892,510 to reflect the tax
obligations of HTLG that were to remain with HTLG. The $429,957
credit to retained earnings was offset against accrued liabilities and
payables.
30
Note
11 - Acquisition
Acquisition
of News Radio Limited
On July
21, 2008, the Company closed a transaction pursuant to which Well Chance
purchased 100% of the common stock of News Radio Limited. The transaction
occurred pursuant to the terms of the News Radio Share Purchase Agreement that
the Company entered into on June 4, 2008 with Well Chance and the News Radio
Shareholders. As a result of the acquisition, the Company obtained control of
the following subsidiaries the Company
•
|
CRI
News Radio Limited (100%-owned)
|
•
|
Legend
Media (Beijing) Information and Technology Co., Ltd.
(100%-owned)
|
•
|
Beijing
Maihesi Advertising International Co., Ltd. (100%-controlled as
VIE)
|
At the
closing of the purchase, July 21, 2008, of News Radio Limited, the
Company delivered to the News Radio Shareholders shares of the Company's common
stock, with an aggregate value of 2,000,000 RMB (on June 5, 2008, $287,728 based
on the currency exchange rate on that date). The amount was settled at $293,800
based on the currency exchange rate on July 21, 2008. The purchase
price was based on the weighted average trading price of the common stock for
the 30 trading days immediately before June 4, 2008 (68,388 shares were actually
delivered).) In addition, (i) within 28 days after closing of the purchase of
News Radio Limited, the Company is obligated to deliver RMB 5,250,000 (on June
5, 2008, this was $755,287 based on the currency exchange rate on that date).
Subsequently on July 21, 2008, the acquisition was closed and settled at
$771,225, based on the currency exchange rate on that date, and (ii) within 90
days after closing of the acquisition the Company is obligated to deliver RMB
1,600,000 (on June 5, 2008, this was $230,182 based on the currency exchange
rate on that date.) Subsequently on July 21, 2008, the acquisition was closed
and settled at $235,040 based on the currency exchange rate on that date. As of
September 30, 2009, the Company delivered the 104,427 shares associated with the
News Radio Share Purchase Agreement.
During
the year ended June 30, 2009, the Company paid $749,990 towards the purchase of
News Radio Limited, and at September 30, 2009 and June 30, 2009, the Company
recognized the remaining $698,065 in Related Party Payables in its consolidated
balance sheets, respectively. See Note 13.
In
addition, the News Radio Shareholders will receive additional, performance-based
consideration within 30 days of each of year-end 2008, 2009 and 2010
based on the net revenues and net income for such periods of Beijing Maihesi
Advertising International Co., Ltd., a company limited by shares, organized in
the PRC and wholly owned by the News Radio Shareholders, as follows: (a) if for
the seven-month period ending December 31, 2008, net revenues equal or exceed
90% of RMB 12,000,000 and net income equals or exceeds RMB 0, the News Radio
Shareholders will receive shares of the Company’s common stock with an aggregate
value of RMB 2,500,000 (approximately $359,660 based on the currency exchange
rate on June 5, 2008) with a price per share equal to the weighted average
trading price for the 30 trading days immediately prior to the date such amount
becomes payable; (b) if for the 12-month period ending December 31, 2009, net
revenues equal or exceed 80% of RMB 30,000,000 and net income equals or exceeds
RMB 6,000,000, the News Radio Shareholders will receive RMB 4,000,000
(approximately $575,457 based on the currency exchange rate on June 5, 2008) in
the form of cash, the number of shares of the Company’s common stock as
determined by a price per share equal to the weighted average trading price for
the 30 trading days immediately prior to the date such amount becomes payable,
or a combination of the two, at the election of the News Radio Shareholders and
(c) if for the 12-month period ending December 31, 2010, net revenues equal or
exceed 80% of RMB 34,000,000 and net income equals or exceeds RMB 8,000,000, the
News Radio Shareholders will receive RMB 8,000,000 (approximately $1,150,914
based on the currency exchange rate on June 5, 2008) in the form of cash, the
number of shares of the Company’s common stock as determined by a price per
share equal to the weighted average trading price for the 30 trading days
immediately prior to the date such amount becomes payable, or a combination of
the two, at the election of the News Radio Shareholders. Pursuant to the terms
of the News Radio Share Purchase Agreement, Well Chance and the News Radio
Shareholders will mutually select an impartial auditor to audit and determine,
according to US GAAP, the Beijing Maihesi Advertising International Co., Ltd.
net revenues and net income for the relevant time-periods. For the seven-month
period from the acquisition date to December 31, 2008, the net revenues of
Beijing Maihesi Advertising International Co., Ltd. were RMB 3,334,050 and net
loss was RMB 6,131,817 RMB.
31
After the
closing of the News Radio Share Purchase Agreement the Company became the
indirect beneficiary of several agreements entered into by the Company's
affiliates.
In
connection with the closing of the News Radio Share Purchase Agreement CRI News
Radio Limited, a Hong Kong company wholly owned by News Radio Limited through
its subsidiary, a company organized in China, Legend Media (Beijing) Information
and Technology Co., Ltd. ("Legend Media IT"), entered into an Exclusive
Technical, Operational, Business Consulting and Services Agreement (the "News
Radio Service Agreement") with Beijing Maihesi Advertising International Co.,
Ltd. and the News Radio Shareholders pursuant to which Legend Media IT became
the exclusive provider of technical, operational, business consulting and other
services to Beijing Maihesi Advertising International Co., Ltd. in exchange for
a service fee and bonus as described in more detail in the News Radio Service
Agreement. The term of the News Radio Service Agreement is 10 years with an
automatic renewal for another 10-year term unless a party provides written
notice that it does not wish to renew the News Radio Service Agreement. Beijing
Maihesi Advertising International Co., Ltd. agreed to several important
covenants in the News Radio Service Agreement, including (but not limited to),
agreeing not to appoint any member of Beijing Maihesi Advertising International
Co., Ltd.’s senior management without Legend Media IT's consent and to grant
Legend Media IT certain informational rights. In addition, in the News Radio
Service Agreement, each of the News Radio Shareholders (a) pledged his 100%
equity interest in Beijing Maihesi Advertising International Co., Ltd. to Legend
Media IT as a guarantee of Beijing Maihesi Advertising International Co., Ltd.’s
fulfillment of its obligations under the News Radio Service Agreement; (b)
granted to Legend Media IT or its designee an option to purchase any or all of
his equity interest in Beijing Maihesi Advertising International Co., Ltd. at
nominal value; and (c) agreed not to dispose of or encumber any of his equity
interest in Beijing Maihesi Advertising International Co., Ltd. without Legend
Media IT prior written consent.
On July
20, 2009, the Company terminated its advertising agreements with respect News
Radio Limited. See Note 8 for disposal of the VIE associated with News Radio
Limited.
Acquisition
Agreement for the effective control of BJ YSLD
On
November 28, 2008, the Company entered into and closed the Music Radio
Acquisition Agreement with Well Chance, MRL, and the Music Radio Shareholders.
Pursuant to the Music Radio Acquisition Agreement, the Company acquired control
over BJ YSLD and caused the contribution of the airline advertising business of
HTLG to BJ YSLD. BJ YSLD and HTLG were under common control. In
exchange for the acquisition of control, the Company issued 5,033,680 shares of
its newly-created Series B convertible Preferred Stock, to the Music Radio
Shareholders and two warrants to purchase an aggregate of 10,000,000 shares of
the Company's common stock, to Ju Baochun. As a result of the
acquisition, the Company obtained 100% control of BJ YSLD.
32
In
determining the amount of consideration to be paid in the Music Radio
Acquisition Agreement the Company reviewed and compared publicly available
selected financial data and stock trading prices for public companies chosen
based on their common participation in the Chinese advertising and media
industry, and conducted a discounted cash flow analysis. Applying the
conclusions drawn therefrom, the number of shares of Series B convertible
preferred stock issued in the Music Radio Acquisition Agreement was calculated
based on an aggregate purchase price of RMB275,000,000, a currency exchange rate
of RMB6.829 to U.S. $1, and a per share issue price of 20 times the greater of
(a) 75% of the weighted average trading price of one share of common stock for
the 15 trading days ended on the third day before closing, and (b) $0.40.
Because 75% of the weighted average trading price for the common stock during
the period was $0.3440, the per share issue price used was $0.40. As more fully
described below, each share of Series B convertible preferred stock is initially
convertible into 20 shares of common stock or an aggregate of 100,673,600 shares
of common stock representing approximately 90.6% of the issued and outstanding
common stock on an as-converted basis (not including the Company's outstanding
Series A convertible preferred stock warrants or options). The Series B
convertible preferred stock converted into 100,673,600 shares of common stock on
December 21, 2008.
One of
the warrants issued Ju Baochun upon closing of the Music Radio Acquisition
Agreement is immediately exercisable for 5,000,000 shares of common stock at an
exercise price of $0.40 per share until November 28, 2011 (the "First Expiration
Date") and is exercisable on a cashless basis at any time after November 28,
2009 and until the First Expiration Date if the shares of common stock
underlying the warrant have not been registered with the SEC by such date. The
other warrant issued to Ju Baochun upon closing of the Music Radio Acquisition
Agreement is immediately exercisable for 5,000,000 shares of common stock at an
exercise price of $0.80 per share until November 28, 2013 (the "Second
Expiration Date") and is exercisable on a cashless basis at any time after
November 28, 2009 and until the Second Expiration Date if the shares of common
stock underlying the warrant have not been registered with the SEC by such
date.
Upon the
closing of the Music Radio Acquisition Agreement the Company became the
beneficiary of several agreements. As a condition to closing, Legend Media IT
entered into an Exclusive Technical, Operational, Business Consulting and
Services Agreement (the “Music Radio Services Agreement”) with BJ YSLD, a
company owned by Xue Wei and Ju Bingzhen, the father of Ju Baochun. Ju Bingzhen
and Xue Wei are also parties to the Music Radio Services Agreement. Pursuant to
the Music Radio Services Agreement, Legend Media IT became the exclusive
provider of technical, operational, business consulting and other services to BJ
YSLD in exchange for a service fee and bonus as described in more detail in the
Music Radio Services Agreement. The financial results of BJ YSLD will be
consolidated with the Company's financial statements. The term of the Music
Radio Services Agreement is 10 years with an automatic renewal for another
10-year term unless either party provides written notice to the other party that
it does not wish to renew the Music Radio Services Agreement. BJ YSLD agreed to
several important covenants in the Music Radio Services Agreement, including
(but not limited to), agreeing not to appoint any member of BJ YSLD’s senior
management without Legend Media IT’s consent and to grant Legend Media IT
certain informational rights. In addition, pursuant to the Music Radio Services
Agreement, each of Ju Bingzhen and Xue Wei: (a) pledged their equity interests
(representing 100% of the equity interest) in BJ YSLD to Legend Media IT as a
guarantee of BJ YSLD’s fulfillment of its obligations under the Music Radio
Services Agreement; (b) granted to Legend Media IT or its designee an option to
purchase any or all of their equity interest in BJ YSLD at nominal value to the
extent permitted under applicable laws and regulations; and (c) agreed not to
dispose of or encumber any of their equity interest in BJ YSLD without Legend
Media IT’s prior written consent.
33
Legend
Media IT also entered into the Music Radio Operating Agreement with BJ YSLD and
the Music Radio Shareholders to secure the performance of the parties'
obligations under the Music Radio Services Agreement. Pursuant to the terms of
the Music Radio Operating Agreement: (a) BJ YSLD, Ju Bingzhen and Xue Wei agreed
not to, or to cause BJ YSLD not to, conduct any transactions which may have a
material adverse effect on BJ YSLD's assets, obligations, rights or operations
without Legend Media IT’s prior written consent; (b) BJ YSLD, Ju Bingzhen and
Xue Wei granted Legend Media IT certain informational rights; (c) BJ YSLD, Ju
Bingzhen and Xue Wei agreed to (i) submit BJ YSLD’s annual budget and monthly
cash requirement plans to Legend Media IT for approval, (ii) obtain Legend
Media’s approval for withdrawals from BJ YSLD’s bank accounts, and (iii) accept
corporate policies and guidance from Legend Media IT with respect to the
appointment and dismissal of senior management, daily operations and management
and financial administrative systems; (d) BJ YSLD, Ju Bingzhen and Xue Wei
agreed to appoint or cause to be appointed the individuals nominated by Legend
Media IT to become directors, general manager, chief financial officer or other
senior management of BJ YSLD and (e) each of Ju Bingzhen and Xue Wei entered
into an Authorization Agreement (the "Music Radio Authorization Agreement")
pursuant to which each authorized Jeffrey Dash, the Company's Chief Financial
Officer, to exercise his voting rights with respect to shares of BJ YSLD at BJ
YSLD’s stockholders' meetings. The term of the Music Radio Operating Agreement
is 10 years with an automatic renewal for another 10-year term unless any party
provides written notice to the other parties that it does not wish to renew the
Music Radio Operating Agreement. The term of each of the Music Radio
Authorization Agreements is 10 years but it terminates automatically upon the
earlier termination of the Music Radio Services Agreement.
For the
purpose of this combination between BJ YSLD and HTLG and pursuant the Music
Radio Acquisition Agreement, the account receivables and accounts payable of
HTLG related to the airline advertising business that occurred on or prior to
November 30, 2008 shall remain with HTLG. The transaction is between parties
under common control and has been accounted for in a manner similar to a pooling
of interests. As a result of the transaction described above, the historical
financial statements presented are a combination of BJ YSLD and the airline
magazine advertising business of HTLG, and the financial statements of the
Company have been restated to report the results of operations for the period in
which the transfer occurs as though the transfer of net assets or exchange of
equity interests had occurred at July 1, 2007. The Company’s consolidated
balance sheets at December 31, 2008 and June 30, 2008, and the results of
operations presented in the accompanying consolidated statements of operations
and other comprehensive income (loss) for the three months ended September 30,
2009 and 2008 are composed of the previously separate entities combined
beginning July 1, 2007. This required the historical financial statements of the
Company be restated to reflect the consolidation of BJ YSLD under a method
similar to a pooling of interests. The Company recorded the acquisition as a
deemed dividend in the amount of $51,561,046, which represents the $51,343,536
value of the 100,673,600 common stock into which the Series B convertible
preferred stock was convertible, less the net book value of BJ YSLD net assets
of ($217,510) on the date of acquisition. The closing of the Music Radio
Acquisition Agreement gives the Company effective control of BJ YSLD, a
PRC-based company that has the exclusive sales contract for Xinhua Airline
Magazine, the airline magazine for Hainan Airline Group.
Note
12 - Commitments and Contingencies
Leases
On May 1,
2008, the Company entered into a 19-month lease for premises in Tianjin, China.
Under the terms of the lease, the Company is required to make monthly payments
of RMB 29,437 (approximately $4,327 per month, based on the exchange
rate as of September 30, 2009)
34
On June
13, 2008, the Company entered into a two-year lease for premises in Beijing,
China. Under the terms of the lease, the Company is required to make monthly
payments of RMB 31,800 (approximately $4,675 per month, based on the exchange
rate as of September 30, 2009).
On
October 27, 2008, the Company entered into a one-year lease for corporate
housing in Sanya, China. Under the terms of the lease, the Company is
required to make monthly payments of RMB 1,600 (approximately $235 per month,
based on the exchange rate as of September 30, 2009).
On
December 1, 2008, the Company entered into a one-year lease for premises in
Beijing, China. Under the terms of the lease, the Company is required
to make monthly payments of RMB 104,103 (approximately $15,303 per month, based
on the exchange rate as of September 30, 2009).
On
January 1, 2009, the Company entered into a one-year lease for premises in
Haikou, China. Under the terms of the lease, the Company is required
to make monthly payments of RMB 3,412 (approximately $500 per month, based on
the exchange rate as of September 30, 2009).
On
January 10, 2009, the Company entered into a two-year lease for premises in
Shanghai, China. Under the terms of the lease, the Company is
required to make monthly payments of RMB 42,580 (approximately $6,259 per month,
based on the exchange rate as of September 30, 2009).
On
February 28, 2009, the company entered into a one-year lease for corporate
housing in Qingdao, China. Under the terms of the lease, the Company
is required to make monthly payments of RMB 1,667 (approximately $245 per month,
based on the exchange rate as of September 30, 2009).
On March
15, 2009, the Company entered into a one-year lease for premises in Qingdao,
China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 7,500 (approximately $1,103 per month, based on the
exchange rate as of September 30, 2009).
On March
18, 2009, the Company entered into a one-year lease for corporate housing in
Haikou, China. Under the terms of the lease, the Company is required
to make monthly payments of RMB 1,800 (approximately $265 per month, based on
the exchange rate as of September 30, 2009).
At
September 30, 2009, total future minimum lease payments under operating leases
were as follows:
Amount
|
||||
Year
ending September 30, 2010
|
$ | 299,843 | ||
Year
ending September 30, 2011
|
64,467 | |||
Thereafter
|
- | |||
$ | 364,310 |
During
the three months ended September 30, 2009 and 2008, the Company had rent expense
of $83,576 and $31,153,
35
Note 13 - Related Party
Transactions
Significant
balances and transactions and balances with related parties are as
follows:
a. Amounts
due to related parties
Related
Party
|
Relationship
|
September 30,
|
June 30,
|
|||||||||
Classified
as Related Party Payable
|
(audited)
|
|||||||||||
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
majority
Shareholder
|
$ | 1,688,892 | $ | 1,667,679 | 1 | ||||||
Beijing Hongtenglianguang
Advertising Co., Ltd,
|
common
control PRC entity
|
374,041 | - | 2 | ||||||||
2,062,933 | 1,667,679 | |||||||||||
Related
party receivables offset against related party payables
|
||||||||||||
Beijing
Hongtenglianguang Advertising Co., Ltd,
|
common
control PRC entity
|
- | (335,155 | ) | 3 | |||||||
$ | 2,062,933 | $ | 1,332,524 | |||||||||
Classified
as Related Party Note Payable
|
||||||||||||
RMK Emerging Growth
Fund,
|
controlled
by a shareholder who is also the CEO of ARC
Investment
Partners
|
375,733 | 375,733 | 4 | ||||||||
$ | 2,438,666 | $ | 1,708,257 |
|
1
|
BaoChun
Ju and his wife Ms. Wei Xue, pursuant to the Music Radio Acquisition
Agreement, became the beneficial owners of 90.6% of the Company’s common
stock. Mr. Ju and Ms. Xue Wei are also controlling shareholders
of HTLG, BJ YSLD and TJ YSLD.
|
|
2
|
HTLG
is controlled by BaoChun Ju and his wife, Ms. Xue Wei. Further,
pursuant to the Music Radio Acquisition Agreement dated November 28, 2008,
the Company gained effective control over the airline magazine advertising
product line of HTLG. HTLG, as a related company under common control,
paid expenses for the Company. In connection with the BJ YSLD
contracts acquired with the May 30, 2008 acquisition, the Company pays
advertising minutes contract costs of RMB208,833 per month to HTLG as
pass-through to the counterparties in the contracts. Further,
for a period of time HTLG was providing sales and marketing support to the
BJ YSLD for RMB105,000 per month and a variable portion equal 15% of
revenues earned and collected per
month.
|
|
3
|
HTLG
is controlled by BaoChun Ju and his wife, Ms. Xue Wei. HTLG
performed sales functions for BJ YSLD prior to the Music Radio Acquisition
Agreement. Some sales agreements dated prior to this agreement
where in the name of HTLG and left as such for ease of customer service
and administration. As of September 30, 2009 the Company has a
receivable balance from HTLG; however, since HTLG is controlled by BaoChun
Ju and his wife, Ms. Xue Wei it shown as an offset to the amount due
BaoChun Ju.
|
|
4
|
RMK
is a fund controlled by a shareholder. RMK made advances to the Company in
February and March 2008 for a total note issued of $375,733. The balances
presented are net of the note discount and the movement relates to the
amortization of such note. See Note
6.
|
36
b.
Related parties paid by the Company; the expenses included rent, commissions and
media related expenses:
Three Months ended
September 30,
|
Three Months ended
September 30,
|
|||||||||||
Related Party
|
2009
|
2008
|
||||||||||
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
majority
Shareholder
|
$ | 85,066 | 1 | $ | - | ||||||
Beijing
Hongtenglianguang Advertising Co., Ltd,
|
common
control PRC entity
|
$ | 333,060 | $ | - | 1 |
1
|
Includes
$183,636 for an office in Beijing that the Company rents from BaoChun Ju;
the rent per month is $15,303 which is based on fair market
value.
|
c.
Related parties provided short term loans or advances to the Company to assist
with working capital shortfalls:
Three Months ended
September 30,
|
Three Months ended
September 30,
|
||||||||||
Related Party
|
2009
|
2008
|
|||||||||
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
majority
Shareholder
|
$ | 23,460 | 1 | $ |
-
|
d. The
related party collected cash on behalf of the Company:
|
Three Months ended September 30,
|
Three Months ended September 30,
|
|||||||||
Related Party
|
2009
|
2008
|
|||||||||
Beijing
Hongtenglianguang Advertising Co., Ltd.
|
common
control PRC entity
|
$ | 1,610,617 | 1 | $ | - |
Note
14 – Income Taxes
On
March 16, 2007, the National People’s Congress adopted the Enterprise
Income Tax Law (the “New Income Tax Law”), effective on January 1, 2008,
replaced the separate income tax laws for domestic enterprises and
foreign-invested enterprises, which are PRC subsidiaries of the Company, by
adopting unified income tax rate of 25% for most enterprises. In accordance with
the implementation rules of the New Income Tax Law, the preferential tax
treatments granted to various of the Company’s PRC entities did not continue and
they are subject to the statutory 25% tax rate.
No
provision for taxation has been made for Legend Media (Beijing) Consulting
Company Limited, Legend Media (Beijing) Information and Technology Co., Ltd. and
Beijing Maihesi Advertising International Co., Ltd. for the three months ended
September 30, 2009 and 2008, as they did not generate any taxable profits during
the periods.
As income
taxes are not calculated on a consolidated basis the individual entities may be
subject to tax in cases where the group is not profitable. Pursuant
to the law the Company’s Chinese entities are subject to 25% tax.
The
Company adopted the provisions of FASB ASC 740 “Income Taxes.” ASC 740
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FASB ASC 740 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Since the Company has substantial net operating loss
carryforwards, adoption of FASB ASC 740 had no impact on the Company’s beginning
retained earnings, balance sheets, or statements of operations.
37
Note
15 – Segment Information
Based on
FASB ASC 280 “Segment
Reporting,” the Company identified one operating segment. The Company is
only able to disaggregate revenue and cost of revenue data by product line.
Further disaggregation is impracticable, because the Company’s customers and
distribution methods overlap and management reviews its business as a single
operating segment. Assets overlap between the two product lines as well. Thus,
discrete financial information is not available by more than one operating
segment.
Note
16- Subsequent Events
In
reviewing subsequent events, management considers events that take place up to
and including December 22, 2009.
38
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q and the documents we incorporate by
reference herein include forward-looking statements. All statements other than
statements of historical facts contained in this Form 10-Q and the documents we
incorporate by reference, including statements regarding our future financial
position, business strategy and plans and objectives of management for future
operations, are forward-looking statements. The words “believe,” “may,”
“estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,”
“target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as
they relate to us, are intended to identify forward-looking statements within
the meaning of the “safe harbor” provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and financial
needs.
These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions described in Part II Item 1A under the caption “Risk Factors” and
elsewhere in this Quarterly Report on Form 10-Q. In addition, our past results
of operations do not necessarily indicate our future results. New risk factors
emerge from time to time and it is not possible for us to predict all such risk
factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any risk factor, or combination of risk factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
Except as
otherwise required by applicable laws, we undertake no obligation to publicly
update or revise any forward-looking statements or the risk factors described in
this Quarterly Report on Form 10-Q or in the documents we incorporate by
reference, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this Quarterly Report on
Form 10-Q. You should not rely upon forward-looking statements as
predictions of future events or performance. We cannot assure you that the
events and circumstances reflected in the forward-looking statements will be
achieved or occur. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
Executive
Overview
Legend
Media, formerly known as Noble Quests, Inc., was organized as a Nevada
corporation on March 16, 1998, to sell multi-media marketing services and other
related services to network marketing groups. Specifically, we assisted network
marketers in using marketing tools such as public relations, advertising, direct
mail, collateral development, electronic communications and promotion tools to
increase product and service awareness.
On
January 31, 2008, the Company entered into a Share Exchange Agreement with Well
Chance Investments Limited (“Well Chance”) and Well Chance's sole shareholder
(the "Well Chance Shareholder"), which was accounted for as a reverse
acquisition under the purchase method because Well Chance obtained control of
the Company. Accordingly, the share exchange was recorded as a recapitalization
of Well Chance, with Well Chance being treated as the continuing
entity.
Well
Chance was incorporated under the laws of the British Virgin Islands as an
International Business Company on February 22, 2005. Well Chance was formed to
create a business that principally engaged in the development and management of
a technology platform that deploys advertisements across its various advertising
media.
39
We
expanded our business in February 2008 to focus on building a consumer
advertising network in the PRC focused on the Chinese radio advertising and air
travel based advertising . We conduct our business operations through our 80%
owned subsidiary Legend (Beijing) Consulting Co., Ltd. and our wholly
owned subsidiary Legend (Beijing) Information and Technology Co., Ltd., each of
which are incorporated under the laws of the PRC.
As of
October 12, 2009, we secured the exclusive rights to 39,420 minutes of radio
advertising annually in Tianjin and Xi’an. The Company also has
rights to sell advertising content for an airline magazine which has the
potential to reach 20 million Chinese consumers. Management has
identified several other opportunities to acquire additional advertising rights
and expects continued expansion of both air travel and radio advertising assets
as well as other targeted media platforms in China.
Critical
Accounting Policies and Estimates
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements in this Quarterly Report on Form 10-Q, we
believe that the accounting policies described below are the most critical to
aid you in fully understanding and evaluating this management discussion and
analysis.
Going
Concern
The
accompanying consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the three months ended September 30, 2009,
we generated net loss of $106,026, and have a working capital deficit of
$1,932,444 as of September 30, 2009. The working capital deficit includes
$2,062,933 of related party payables.
As
further described in Note 6 to the consolidated financial statements, On January
31, 2008, in connection with the Share Exchange Agreement discussed under Note 1
to the consolidated financial statements, we entered into a loan agreement with
RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to which we had the
right to borrow $375,733 from RMK as a short-term bridge loan. The due date on
this loan was February 10, 2009. The full $375,733 is currently outstanding and
is classified as a related party note payable. On November 25, 2009, RMK issued
notice to us requiring immediate repayment of the loan. We are working with RMK
to extend the note, but no outcome has been reached. RMK is a fund controlled by
a shareholder who is also the CEO of ARC Investment Partners, LLC, a shareholder
of Legend Media, Inc.
As
further described in Note 1 to the consolidated financial statements, we have
effective control of BJ YSLD, a PRC-based company. The significant portion of
our revenues are derived from BJ YSLD’s exclusive contract with Xinhua Airline
Magazine. The exclusive contract expires March 31, 2010. Mr Ju, our CEO, is
actively negotiating an extension to the contract for at least 3 years. This
extension may require upfront payments in the amount that we are not in a
position to pay. Mr. Ju, as the majority shareholder, is looking for solutions
if an upfront payment is required. The possible solutions include Mr. Ju
organizing a personal loan for the amount needed by which the extension will be
held by a separate company that may or may not be under the control of Mr. Ju,
and licensed back to the Company until such time that we have the resources to
repay the amount borrowed personally by Mr. Ju.
These
factors among others may indicate that we may be unable to continue as a going
concern for a reasonable period of time.
In view
of these matters, realization of profitability is dependent upon the success of
its future operations and our ability to meet its financial requirements and
raise additional capital. Management's plans include negotiation with RMK to
extend the note, renegotiation of the exclusive Xinhua Airline Magazine
contract, further marketing of its advertising network and the expansion of its
advertising sales for both the Chinese radio stations and the airline magazine.
If we are unsuccessful in these efforts and cannot attain sufficient revenue to
permit profitable operations, or if it cannot obtain a source of funding or
investment, we may be required to substantially curtail or terminate our
operations.
Use of
Estimates
The
preparation of financial statements in conformity with United States generally
accepted accounting principles (“USGAAP”) 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
reporting period. Actual results could differ from those estimates. Areas that
require estimates and assumptions include valuation of accounts receivable and
determination of useful lives of property and equipment.
Variable Interest
Entities
In
January 2003, the FASB issued Statement of Financial Accounting Standards Board
Interpretation FSB ASC 810-10-05-8, "Consolidation of VIEs.” ASC 810-10-05-8
states that in general, a VIE is a corporation, partnership, limited liability
corporation, trust or any other legal structure used to conduct activities or
hold assets that either (1) has an insufficient amount of equity to carry out
its principal activities without additional subordinated financial support, (2)
has a group of equity owners that are unable to make significant decisions about
its activities, or (3) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its
operations.
On May
30, 2008, we purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, and on July 21, 2008, we purchased 100% of the
common stock of News Radio Limited. Additionally, on November 28, 2008, we
entered into and closed the Music Radio Acquisition Agreement with Well Chance,
MRL, and the Music Radio Shareholders, pursuant to which we acquired control of
BJ YSLD, another variable interest entity. Due to certain restrictions imposed
upon Chinese advertising companies, direct investment and ownership of media and
advertising companies in the PRC is prohibited. Therefore, we acquired control
of TJ YSLD and we acquired control of Beijing Maihesi Advertising International
Co., Ltd. (through its purchase of News Radio Limited). We structured the MRL
and News Radio Limited transactions to comply with such
restrictions.
40
The
principal regulations governing foreign ownership in the advertising industry in
China include:
·
|
The
Catalogue for Guiding Foreign Investment in Industry (2004);
and
|
·
|
The
Administrative Regulations on Foreign-invested Advertising Enterprises
(2004).
|
These
regulations set the guidelines by which foreign entities can directly invest in
the advertising industry. The regulations require foreign entities that
directly invest in the China advertising industry to have at least two years of
direct operations in the advertising industry outside of China. Further,
since December 10, 2005, 100% ownership in Chinese advertising companies is
allowed, but the foreign company must have at least three years of direct
operations in the advertising industry outside of China.
Because
we have not been involved in advertising outside of China for the required
number of years, our domestic PRC operating subsidiaries, which are considered
foreign-invested, are currently ineligible to apply for the required advertising
services licenses in China. Our PRC operating affiliates hold the
requisite licenses to provide advertising services in China and they are owned
or controlled by PRC citizens designated by us. Our radio advertising
business operates in China though contractual arrangements with consolidated
entities in China. Until the July 20, 2009 termination of the VIE
agreements with TJ YSLD and Beijing Maihesi Advertising International Co., Ltd.,
we and our PRC subsidiaries entered into contractual arrangements with TJ YSLD,
Beijing Maihesi Advertising International Co., Ltd. and BJ YSLD as well as their
respective shareholders under which:
|
·
|
We
have been able to exert significant control over significant decisions
about the activities of TJ YSLD, Beijing Maihesi Advertising
International Co., Ltd. and BJ
YSLD,
|
|
·
|
a
substantial portion of the economic benefits and risks of the operations
of TJ YSLD, Beijing Maihesi Advertising International Co., Ltd. and BJ
YSLD were transferred to us through a revenue assignment agreement,
and
|
|
··
|
The
equity owner of TJ YSLD, Beijing Maihesi Advertising International Co.,
Ltd. and BJ YSLD has not had the obligation to absorb the losses of TJ
YSLD Beijing Maihesi Advertising International Co., Ltd. or BJ
YSLD.
|
As we
have been able to exert significant control over the PRC operating affiliates
and a substantial portion of the economic benefits and risks have been
transferred to us, we have determined that the advertising entities, TJ YSLD,
Beijing Maihesi Advertising International Co., Ltd. and BJ YSLD meet the
definition of a VIE through July 20, 2009, and subsequent to the July 20, 2009
termination of the TJ YSLD and Beijing Maihesi Advertising International Co.,
Ltd. agreements, BJ YSLD meets the definition of a VIE. Further, we are
considered to be the primary beneficiary of the risks and benefits of equity
ownership of TJ YSLD, Beijing Maihesi Advertising International Co., Ltd. and BJ
YSLD and thus have consolidated this entity in our accompanying financial
statements through July 20, 2009 and BJ YSLD as of September 30,
2009.
41
Long-Lived
Assets
We apply
the provisions of FASB ASC 360-10, “Property, Plant, and Equipment”, which
established a “primary asset” approach to determine the cash flow estimation
period for a group of assets and liabilities that represents the unit of
accounting for a long-lived asset to be held and used. Long-lived assets to be
held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to
sell.
In June
2009, we decided and executed a plan to terminate the exclusive sales contract
for the Beijing FM 90.5 channel which was acquired July 21, 2008. As
part of this transaction, we capitalized $1,016,206 as an intangible asset to
recognize the believed value of the contract. For the year ended June
30, 2009, we recognized an impairment of $774,528 based on the net book value of
the asset as of June 30, 2009.
We
recorded an impairment loss on its FM 92.5 advertising rights agreement during
the year ended June 30, 2009 as a result of management’s analysis of future cash
flows indicating that we will not recover the value of the asset.
Based on
its review, we believe that, at September 30, 2009, there were no other
significant impairments of its long-lived assets.
Intangible
Assets
Intangible
assets consist of contract rights purchased in the acquisition of Legend Media
Tianjin Investment Company Limited, the entity controlling the advertising
rights to Tianjin FM 92.5, on May 30, 2008 and the acquisition of News Radio
Limited, the entity controlling the advertising rights to Beijing FM 90.5 on
July 21, 2008. In July 2009, we terminated the Beijing FM 90.5
contract and during the year ended June 30, 2009 recognized an impairment loss
for the entire amount of the intangible asset. Further, we recognized an
impairment loss on the Tianjin FM92.5 contract rights (see Long-Lived Assets
policy above). Intangible assets consist of the following at the
dates indicated:
September 30,
|
June 30,
|
|||||||
2009
|
2009
|
|||||||
FM
92.5 Contract rights
|
$ | 1,422,854 | $ | 1,422,854 | ||||
Exclusivity
agreement
|
7,388,731 | 7,388,731 | ||||||
8,811,585 | 8,811,585 | |||||||
Less
Accumulated amortization
|
(1,819,848 | ) | (1,517,496 |
)
|
||||
Intangibles,
net
|
$ | 6,991,737 | $ | 7,294,089 |
42
The FM
92.5 contract rights primarily arise from an exclusive contract acquired in
connection with the acquisition of Legend Media Tianjin Investment Company
Limited, which is amortized over 31 months, from June 1, 2008, the first day of
operations by the Company, based on the duration of the existing advertising
agreement that expired December 31, 2008 plus renewal of the advertising
agreement. The agreement was renewed January 1, 2009. The contract is
with Tianjin FM 92.5 provides exclusive rights to 54 advertising minutes per day
or 19,710 minutes per year. The channel is Beijing-based and through a relay
facility airs in Tianjin. Legend Media’s contract is with the Beijing channel’s
exclusive agent, which has a national exclusive contract with the channel. The
exclusive agent subcontracted the rights for the Tianjin market to Legend Media.
The value was derived as the net present value of the contract’s earnings before
interest, tax, depreciation and amortization (“EBITDA”) over the contract’s
expected term from May 30, 2008 through December 31, 2010, using a discount rate
of 15%. We determined that a 15% discount rate accurately reflects the rate of
return we expect to earn on the contract, which resulted in a contract value of
$1,709,888. The $1,709,888 was reduced by $201,524 on June 30,
2009 to recognize an impairment loss after forecasting the remaining value of
the agreement through December 31, 2010.
The
remainder of the purchase price of $7,388,731 was allocated to an Operating
Agreement among Legend Media (Beijing) Consulting Co., Ltd., TJ YSLD and Ju
Baochun (the "Music Radio Operating Agreement"), entered into in connection with
the Music Radio Share Purchase Agreement. Mr. Baochun, through a company he owns
and operates, is the 80% owner of MRL, which is the 20% owner of the
post-acquisition variable interest entity ("VIE"), TJ YSLD. Pursuant to the
terms of the Operating Agreement, TJ YSLD and Mr. Baochun are prohibited
from:
·
|
Borrowing
money from any third party or assuming any
debt;
|
·
|
Selling
to any third party or acquiring from any third party any assets,
including, without limitation, any intellectual
rights;
|
·
|
Granting
any security interests for the benefit of any third party through
collateralization of TJ YSLD's
assets;
|
·
|
Assigning
to any third party the Music Radio Operating Agreement;
and
|
·
|
Selling,
transferring and disposing of any license held by TJ
YSLD.
|
The FM
90.5 contract rights that were capitalized in July 2008 and subsequently
impaired on June 30, 2009 primarily relate to an exclusive contract acquired in
connection with the acquisition of News Radio Limited which is being amortized
over the 48-month contract period, beginning on July 1, 2008. The contract was
with the Beijing FM 90.5 radio station and provides 126 advertising minutes per
day or 45,990 minutes per year.
Revenue
Recognition
Our
revenue recognition policies comply with SEC Staff Accounting Bulletin
(“SAB”) 104. We purchase (i) advertising inventory in the form of advertising
airtime, the unit being minutes, from radio stations and (ii) advertising pages
from airline magazines. We then distribute these minutes and pages under various
sales agreements. We recognize advertising revenue over the term of each sales
agreement, provided evidence of an arrangement exists, the fees are fixed or
determinable and collection of the resulting receivable is reasonably assured.
We recognize deferred revenue when cash has been received on a sales agreement,
but the revenue has not yet been earned. Under these policies, no revenue is
recognized unless persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collection is reasonably
assured. Barter advertising revenues and the offsetting expense are
recognized at the fair value of the advertising as determined by similar cash
transactions. Barter revenue for the three months ended September 30,
2009 and 2008 was $845,464 and $395,834, respectively. expense
for the three months ended September 30, 2009 and 2008 was $417,434 and
$148,198, respectively. Under PRC regulations, we must pay
certain taxes on revenues generated. These taxes include:
43
·
|
Business tax: 5% of revenues
generated net of fees paid to advertising agencies and media companies for
services and advertising
inventory;
|
·
|
Construction tax: 3%
of revenues generated net of fees paid to advertising agencies and media
companies for services and advertising
inventory;
|
·
|
Education tax: 7% of
the business
tax;
|
·
|
Urban development
tax: 3% of the business tax;
and
|
·
|
Flood insurance
tax: 1% of the business
tax.
|
We
recognize these taxes in cost of revenue in the period
incurred.
Cost of
Revenue
We
expense advertising costs monthly according to the terms of the underlying
contracts. The contract is expensed evenly over the term of the agreement from
the date advertising is first expected to take place. As the advertising
inventory does not carry forward, all minutes are expensed whether sold or
not.
Foreign Currency
Transactions and Comprehensive Income
US GAAP requires recognized revenue,
expenses, gains and losses are included in net income. Certain statements,
however, require entities to report specific changes in assets and liabilities,
such as gain or loss on foreign currency translation, as a separate component of
stockholders’ equity. Such items, along with net income, are
components of comprehensive income. Translation gains of $46,137 and
$24,646 at September 30,
2009 and June 30, 2009, respectively, are classified as an item of other
comprehensive income in the stockholders’ equity section of the consolidated
balance sheets.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in
FASB ASC 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. FASB
ASC 855-10-05 also requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected. FASB ASC 855-10-05 is effective for interim and annual periods ending
after June 15, 2009, and accordingly, we adopted this pronouncement year ended
June 30, 2009. FASB ASC 855-10-05 requires that public entities evaluate
subsequent events through the date that the financial statements are issued.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB
ASC 860, which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. FASB ASC 860 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. FASB ASC 860 is effective for fiscal years
beginning after November 15, 2009. The adoption of FASB ASC 860 is not expected
to have an impact on our financial condition, results of operations or cash
flows.
44
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”), codified as FASB ASC 810-10, which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FASB ASC
810-10 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. FASB ASC 810-10 requires
an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. FASB ASC 810-10 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. FASB ASC 810-10 is effective
for fiscal years beginning after November 15, 2009. Management is currently
assessing the impact that the adoption of FASB ASC 810-10 will have on our
financial condition, results of operations or cash flows.
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles,
which establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC 105, the Company has updated references to GAAP in its
financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC 105 did not impact our financial position or results of
operations.
Results
of Operations
The
exchange of shares with the Well Chance Shareholder in February 2008 was
accounted for as a reverse acquisition of the Company under the purchase method
of accounting because Well Chance obtained control of the Company. Accordingly,
the share exchange was recorded as a recapitalization of Well Chance, with Well
Chance being treated as the continuing entity at the
time. Subsequently, the Music Radio Acquisition Agreement, leading to
the control of BJ YSLD in November 2008, was accounted for similarly to a
pooling of interest as there was common control. Therefore, the
Company's historical financial information includes that of BJ
YSLD.
45
Comparison of Three Months Ended
September 30, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
|||||||||||||
(in dollars, except percentages)
|
||||||||||||||||
REVENUE
|
$ | 2,160,432 | 100.0 | % | $ | 2,324,491 | 100.0 | % | ||||||||
COST
OF REVENUE
|
994,927 | 46.1 | % | 1,162,682 | 50.0 | % | ||||||||||
GROSS
PROFIT
|
1,165,505 | 53.9 | % | 1,161,809 | 50.0 | % | ||||||||||
OPERATING
EXPENSES
|
2,065,822 | 95.6 | % | 1,848,607 | 79.5 | % | ||||||||||
LOSS
FROM OPERATIONS
|
(900,317 | ) | (41.7 | )% | (686,798 | ) | (29.5 | )% | ||||||||
OTHER
INCOME (EXPENSE), NET
|
811,167 | 37.5 | % | (278,848 | ) | (12.0 | )% | |||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(89,150 | ) | (4.1 | )% | (965,646 | ) | (41.5 | )% | ||||||||
PROVISION
FOR INCOME TAXES
|
16,876 | 0.8 | % | 177,445 | 7.6 | % | ||||||||||
NET
LOSS
|
(106,026 | ) | (4.9 | )% | (1,143,091 | ) | (49.2 | )% | ||||||||
NET
LOSS ATTRIBUTABLE TO LEGEND MEDIA, INC. COMMON
SHAREHOLDERS
|
(106,026 | ) | (4.9 | )% | (1,155,823 | ) | (49.7 | )% | ||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation gain
|
46,137 | 2.1 | % | 33,403 | 1.4 | % | ||||||||||
COMPREHENSIVE
LOSS
|
$ | (59,889 | ) | (2.8 | )% | $ | (1,122,420 | ) | (48.3 | )% |
Revenues. Our
revenue included revenues from sales radio advertising and airline magazine
advertising. During the three months ended September 30, 2009, we had
revenues of $2,160,432 compared to revenues of $2,324,491 for the three months
ended September 30, 2008, a decrease of $164,059. The decrease is
attributable to less demand for our advertising assets than that of the previous
year. Management believes customers will increase advertising in the
coming quarters as overall market conditions continue to improve.
Cost of revenue. Cost of sales decreased
to $994,927 for the three months ended September 30, 2009, compared to
$1,162,682 for the three months ended September 30, 2008, a decrease of $167,755
or 14.4%. The majority of the decrease is a result of the termination
of underperforming advertising assets. Management has taken several
steps to reduce costs associated with poor performing advertising
assets. These efforts are expected to help the Company reach
profitability in the coming quarters. The Company’s costs of revenue
are largely fixed and, thus, any efforts made to cut costs that do not
materially impact revenue results have significant impact on gross profit and
profitability.
46
Gross
Profit. Gross profit was $1,165,505 for the three months ended
September 30, 2009 compared to $1,161,809 for the three months ended September
30, 2008, an increase of $3,696 or 0.3%. The overall gross profit
increase for the three months ended September 30, 2009 is attributable to the
cost of revenue reduction efforts made by management. The elimination
of underperforming assets have had a significant beneficial impact on gross
profit.
The gross
margin for the three months ended September 30, 2009 and 2008 are 53.9% and
50.0%, respectively, respectively. As with the overall gross profit,
the gross margin decrease was the product of an improved cost
structure.
Management
expects margins to continue to improve as sales increase.
Operating
Expenses. Operating expenses increased to $2,065,822
for the three months ended September 30, 2009, compared to $1,848,607 for the
three months ended September 30, 2008. The increase is the result of
a $320,895 increase in selling, general and administrative expenses offset by a
$103,680 decrease in amortization expenses.
General
and administrative expenses increased by $53,677. Management expects
selling, general and administrative expenses to grow as the business expands;
however, as a percentage of revenue, selling, general and administrative is
expected to decrease as some of the costs will not need to increase to handle
future growth, except bad debt provision increased slightly according to the
aging growth of the Accounts Receivable balances.
Depreciation
and amortization decreased to $306,962 for the three months ended September 30,
2009, as compared to $410,462 for the three months ended September 30, 2008, a
decrease of $103,680. The majority of the difference is related to a
reduced amount of intangible assets to amortize as compared to the previous as
the Company took an impairment charge in the last quarter ended June 30,
2009.
Loss from Operations. As a
result of the above, loss from operations totaled $900,317 for the three months
ended September 30, 2009 as compared to loss from operations of $686,798 for the
three months ended September 30, 2008, a difference of $213,519. As a percentage
of revenues, loss from operations was (41.7)% for the three months ended
September 30, 2009 compared to (29.5)% for the three months ended September 30,
2008.
Non-operating Income and
Expense. Non-operating income for the three months ended September 30,
2009 was $811,167 as compared to non-operating expense of $278,848 for the three
months ended September 30, 2008. The difference, $1,090,016, can be
attributed to nonrecurring gains resulting from the restructuring of the
Company’s operating units and the resulting termination of certain VIE
agreements.
Income (Loss) before Provision for
Income Taxes. Loss before provision for income taxes was $89,150 for the
three months ended September 30, 2009 as compared to a loss of $965,646 for the
three months ended September 30, 2008, an improvement of $876,496.
Net Loss attributable to Legend
Media, Inc. common shareholders. As a result of the
foregoing, net income attributable to Legend Media, Inc. common shareholders
decreased to $106,026 for the three months ended September 30, 2009 compared to
a net loss of $1,155,823 for the three months ended September 30, 2008, an
improvement of $1,049,797. The respective net margins are (5%) and
(49.7) % for the three months ended September 30, 2009 and 2008, respectively.
The income for the three months ended June 30, 2009 was mainly due to the
increase of fixed advertising costs related to the radio advertising product
line, less than expected radio advertising sales, the overall increase in
selling, general and administrative expenses, goodwill impairment and the gains
on the disposal of contracts. Management believes the Company's
operations will generate net income at an increasing rate due to fixed nature of
many of the expenses and expectations of continued revenue
growth.
47
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth a summary of our cash flows for the three months
periods indicated below:
September
30,
|
September
30,
|
|||||||
(audited)
|
||||||||
Net
cash used in operating activities
|
$ | (165,295 | ) | $ | (432,399 | ) | ||
Net
cash used in investing activities
|
(176,725 | ) | (805,727 | ) | ||||
Net
cash provided by financing activities
|
300,000 | 1,149,366 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
5,430 | 9,280 | ||||||
Net
increase (decrease) in cash and cash
equivalents
|
(36,590 | ) | (79,480 | ) | ||||
Cash
and cash equivalents at the beginning of year
|
169,343 | 3,372,499 | ||||||
Cash
and cash equivalents at the end of year
|
132,753 | 3,293,019 |
Operating
Activities
Net cash
used in operating activities was $165,295 in the three months ended September
30, 2009 compared with net cash used in operating activities of $432,399 in the
period ending September 30, 2008. Our revenues have not reached a
level sufficient to support our operations.
Cash
flows from Investing and Financing Activities
Cash used
in investing activities in the three months ended September 30, 2009 was
$176,725 compared with cash used of $805,727 for the period ended September 30,
2008. Cash provided by financing activities was $300,000 for the
three months ended September 30, 2009. The cash provided by financing
activities was obtained by the contribution of capital by shareholders to the
operating entity in China. Although the business continues to develop
and generate an increasing amount of cash, the Company may have to raise
additional funds to finance any continued losses and the existing
commitments. The Company has outstanding notes payables of $431,733
which are due; $375,733 of which amount is a loan from a related party, RMK
Emerging Growth Fund LP. Further, the Company will have to raise additional
funds to finance further expansion in China.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do 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. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
48
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
required.
Item
4T. Controls and Procedures
(a) Evaluation of
Disclosure Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer (collectively, the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Exchange Act) for us. Based on their evaluation of our disclosure controls
and procedures as of the end of the period covered by this quarterly report on
Form 10-Q, the Certifying Officers have concluded that (a) our disclosure
controls and procedures are effective for ensuring that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms; and (b) our disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal
Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2009 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
49
PART
II: OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
We are
not a party and our property is not subject to any material pending legal
proceedings nor are we aware of any threatened or contemplated proceeding by any
governmental authority against the Company as of the date of this Quarterly
Report on Form 10-Q.
Item 1A.
|
Risk
Factors
|
There
have been no material changes to the risk factors previously disclosed in the
Company's Annual Report on Form 10-K for the year ended June 30,
2009. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item
2.
|
Unregistered
Sales of Equity Securities 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
|
Exhibits:
31.1
|
Section
302 Certification of Principal Executive Officer.*
|
|
31.2
|
Section
302 Certification of Principal Financial Officer.*
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.*
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.*
|
*
Filed herewith
50
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LEGEND
MEDIA, INC.
Date: December
22, 2009
|
By:
|
/s/ Ju BaoChun
|
Ju
BaoChun
|
||
Chief Executive Officer
|
||
Date: December
22, 2009
|
By:
|
/s/ Jeffrey Dash
|
Jeffrey
Dash
|
||
Chief
Financial
Officer
|
51