Unassociated Document
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 March 31, 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)
|
|
|
9663
Santa Monica Blvd. #952, Beverly Hills, CA 90210
(Address
of Principal Executive Offices )
(310) 933-6050
(Registrant’s
Telephone Number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|
Yes
x
No¨
|
|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
Yes
¨
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 ¨ Accelerated
filer ¨
Non-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
|
As of
March 31, 2009, the Registrant had 111,013,355 shares of common stock
outstanding.
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
3
|
|
|
Item
1. Financial Statements (Unaudited)
|
3
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
3
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(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
|
38
|
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
62
|
|
|
Item
4T. Controls
and Procedures
|
62
|
|
|
PART
II: OTHER INFORMATION
|
63
|
|
|
Item
1. Legal Proceedings
|
63
|
|
|
Item
1A. Risk Factors
|
63
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
63
|
|
|
Item
3. Defaults Upon Senior Securities
|
63
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
63
|
|
|
Item
5. Other Information
|
63
|
|
|
Item
6. Exhibits
|
63
|
|
|
SIGNATURES
|
64
|
PART
I: FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
MARCH 31, 2009 and JUNE 30, 2008
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$ |
199,606 |
|
|
$ |
3,372,499 |
|
Accounts
receivable
|
|
|
1,767,635 |
|
|
|
1,194,005 |
|
Vendor
deposits
|
|
|
112,048 |
|
|
|
17,464 |
|
Prepaid
expenses
|
|
|
459,653 |
|
|
|
313,735 |
|
Deferred
costs
|
|
|
1,600,457 |
|
|
|
14,538 |
|
Other
receivables
|
|
|
160,159 |
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,299,558 |
|
|
|
4,913,274 |
|
|
|
|
|
|
|
|
|
|
Long
term deposits, contract guarantees and transaction
deposits
|
|
|
404,064 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
121,908 |
|
|
|
26,430 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
8,770,386 |
|
|
|
9,045,310 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
13,595,916 |
|
|
$ |
14,485,014 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,344,489 |
|
|
$ |
517,980 |
|
Accrued
liabilities
|
|
|
961,253 |
|
|
|
605,468 |
|
Accrued
interest
|
|
|
424,124 |
|
|
|
282,686 |
|
Unearned
revenue
|
|
|
716,941 |
|
|
|
86,659 |
|
Short
term notes payable, net of discount of $0 and $100,364,
respectively
|
|
|
56,000 |
|
|
|
315,636 |
|
Related
party note payable, net of discount of $0 and $68,438,
respectively
|
|
|
375,733 |
|
|
|
307,294 |
|
Related
party payables
|
|
|
2,165,734 |
|
|
|
2,591,943 |
|
Other
payables
|
|
|
429,151 |
|
|
|
82,149 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,473,425 |
|
|
|
4,789,815 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
- |
|
|
|
6,215 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock - 20,000,000 shares authorized, par value
$0.001, 1,937,500 and 1,250,000 shares issued and outstanding at March 31,
2009 and June 30, 2008, respectively
|
|
|
1,938 |
|
|
|
1,250 |
|
Series
B convertible preferred stock - 6,000,000 shares authorized, par value
$0.001 0 and 5,033,680 shares issued and outstanding at March
31, 2009 and June 30, 2008, respectively
|
|
|
- |
|
|
|
5,034 |
|
Common
stock - 127,000,000 shares authorized, par value $0.001, 111,013,355 and
10,235,328 shares issued and outstanding at March 31, 2009 and June 30,
2008, respectively
|
|
|
111,013 |
|
|
|
10,235 |
|
Additional
paid-in capital
|
|
|
68,774,089 |
|
|
|
11,180,217 |
|
Accumulated
deficit, deemed dividends related to entities under common
control
|
|
|
(55,948,969 |
) |
|
|
- |
|
Accumulated
deficit, from operations
|
|
|
(5,842,065 |
) |
|
|
(1,605,115 |
) |
Total
Accumulated deficit
|
|
|
(61,791,034 |
) |
|
|
(1,605,115 |
) |
Other
comprehensive income
|
|
|
26,485 |
|
|
|
97,363 |
|
Total
stockholders' equity
|
|
|
7,122,491 |
|
|
|
9,688,984 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
13,595,916 |
|
|
$ |
14,485,014 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
FOR THREE
AND NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
2,630,624 |
|
|
$ |
1,305,560 |
|
|
$ |
7,614,205 |
|
|
$ |
3,263,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,447,254 |
|
|
|
678,730 |
|
|
|
4,133,588 |
|
|
|
2,122,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,183,370 |
|
|
|
626,830 |
|
|
|
3,480,617 |
|
|
|
1,141,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
928,339 |
|
|
|
247,955 |
|
|
|
2,075,205 |
|
|
|
700,514 |
|
General
and administrative expenses
|
|
|
817,599 |
|
|
|
623,935 |
|
|
|
2,495,129 |
|
|
|
756,912 |
|
Total
operating expenses
|
|
|
1,745,938 |
|
|
|
871,890 |
|
|
|
4,570,334 |
|
|
|
1,457,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(562,568 |
) |
|
|
(245,060 |
) |
|
|
(1,089,717 |
) |
|
|
(316,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
(425,286 |
) |
|
|
(1,781 |
) |
|
|
(1,239,834 |
) |
|
|
(3,425 |
) |
Interest
income
|
|
|
16 |
|
|
|
414 |
|
|
|
787 |
|
|
|
792 |
|
Interest
expense
|
|
|
(11,044 |
) |
|
|
(2,710 |
) |
|
|
(212,199 |
) |
|
|
(2,710 |
) |
Related
party interest expense
|
|
|
(83,990 |
) |
|
|
(60,448 |
) |
|
|
(267,724 |
) |
|
|
(60,448 |
) |
Loss
on disposal of fixed assets
|
|
|
(12,803 |
) |
|
|
- |
|
|
|
(16,161 |
) |
|
|
- |
|
Non-controlling
interest in loss from variable interest entity
|
|
|
(107,936 |
) |
|
|
- |
|
|
|
6,087 |
|
|
|
- |
|
Foreign
exchange gain (loss)
|
|
|
(3,073 |
) |
|
|
- |
|
|
|
4,636 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
(27,654 |
) |
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating expense
|
|
|
(644,116 |
) |
|
|
(64,525 |
) |
|
|
(1,752,062 |
) |
|
|
(65,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax
|
|
|
(1,206,684 |
) |
|
|
(309,585 |
) |
|
|
(2,841,779 |
) |
|
|
(382,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
208,890 |
|
|
|
36,126 |
|
|
|
502,661 |
|
|
|
36,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(1,415,574 |
) |
|
|
(345,711 |
) |
|
|
(3,344,440 |
) |
|
|
(418,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(70,127 |
) |
|
|
10,442 |
|
|
|
(70,877 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss
|
|
$ |
(1,485,701 |
) |
|
$ |
(335,269 |
) |
|
$ |
(3,415,317 |
) |
|
$ |
(418,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
111,013,355 |
|
|
|
5,892,308 |
|
|
|
47,074,322 |
|
|
|
2,752,727 |
|
Diluted
|
|
|
111,013,355 |
|
|
|
5,892,308 |
|
|
|
47,074,322 |
|
|
|
2,752,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.013 |
) |
|
$ |
(0.059 |
) |
|
$ |
(0.071 |
) |
|
$ |
(0.152 |
) |
Diluted
|
|
$ |
(0.013 |
) |
|
$ |
(0.059 |
) |
|
$ |
(0.071 |
) |
|
$ |
(0.152 |
) |
The
accompanying notes are an integral part of these consolidated financial
statements.
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,344,440 |
) |
|
$ |
(418,348 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,239,834 |
|
|
|
3,760 |
|
Amortization
of debt discounts
|
|
|
168,803 |
|
|
|
32,413 |
|
Fair
value of stock options under SFAS 123R
|
|
|
253,087 |
|
|
|
26,138 |
|
Common
stock issued for services
|
|
|
- |
|
|
|
4,280 |
|
Barter
revenues
|
|
|
(1,955,962 |
) |
|
|
(47,613 |
) |
Barter
expenses
|
|
|
954,796 |
|
|
|
47,613 |
|
Loss
on disposal of assets
|
|
|
16,238 |
|
|
|
- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,628,330 |
) |
|
|
(310,358 |
) |
Vendor
deposits
|
|
|
(94,347 |
) |
|
|
- |
|
Prepaid
expenses
|
|
|
(21,574 |
) |
|
|
19,118 |
|
Other
receivables
|
|
|
(157,672 |
) |
|
|
(20,201 |
) |
Accounts
payable
|
|
|
816,454 |
|
|
|
272,919 |
|
Accrued
liabilities
|
|
|
664,205 |
|
|
|
78,679 |
|
Other
payables
|
|
|
448,291 |
|
|
|
59,206 |
|
Related
party payables
|
|
|
(244,515 |
) |
|
|
(85,320 |
) |
Unearned
revenue
|
|
|
83,749 |
|
|
|
139,601 |
|
Accrued
interest
|
|
|
141,438 |
|
|
|
30,745 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,659,945 |
) |
|
|
(167,368 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(128,335 |
) |
|
|
(244 |
) |
Payment
on acquisition of Music Radio Limited
|
|
|
(740,010 |
) |
|
|
- |
|
Cash
paid for acquisition of News Radio Limited
|
|
|
(749,990 |
) |
|
|
- |
|
Cash
acquired in acquisition of News Radio Limited
|
|
|
286 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,618,049 |
) |
|
|
(244 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
- |
|
|
|
794,733 |
|
Repayment
of notes payable
|
|
|
(360,000 |
) |
|
|
(69,000 |
) |
Proceeds
from sale of common stock
|
|
|
- |
|
|
|
87,740 |
|
Proceeds
from sale of convertible preferred stock
|
|
|
1,650,000 |
|
|
|
- |
|
Contributed
capital from assumption of obligations
|
|
|
60,658 |
|
|
|
31,388 |
|
Dividend
to shareholders of HTLG
|
|
|
(250,170 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,100,488 |
|
|
|
844,861 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash eqiuvalents
|
|
|
4,613 |
|
|
|
23,344 |
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH & CASH EQUIVALENTS
|
|
|
(3,172,893 |
) |
|
|
700,593 |
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
3,372,499 |
|
|
|
164,100 |
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
|
$ |
199,606 |
|
|
$ |
864,693 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
170,000 |
|
|
$ |
- |
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance
of preferred shares for acquisition of Beijing Tianjing Yinse Lingdong
through VIE agreements
|
|
$ |
51,561,046 |
|
|
$ |
5,034 |
|
Issuance
of warrants for acquisition of Beijing Tianjing Yinse Lingdong through VIE
agreements
|
|
$ |
4,387,923 |
|
|
$ |
- |
|
Issuance
of common shares for purchase of News Radio Limited
|
|
$ |
293,800 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
LEGEND
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Organization and Basis of
Presentation
The
unaudited consolidated financial statements were prepared by Legend Media, Inc.
(the “Company” or "Legend Media") pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) have been omitted pursuant to such
rules and regulations. These consolidated unaudited financial statements should
be read in conjunction with the audited consolidated financial statements and
footnotes included in the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008. The results for the three and nine months ended March 31,
2009 are not necessarily indicative of the results to be expected for the full
year ending June 30, 2009.
Organization and Line of
Business
The
Company, formerly known as Noble Quests, Inc., was organized as a Nevada
corporation on March 16, 1998, for the purpose of selling multi-media marketing
services 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 (the
"Share Exchange Agreement") with Ms. Shannon McCallum-Law, the majority
stockholder, sole director and Chief Executive Officer of the Company, Well
Chance Investments Limited (“Well Chance”) and Well Chance's sole shareholder
(the "Well Chance Shareholder"). Pursuant to the terms of the Share Exchange
Agreement, the Company agreed to acquire all of the issued and outstanding
shares of Well Chance's common stock in exchange for the Company’s issuance of
1,200,000 shares of its common stock to the Well Chance Shareholder on the basis
of 1,200 shares of its common stock for every one share of Well Chance common
stock held.
Concurrently
with the closing of the transactions under the Share Exchange Agreement and as a
condition thereof, the Company entered into an agreement with Ms. McCallum-Law,
pursuant to which she returned to the Company for cancellation 2,419,885 of the
5,119,885 shares of the Company’s common stock owned by her. Ms. McCallum-Law
was not compensated in any way for the cancellation of the shares. In addition,
the Company issued (i) 4,100,000 shares of its common stock to certain
affiliates of Well Chance for $87,740 and (ii) 200,000 shares in exchange for
consulting services performed in connection with this transaction. Upon
completion of the foregoing transactions, the Company had an aggregate of
8,200,000 shares of common stock issued and outstanding.
The
exchange of shares with the Well Chance Shareholder was accounted for as a
reverse acquisition under the purchase method of accounting since Well Chance
obtained control of Legend Media. Concurrent with the closing of the
transaction, Noble Quests, Inc. changed its name to Legend Media, Inc.
Accordingly, the share exchange was recorded as a recapitalization of Well
Chance, 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
mediums.
On May
30, 2008, the Company completed a Share Purchase Agreement (the “Music Radio
Share Purchase Agreement") with Music Radio Limited, a British Virgin Islands
company ("Music Radio Limited”) and all of the shareholders of Music Radio
Limited pursuant to which the Company purchased 80% of the common stock of
Legend Media Tianjin Investment Company Limited, a British Virgin Islands
company and a wholly owned subsidiary of Music Radio Limited. On that date, the
Company gained effective control of the exclusive sales contract through
December 31, 2010 for the Tianjin, China based radio channel. The exclusive
sales contract provides the Company with 19,710 minutes per year of advertising
space. The original contract expired December 31, 2008 and was renewed until
December 31, 2009. The channel reaches over 11.5 million people in the Tianjin
area. Because the region is one of the most economically developed and urbanized
in the People’s Republic of China (“PRC”), the Company believes that the radio
station is well situated to take advantage of the expanding middle and upper
class in the PRC. On November 28, 2008 the Music Radio Share Purchase
Agreement was amended by which the escrow provisions were removed and all
escrowed consideration was released. Further, the obligation for the
Company to escrow additional cash was eliminated by which cash was made
available for ongoing operations and expansion.
On July
21, 2008, the Company closed a transaction pursuant to which Well Chance,
purchased 100% of the common stock of News Radio Limited, a British Virgin
Islands company ("News Radio Limited"). The transaction occurred pursuant to the
terms of a Share Purchase Agreement (the “News Radio Share Purchase Agreement”)
that 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
gives 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 The contract expires June 30, 2010 and has an option for a two
year extension. Beijing is a metropolis in northern PRC with a population of
over 17 million. As with Tianjin, it is one of four municipalities in the PRC
with status as a province in the PRC's administrative structure. Beijing is the
PRC's second largest city, after Shanghai, and is recognized as the political,
educational, and cultural center of the PRC. Beijing has a rapidly developing
economy with an expanding affluent population. In 2008, retail sales in Beijing
exceeded $67 billion.
The
exclusive contract for Beijing FM 90.5 is with a subsidiary of China Radio
International, the owner of the radio channel. As part of the exclusive sales
agreement, Legend Media, through its operating affiliate, is provided with the
first right of refusal to be the exclusive agent for Beijing FM 90.5 as it
expands its content to frequencies outside of Beijing.
On August 4, 2008,
Beijing Merci International
Advertising Co., Ltd., a company organized in the PRC and an affiliate of the
Company, 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 on August 31, 2008 and expires on September 30, 2010. In
February 2009, the Company decided to terminate the Beijing Merci Agreement. The decision
to do so was based on a) a determination that the operations by the radio
channel in Shenzhen could be considered invalid by the Chinese authorities and b)
management's decision to make a strategic shift towards larger, more established
opportunities. The Company notified Beijing Guo Guangrong Advertising Co., Ltd.
of its decision to terminate the agreement based on breach of contract and made
an immediate request for the return of all deposits and payments. Subsequent to attempts
Beijing Merci International Advertising Co., Ltd and Beijing Guo Guangrong
Advertising Co., Ltd. to settle the dispute, Beijing Merci
International Advertising Co., Ltd
began the process of entering into arbitration. We are requesting immediate
termination of all contractual obligations under the Beijing Merci Agreement and repayment
of approximately $500,000 paid to Beijing Guo Guangrong Advertising Co., Ltd.
under the Beijing Merci Agreement. Because the outcome of the arbitration is
uncertain, for the period ending March 31, 2009, the Company has accrued all
expenses under the Beijing Merci Agreement.
On
October 28, 2008, Tianjin Yinse Lingdong Advertising Co., Ltd., a company
organized in the PRC and an affiliate of Legend Media, entered into an Exclusive
Advertising Rights Agreement Beijing Attis Advertising Co., Ltd., pursuant to
which Tianjin Yinse Lingdong Advertising Co., Ltd. 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.
As of
March 31, 2009, the Company had a combined annual inventory of 85,410 minutes of
radio advertising with a combined potential audience of over 30 million people.
The Company currently maintains radio operation offices in Beijing, Tianjin and
Xi’an.
On
November 28, 2008, the Company entered into and closed an Acquisition Agreement
(the "Music Radio Acquisition Agreement") with Well Chance, Music Radio Limited,
and Music Radio Limited's two stockholders, Ju Baochun and Xue Wei (the "Music
Radio Shareholders"). Pursuant to the Music Radio Acquisition Agreement, the
Company acquired control over Beijing Yinse Lingdong Advertising Co., Ltd.
(“YSLD”), a PRC corporation. Further, pursuant to the Music Radio
Acquisition Agreement, the Music Radio Shareholders contributed the airline
magazine advertising business of Beijing Hongtenglianguang Advertising Co., Ltd.
("HTLG"), a PRC corporation controlled 100% by the Music Radio Shareholders, to
YSLD. For the purpose of this combination between YSLD and HTLG and
pursuant to the Music Radio Acquisition Agreement, the accounts receivables and
accounts payable of HTLG related to the airline advertising business that
occurred on or prior to November 30, 2008 remained with HTLG. As a
result of the transactions described above, the historical financial statements
presented are a combination of YSLD and the airline magazine advertising
business of HTLG. The transaction is between parties under common
control and has been accounted for in a manner similar to a pooling of
interests. The closing gives Legend Media effective control of YSLD,
a PRC-based company, that has the exclusive sales contract for Xinhua Airline
Magazine, the airline magazine for Hainan Airline Group. The airline
group has domestic and international destinations covering most major cities in
China and 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.
As a
result of the transaction with YSLD and the share exchange transactions with
Well Chance described above, the historical financial statements presented are
those of Well Chance and YSLD. Accordingly, the consolidated
financial statements and notes presented for the Company have been restated to
reflect the combined historical result of operations, financial position and
cash flows of Well Chance and YSLD throughout the periods
presented.
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 have been 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 and nine months ended March 31,
2009, the Company has incurred a net loss of $1,415,574 and $3,344,440,
respectively and has a working capital deficit of $2,173,867 as of March 31,
2009. The working capital deficit includes $2,541,467 of related
party payables. These factors among others may indicate that the
Company may be unable to continue as a going concern for a reasonable period of
time.
In view
of these matters, realization of profitability is dependent upon the success of
its future operations and the Company's ability to meet its financial
requirements and raise additional capital. Management's plans include further
marketing of its advertising network and the expansion of its advertising sales
for both the Chinese radio stations and the airline magazine. If the
Company is unsuccessful in these efforts and cannot attain sufficient revenue to
permit profitable operations, or if it cannot obtain a source of funding or
investment, it may be required to substantially curtail or terminate its
operations.
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
conformity with US GAAP. The Company’s functional currency is the Chinese Yuan
Renminbi ("RMB"), however, the accompanying consolidated financial statements
have been translated and presented in United States Dollars ($).
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 and
nine months ended March 31, 2009 presentation.
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of Legend
Media and its subsidiaries as follows:
Subsidiary
|
|
Place
Incorporated
|
|
% Owned
|
|
Well
Chance
|
|
United States
|
|
|
100
|
|
Legend
Media Investment Company Limited
|
|
PRC
|
|
|
80
|
|
Three
subsidiaries of Legend Media Investment Company Limited
|
|
|
|
|
|
|
Legend
Media Tianjin HK Limited
|
|
PRC
|
|
|
80
|
|
Legend
Media (Beijing) Consulting Company Limited
|
|
PRC
|
|
|
80
|
|
Tianjin
Yinse Lingdong Advertising Co., Ltd
|
|
PRC
|
|
|
80 |
* |
News
Radio Limited
|
|
PRC
|
|
|
100
|
|
Four
subsidiaries of News Radio Limited
|
|
|
|
|
|
|
CRI
News Radio Limited
|
|
PRC
|
|
|
100
|
|
Legend
Media (Beijing) Information and Technology Co., Ltd.
|
|
PRC
|
|
|
100 |
|
Beijing
Mahiesi Advertising International Co., Ltd.
|
|
PRC
|
|
|
100
|
* |
Beijing
Yinse Lingdong Advertising Co., Ltd.
|
|
PRC
|
|
|
100
|
* |
*Variable
Interest Entities: 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.
Restricted
Cash
Restricted
cash represents cash required to be deposited in a separate bank account or with
a service provider for the purpose of registering capital for a new or existing
office in China. The deposits are subject to withdrawal restrictions
pending completion of the registration process. The deposit cannot be
drawn or transferred by the Company until the restriction period has expired.
Restricted cash was $0 and $0 as of March 31, 2009 and June 30, 2008,
respectively.
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 this time, the Company
has no history of bad debt and has made no reserve for bad
debt. Accounts receivable in the balance sheet are stated net of such
allowance, if necessary.
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 March 31,
2009 and June 30, 2008 were $1,325,926 (unaudited) and $195,680,
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. See
Note 3.
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:
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Computer
Equipment
|
|
$ |
82,940 |
|
|
$ |
5,278 |
|
Office
equipment and furniture
|
|
|
58,217 |
|
|
|
17,379 |
|
Leasehold
improvements
|
|
|
8,464 |
|
|
|
8,573 |
|
|
|
$ |
149,621 |
|
|
$ |
31,230 |
|
Less: Accumulated
depreciation
|
|
|
(27,713 |
) |
|
|
(4,800 |
) |
|
|
$ |
121,908 |
|
|
$ |
26,430 |
|
Depreciation
expense for the three months ended March 31, 2009 and 2008 was $10,552 and
$1,781 respectively, and depreciation expense for the nine months ended March
31, 2009 and 2008 was $23,776 and $3,425, respectively.
Long-Lived
Assets
The
Company applies the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS 144”), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of,” and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of March 31, 2009
and June 30, 2008, there were no significant impairments of its long-lived
assets.
Intangible
Assets
Intangible
assets consist of contract rights purchased in the May 30, 2008 acquisition of
Legend Media Tianjin Investment Company Limited, the entity controlling the
advertising rights to Tianjin FM 92.5, and the July 21, 2008 acquisition of News
Radio Limited, the entity controlling the advertising rights to Beijing FM
90.5.
Intangible
assets consist of the following at the dates indicated:
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
FM
92.5 Contract rights
|
|
$ |
1,709,888 |
|
|
$ |
2,174,428 |
|
Exclusivity
agreement
|
|
|
7,388,731 |
|
|
|
6,999,353 |
|
FM
90.5 Contract rights
|
|
|
1,016,206 |
|
|
|
- |
|
|
|
|
10,114,825 |
|
|
|
9,173,781 |
|
Less
Accumulated amortization
|
|
|
(1,344,439 |
) |
|
|
(128,471 |
) |
Intangibles,
net
|
|
$ |
8,770,386 |
|
|
$ |
9,045,310 |
|
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 being amortized over the 31 month contract period, 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 as of January 1,
2009. The contract is with Tianjin FM 92.5 and 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 has 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 change in value of
the FM 92.5 contract and the exclusivity agreement from June 30, 2008
to March 31, 2009 is a result of foreign currency translation at each
balance sheet date and a reallocation of the value between these two intangible
assets subsequent to June 30, 2008. At the May 30, 2008 purchase
date, the Company initially applied a 10% discount rate to calculate the net
present value of the FM 92.5 contract’s EBITDA. However, the Company
subsequently determined that a 15% discount rate more 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 remaining intangible asset value of $7,338,731
attributable to the May 30, 2008 acquisition was then reallocated to the
exclusivity agreement. Amortization expense on this
contract for the three and nine months ended March 31, 2009 was $165,473 and
$509,890, respectively.
The
remainder of the purchase price of $7,388,731 was allocated to an Operating
Agreement among Legend Media (Beijing) Consulting Co., Ltd., Tianjin Yinse
Lingdong Advertising Co., Ltd. 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 Music Radio Limited, which is
the 20% owner of the post-acquisition variable interest entity ("VIE"), Tianjin
Yinse Lingdong Advertising Co., Ltd. Pursuant to the terms of the Operating
Agreement, Tianjin Yinse Lingdong Advertising Co., Ltd. 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 Tianjin Yinse Lingdong Advertising Co., Ltd.'s
assets;
|
|
|
|
|
·
|
Assigning
to any third party the Music Radio Operating Agreement;
and
|
|
·
|
Selling,
transferring and disposing of any license held by Tianjin Yinse Lingdong
Advertising Co., Ltd.
|
Amortization
expense on this contract for the three and nine months ended March 31, 2008
was $184,718 and $528,556, respectively.
The FM
90.5 contract rights 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 is
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
the three and nine months ending March 31, 2009 of $64,543 and $177,612,
respectively, has been included in amortization expense in the accompanying
consolidated statements of operations and other comprehensive income
(loss). See Note 12.
Amortization
expense for the Company’s intangible assets for the three months ended March 31,
2009 and 2008 was $416,247 and $0, respectively, and amortization expense
for the Company’s intangible assets for the nine months ended March 31, 2009 and
2008 was $1,216,058 and $0, 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. 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 March 31, 2009 and 2008 was $729,557 and $0
respectively, and barter revenue for the nine months ended March 31,
2009 and 2008 was $1,955,962 and $47,613, respectively. Barter expense for the
three months ended March 31, 2009 and 2008 was $407,119 and $0, respectively,
and barter expense for the nine months ended March 31, 2009 and 2008 was
$954,796 and $47,613, respectively. 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 calculated business
tax;
|
·
|
Urban
development tax: 3% of the calculated business tax;
and
|
·
|
Flood
insurance tax: 1% of the calculated business
tax.
|
The
Company recognizes these taxes in cost of revenue in the period
incurred.
Cost of
Revenue
The
Company expenses the cost of advertising 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 or not sold. Cost of revenue for the three months
ended March 31, 2009 and 2008 was $1,447,254 and $678,730, respectively;
advertising costs for the nine months ended March 31, 2009 and 2008 was
$4,133,588 and $2,122,421, respectively.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, and an Amendment of Financial Accounting Standards
Board ("FASB") Statement No. 123.” 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 March 31, 2009, there were outstanding options to
purchase 641,820 shares of common stock and warrants to purchase 11,180,294
shares of common stock.
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of FIN 48, the Company recognized
no material adjustments to liabilities or stockholders’ equity. When tax returns
are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position
that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. Interest associated with unrecognized tax benefits
are classified as interest expense and penalties are classified in selling,
general and administrative expenses in the statements of operations and other
comprehensive income (loss). The adoption of FIN 48 did not have a material
impact on the Company’s financial statements.
Tax provisions in the statement of
operations for the three and nine months ended March 31, 2009 were $208,890 and
$502,661, respectively. The tax provisions for the three and nine months ended
March 31, 2008 were $36,136 and $36,136, respectively. The provisions are PRC
income taxes for Beijing Yinse Lingdong Advertising Co., Ltd which has PRC
taxable income .
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 March 31, 2009 and June 30, 2008, the Company had deposits
in excess of federally insured limits totaling $0 and $2,354,139 (based on the
June 30, 2008 FDIC insurance limit of $100,000), 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.
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
$26,485 and $97,363 at March 31, 2009 and June 30, 2008, respectively, are
classified as an item of other comprehensive income in the stockholders’ equity
section of the consolidated balance sheets.
Basic and Diluted Earnings
(Loss) Per Share
Earnings
per share is calculated in accordance with SFAS No. 128 “Earnings Per Share”
("SFAS 128"), Net earnings per share for all periods presented has
been stated to reflect the adoption of SFAS 128. 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. There were
options to purchase 681,820 and 560,000 shares of common stock and warrants to
purchase 11,480,294 and 840,294 shares of common stock outstanding as of March
31, 2009 and 2008, respectively. The Company had issued and outstanding
convertible preferred stock that converted to 1,937,500 and
100,673,600 shares of common stock as of March 31, 2009 and 2008,
respectively. For the three and nine months ended March 31, 2009, the
Company incurred a net loss in the accompanying statements of operations
and other comprehensive income (loss) of $1,415,574 and $3,344,440,
respectively. For the three and nine months ended March 31, 2008, the
Company incurred a net loss in the accompanying statements of operations
and other comprehensive income of $345,711 and $418,348,
respectively. Therefore, the effect of options and warrants
outstanding is anti-dilutive during the three and nine months periods ending
March 31, 2009 and 2008. As of March 31, 2009 and 2008 the following
potentially dilutive shares were excluded from diluted loss per share for all
periods presented because of their anti-dilutive effect:
|
|
2009
|
|
2008
|
Options
|
|
|
641,820
|
|
560,000
|
Warrants
|
|
|
11,480,294
|
|
840,294
|
Convertible
preferred stock
|
|
|
1,937,500
|
|
100,673,600
|
|
|
|
14,059,614
|
|
102,073,894
|
The
following is an analysis of the differences between basic and diluted earnings
per common share in accordance with SFAS 128.
For the
three months ended March 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$ |
(1,415,574 |
) |
|
$ |
(345,711 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
111,013,355 |
|
|
|
5,892,308 |
|
Diluted
effect of convertible preferred stocks, options and
warrants
|
|
|
- |
|
|
|
- |
|
Weighted
average shares - diluted
|
|
|
111,013,355 |
|
|
|
5,892,308 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.013 |
) |
|
$ |
(0.059 |
) |
Diluted
|
|
$ |
(0.013 |
) |
|
$ |
(0.059 |
) |
For the
nine months ended March 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
$ |
(3,344,440 |
) |
|
$ |
(418,348 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
47,074,322 |
|
|
|
2,752,727 |
|
Diluted
effect of convertible preferred stocks, options and
warrants
|
|
|
- |
|
|
|
- |
|
Weighted
average shares - diluted
|
|
|
47,074,322 |
|
|
|
2,752,727 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.071 |
) |
|
$ |
(0.152 |
) |
Diluted
|
|
$ |
(0.071 |
) |
|
$ |
(0.152 |
) |
Statement of Cash
Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheets.
Segment
Reporting
SFAS No.
131, “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. (See Note
15).
Non-controlling Interest
in Subsidiaries
On May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, a British Virgin Island company and a wholly owned
subsidiary of Music Radio Limited. As a result of this purchase, the Company
recognized initial minority interest on its consolidated balance sheet of
$15,524. The income (loss) attributed to non-controlling interest has been
separately designated in the accompanying statements of operations and
other comprehensive income (loss).
Variable Interest
Entities
In
January 2003, the FASB issued Statement of Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") No. 51" ("FIN 46"). In
December 2003, the FASB modified FIN 46 (“FIN 46R”) to make certain technical
corrections and address certain implementation issues that had arisen. FIN 46
provides a new framework for identifying VIEs and determining when a company
should include the assets, liabilities, non-controlling interests and results of
activities of a VIE in its consolidated financial statements.
FIN 46R
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, Music Radio Limited, and the Music Radio Shareholders, pursuant to which
the Company acquired control of 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 Tianjin Yinse Lingdong
Advertising Company, Ltd., and the Company acquired control of Beijing Mahiesi
Advertising International Co., Ltd. (through its purchase of News Radio
Limited). The Company structured the Music Radio Limited 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. The Company
and its newly acquired PRC subsidiaries have entered into contractual
arrangements with Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD, as well as their
respective shareholders under which:
|
·
|
the
Company is able to exert significant control over significant decisions
about the activities of Tianjin Yinse Lingdong Advertising Company,
Ltd., Beijing Mahiesi Advertising International Co., Ltd. and
YSLD;
|
|
·
|
a
substantial portion of the economic benefits and risks of the operations
of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing Mahiesi
Advertising International Co., Ltd. and YSLD have been transferred to the
Company through a revenue assignment agreement; and
|
|
·
|
the
equity owner of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD does not have the
obligation to absorb the losses of Tianjin Yinse Lingdong Advertising
Company, Ltd., Beijing Mahiesi Advertising International Co., Ltd. or
YSLD.
|
As the
Company is 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,
Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing Mahiesi Advertising
International Co., Ltd. and YSLD meet the definition of a VIE. Further, the
Company is considered to be the primary beneficiary of the risks and benefits of
equity ownership of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD and thus has consolidated
these entities in its accompanying financial statements as of March 31,
2009.
Fair Value of Financial
Instruments and Concentrations
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”) SFAS 157 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
March 31, 2009, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheets at fair value.
Recent
Pronouncements
In
December 2007, the SEC issued SAB 110, which expresses the views of the SEC
staff regarding the use of a “simplified” method, as discussed in the previously
issued SAB 107, in developing an estimate of expected term of “plain
vanilla” share options in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123(R), “Share-Based Payment” ("SFAS No. 123(R)").
In particular, the SEC staff indicated in SAB 107 that it will accept a
company’s election to use the simplified method, regardless of whether the
company has sufficient information to make more refined estimates of expected
term. At the time SAB 107 was issued, the SEC staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the SEC staff stated in
SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007. The SEC staff understands that
such detailed information about employee exercise behavior may not be widely
available by December 31, 2007. Accordingly, the SEC staff will continue to
accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. Upon the Company’s adoption of SFAS 123(R), the
Company elected to use the simplified method to estimate the Company’s expected
term.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R changes how a
reporting enterprise accounts for the acquisition of a business. SFAS
141R requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value, with limited exceptions, and applies to a wider range of transactions or
events. SFAS 141R is effective for fiscal years beginning on or after
December 15, 2008 and early adoption and retrospective application is
prohibited. The Company believes adopting SFAS 141R will significantly affect
its financial statements for any business combination completed after June 30,
2009.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. (“SFAS 159”). SFAS 159 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. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company adopted SFAS 159 on July 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” (“SFAS 160”) which is an amendment of ARB
No. 51. This statement clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. This
statement changes the way the consolidated income statement is presented, thus
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both parent and the noncontrolling
interest. This statement is effective for the fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Based on current conditions, the Company does not expect the
adoption of SFAS 160 to have a significant effect on its results of operations
or financial position.
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on the
Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”).
This statement changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP. This statement will not have an impact on
the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60” (“SFAS
163”). The scope of SFAS 163 is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this statement, issued by enterprises
included within the scope of Statement No. 60. Accordingly, this statement does
not apply to financial guarantee contracts issued by enterprises excluded from
the scope of Statement No. 60 or to some insurance contracts that seem similar
to financial guarantee insurance contracts issued by insurance enterprises (such
as mortgage guaranty insurance or credit insurance on trade receivables). SFAS
163 also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This statement
will not have an effect on the Company’s financial statements.
In June
2008, the FASB issued EITF Issue 07-5 “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). EITF
No. 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 “Accounting for
Derivatives and Hedging Activities” (“SFAS 133”) specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. EITF No. 07-5 provides a new
two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer’s own stock and thus able to qualify
for the SFAS 133 paragraph 11(a) scope exception. The Company has not yet
determined the impact of EITF No. 07-5 on its financial statements.
In April
2008, the FASB issued FSP 142-3 “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”), which amends the factors a company should consider when
developing renewal assumptions used to determine the useful life of an
intangible asset under SFAS 142. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. SFAS 142 requires companies to consider whether
renewal can be completed without substantial cost or material modification of
the existing terms and conditions associated with the asset. FSP 142-3 replaces
the previous useful life criteria with a new requirement—that an entity consider
its own historical experience in renewing similar arrangements. If historical
experience does not exist then the Company would consider market participant
assumptions regarding renewal including 1) highest and best use of the asset by
a market participant, and 2) adjustments for other entity-specific factors
included in SFAS 142. The Company is currently evaluating the impact that
adopting FSP No.142-3 will have on its financial statements.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” ("FSP 157-3")
which clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 became effective on October 10, 2008, and its adoption did not
have a material impact on the financial position or results for the three and
nine months ending March 31, 2009.
Note
3 – Prepaid Expenses
The
Company prepaid expenses at March 31, 2009 and June 30, 2008 were as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Accounting
services
|
|
$ |
966 |
|
|
$ |
14,749 |
|
Capital
raising
|
|
|
60,000 |
|
|
|
9,362 |
|
Insurance
|
|
|
8,372 |
|
|
|
7,966 |
|
Investor
relations
|
|
|
- |
|
|
|
34,619 |
|
Legal
Services
|
|
|
10,361 |
|
|
|
2,368 |
|
Media
and ad time
|
|
|
157,933 |
|
|
|
- |
|
Other
|
|
|
17,210 |
|
|
|
20,200 |
|
Rent
|
|
|
18,767 |
|
|
|
11,687 |
|
Selling
expense including commissions and marketing services
|
|
|
186,044 |
|
|
|
212,784 |
|
|
|
$ |
459,653 |
|
|
$ |
313,735 |
|
Note
4 - Deferred Costs and Unearned Revenues
Deferred
costs at March 31, 2009 arise from barter transactions by which the Company
received services for future period use in exchange for
advertising. Unearned revenue at March 31, 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
Note
5 - Long term deposits, contract guarantees and transaction
deposits
The
Company secures advertising rights from radio channels and airline
magazines. In cases where the radio channel or airline magazine
requires a deposit to secure the contract, the Company records such deposits and
presents them in the balance sheet as long term deposits, contract guarantees
and transaction deposits. The transaction deposits presented in
this account relate to payments made to acquisition targets prior to the
completion of transaction.
Long term
deposits, contract guarantees and transaction deposits consisted of the
following:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Deposit
for Music Radio Acquisition
|
|
$ |
- |
|
|
$ |
500,000 |
|
FM
90.5 Beijing contract deposits
|
|
|
404,064 |
|
|
|
- |
|
|
|
$ |
404,064 |
|
|
$ |
500,000 |
|
Note
6 - Accrued Liabilities
Accrued
liabilities in the accompanying consolidated balance sheets at March 31, 2009
and June 30, 2008 consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Compensation
|
|
$ |
287,498 |
|
|
$ |
120,833 |
|
Revenue
and tax levies
|
|
|
134,468 |
|
|
|
102,612 |
|
Legal
fees
|
|
|
161,303 |
|
|
|
161,303 |
|
Commissions
|
|
|
- |
|
|
|
41,669 |
|
Payroll
taxes and employee welfare expenses
|
|
|
9,012 |
|
|
|
19,778 |
|
Other
accrued expenses
|
|
|
21,092 |
|
|
|
21,092 |
|
Rent
|
|
|
30,706 |
|
|
|
3,056 |
|
Income
taxes (PRC)
|
|
|
309,506 |
|
|
|
135,125 |
|
Cost
of advertising media
|
|
|
7,668 |
|
|
|
- |
|
|
|
$ |
961,253 |
|
|
$ |
605,468 |
|
Note
7 - 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 March 31, 2009, the note had not
been repaid and the full $375,733 principal balance and $228,812 of accrued
interest is outstanding on the RMK note. The Company has 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. See Note 10 for
description of warrants.
The due
date on this loan was February 10, 2009. The Company has worked
diligently with RMK to extend the note. As of this filing, the
Company expects to have a finalized extension in place in June
2009. Related party interest expense of $83,990 and $267,724 has been
included in the accompanying statements of operations and other
comprehensive income (loss) for the three and nine months ended March 31, 2009,
respectively. Related party interest expense of $40,819 and
$40,819 has been included in the accompanying statements of operations and
other comprehensive income (loss) for the three and nine months ended March 31,
2009, respectively. Of the $375,733 original loan amount, the full
$375,733 is outstanding and is classified as related party note payable in the
amount of $375,333, net of debt discount of $0 in the accompanying consolidated
balance sheets at March 31, 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 14)
Kantor
and Blueday Loan Agreements
On March
30, 2008, the Company entered into a loan agreement (the "Kantor Loan") with
Jonathan Kantor in the principal amount 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. See Note 10.
Also on
March 30, 2008, the Company entered into a loan agreement (the "Blueday Loan”)
with Blueday Limited ("Blueday"), in the principal amount 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. See Note
10.
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.
On June
30, 2008, waivers of default were executed on the Kantor and Blueday loans,
extending the term of the loans to August 31, 2008. The Company has
continued dialogue with the note holders and no formal demand for payment has
been made. As of March 31, 2009, the Company owed $76,693, on the
Kantor Loan representing $33,000 of principal and $43,693 of interest and
additional fees. As of March 31, 2009, the Company owed $109,160, on the Blueday
Loan representing $23,000 of principal and $86,160 of interest and additional
expenses.
|
|
Original Note Balance
|
|
|
Balance as of
March 31, 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 income (loss) was $11,044 and $2,710 for the three months ended
March 31, 2009 and 2008, respectively. Interest expense for the nine
months ended March 31, 2009 and 2008 was $212,199 and $2,710,
respectively.
Note
8 - Other Payables
Following
is a summary of other payables at March 31, 2009 and June 30, 2008:
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Insurance
|
|
$ |
72,866 |
|
|
$ |
- |
|
Office
Expenses
|
|
|
3,397 |
|
|
|
378 |
|
Service
commitment to provide advertising pages
|
|
|
74,957 |
|
|
|
74,496 |
|
Duties
and levies
|
|
|
277,650 |
|
|
|
- |
|
Other
|
|
|
281 |
|
|
|
7,275 |
|
|
|
$ |
429,151 |
|
|
$ |
82,149 |
|
Note
9 - Variable Interest Entities
At March
31, 2009, the Company consolidated the balance sheets and operations of Tianjin
Yinse Lingdong Advertising Co., Ltd., the VIE controlled under the May 30, 2008
Music Radio Limited acquisition. On July 21, 2008, the Company completed the
acquisition of News Radio Limited, and with the purchase the Company acquired
control of Beijing Mahiesi 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, Music Radio Limited, and the Music Radio
Shareholders pursuant to which the Company acquired control of YSLD, HTLG
another VIE. See Note 12 for acquisition details. Tianjin Yinse Lingdong
Advertising Co., Ltd., YSLD and HTLG have been consolidated with the Company’s
financial statements at March 31, 2009.
The
following is the condensed balance sheet of Beijing Mahiesi 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 have been recorded at fair value, as required under
FIN 46R. The Company consolidated all balances in the accompanying March 31,
2009 consolidated balance sheets. The operations of the VIE for the period from
July 21, 2008 (date of acquisition) through March 31, 2009 have been included in
the Company’s consolidated statements of operations and other comprehensive
income (loss). See Note 12 for details of the acquisition.
The
Company has accounted for the acquisition of 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 YSLD from that date. Fair value of
the variable interest entity associated with 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 nine months ended March 31, 2009 and 2008 have
been included in the Company’s consolidated statements of operations and
other comprehensive income (loss). See Note 12 for required disclosures for the
acquisition of YSLD.
Note
10 - Stock Options and Warrants
Stock
Options
The
Company entered into an employment agreement with Mr. Jeffrey Dash on January
31, 2008. Effective January 31, 2008, Mr. Dash was appointed the 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 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.
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 a 24
month period 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 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 a 24 month period
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
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.
Following
is a summary of the stock option activity:
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
Outstanding
as of July 1, 2008
|
|
|
1,040,000 |
|
|
$ |
2.88 |
|
|
$ |
- |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
398,180 |
|
|
|
3.10 |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding as of March 31, 2009
|
|
|
641,820 |
|
|
$ |
2.75 |
|
|
|
- |
|
Exercisable
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
|
194,224 |
|
|
$ |
2.69 |
|
|
|
- |
|
March
31, 2009
|
|
|
376,153 |
|
|
$ |
2.79 |
|
|
|
- |
|
Warrants
Under the
loan agreement with RMK described in Note 7 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 are being
amortized over the term of the loan.
On March
30, 2008, and pursuant to the terms of the Kantor Loan and Blueday Loan
described in Note 7, 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
are being 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 is recorded as debt discounts and will be amortized over the term of
the loan.
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 months, (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, since this warrant is exercisable into shares of
common stock at a one to one ratio, an embedded beneficial conversion feature
was recorded in accordance with EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The
relative fair value of the beneficial conversion feature was $44,626 and has
been classified in additional paid-in capital in the March 31, 2009 consolidated
balance sheets.
On July
1, 2008, the Company issued warrants to purchase 600,000 shares of the Company's
common stock to Maoming China Fund ("Maoming") in connection with a preferred
stock placement that closed on the same date. The warrants are immediately
exercisable at an exercise price of $2.50 per share until their expiration on
June 30, 2011 and are exercisable on a cashless basis at any time after July 1,
2009 and until June 30, 2011, if the common stock underlying the warrants has
not been registered with the SEC by such date. The relative fair value of the
600,000 warrants issued with the Series A convertible preferred stock was
$554,536. The relative fair value was computed using the Black-Scholes model
under the following assumptions: (1) expected life of three years; (2)
volatility of 69%, (3) risk free interest of 2.9% and (4) dividend rate of $0%.
In addition, since the Series A convertible preferred stock is convertible into
shares of common stock at a one to one ratio, an embedded beneficial conversion
feature was recorded as a discount to additional paid in capital in accordance
with Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments.” The intrinsic value of the beneficial
conversion feature was $604,536. The beneficial conversion feature is considered
a deemed dividend, but the Company has an accumulated deficit; therefore, the
entry is not recorded as the accounting entry would be both a debit and a credit
to additional paid in capital.
On August
29, 2008, the Company issued warrants to purchase 300,000 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 11) 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 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 300,000
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 Emerging Issues
Task Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments.” 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
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
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
YSLD.
Note
11 - Stockholders Equity
Unregistered
Sale of Series A Convertible Preferred Stock
On August
29, 2008, the Company completed the sale of 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 completed the sale of
62,500 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 to the Company of $150,000. 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 10.
In
accordance with the terms of the Maoming Purchase Agreement, Maoming is
obligated to purchase an additional 145,833 shares of Series A convertible
preferred stock and additional warrants to purchase 70,000 shares of common
stock for $350,000. The Company expects these securities to be issued on an
as-needed basis.
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 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 12 for acquisition of News Radio
Limited.
Series
B Convertible Preferred Stock Issued in connection with YSLD and Conversion to
Common Stock
As
consideration for the acquisition of YSLD, the Company issued 5,033,680 shares
of its newly created Series B convertible preferred stock to Ju Baochun, the
owner of YSLD. Each share of the 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 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
YSLD
The
Company recorded the Music Radio Acquisition Agreement, pursuant to which the
Company obtained effective control of 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 YSLD net assets of ($217,510) on the date of acquisition.
The closing gives Legend Media effective control of 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
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 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.
Note
12 - 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 the amount was
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 approximately $230,182 based on
the currency exchange rate on that date). Subsequently on July 21, 2008, the
acquisition was closed and the amount was settled at approximately $235,040
based on the currency exchange rate on that date. As of March 31, 2009, the
Company delivered the 104,427 shares associated with the News Radio Share
Purchase Agreement.
During
the nine months ended March 31, 2009, the Company paid $749,990 towards the
purchase of News Radio Limited, and at March 31, 2009, the Company recognized
the remaining $256,275 in Related Party Payables in its consolidated balance
sheets. See Note 14.
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.
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’s
prior written consent.
During
the nine months ended March 31, 2009, the Company paid $749,990 towards the
purchase of News Radio Limited, and at March 31, 2009, the Company recognized
the remaining $256,275 in Related Party Payables in its consolidated balance
sheets. See Note 14.
Acquisition
Agreement for the effective control of YSLD
On
November 28, 2008, the Company entered into and closed the Music Radio
Acquisition Agreement with Well Chance, Music Radio Limited, and the Music Radio
Shareholders. Pursuant to the Music Radio Acquisition Agreement, the Company
acquired control over YSLD and caused the contribution of the airline
advertising business of HTLG to YSLD. 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 YSLD.
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 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 $0.40 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 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 YSLD in
exchange for a service fee and bonus as described in more detail in the Music
Radio Services Agreement. The financial results of 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. YSLD agreed to several important
covenants in the Music Radio Services Agreement, including (but not limited to),
agreeing not to appoint any member of 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 YSLD to Legend Media IT as a guarantee of 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 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 YSLD without Legend Media IT’s prior written
consent.
Legend
Media IT also entered into the Music Radio Operating Agreement with 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) YSLD, Ju Bingzhen and Xue Wei agreed not to, or
to cause YSLD not to, conduct any transactions which may have a material adverse
effect on YSLD's assets, obligations, rights or operations without Legend Media
IT’s prior written consent; (b) YSLD, Ju Bingzhen and Xue Wei granted Legend
Media IT certain informational rights; (c) YSLD, Ju Bingzhen and Xue Wei agreed
to (i) submit YSLD’s annual budget and monthly cash requirement plans to Legend
Media IT for approval, (ii) obtain Legend Media’s approval for withdrawals from
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) 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 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 YSLD at 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 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 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 and nine months ended March
31, 2009 and 2007 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 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 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 YSLD, a PRC-based company that has the
exclusive sales contract for Xinhua Airline Magazine, the airline magazine for
Hainan Airline Group.
Note
13 - 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 $4,303 per month, based on the average exchange
rate for the three months ending March 31, 2009).
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 $4,649 per month, based on the average
exchange rate for the three months ending March 31, 2009).
On July
7, 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 approximately RMB 21,415 (approximately $3,130 per month, based on
the average exchange rate for the three months ending March 31,
2009).
On
September 16, 2008, the Company entered into a one-year lease for premises in
Shenzhen, China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 25,417 (approximately $3,715 per month, based on the
average exchange rate for the three months ending March 31, 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 202,500 (approximately $29,605 per month, based on the
average exchange rate for the three months ending March 31, 2009).
The total
amount of rental payments due over each lease term is being charged to rent
expense on a straight-line method over the term of each lease. During the
three and nine months ended March 31, 2009, the Company had lease expense in the
amount of $124,223 and $347,275, respectively.
Note 14 - Related Party
Transactions
Significant
balances and transactions and balances with related parties are as
follows:
a. Amounts
due to related parties
|
|
|
|
March 31,
|
|
|
June 30,
|
|
Party
|
|
Relationship
|
|
2009
|
|
|
2008
|
|
Classified
as Related Party Payable
|
|
|
|
|
|
|
|
|
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
|
majority
Shareholder
|
|
$ |
1,610,236
|
|
|
$ |
2,029,440 |
1
|
Beijing Hongtenglianguang
Advertising Co., Ltd,
|
|
common
control PRC entity
|
|
|
555,498
|
|
|
|
562,503
|
2 |
|
|
|
|
|
2,165,734 |
|
|
|
2,591,943 |
|
Classified
as Related Party Note Payable
|
|
|
|
|
|
|
|
|
|
|
RMK Emerging Growth Fund,
LLC
|
|
controlled by a
shareholder who is also the CEO of ARC Investment Partners,
LLC
|
|
|
375,733
|
|
|
|
307,294
|
3 |
|
|
|
|
$ |
2,541,467 |
|
|
$ |
2,899,237 |
|
|
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, YSLD and Tianjin Yinse Lingdong Advertising Co.
Ltd.
|
|
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, has
paid expenses on behalf of the Company. In connection with the
Tianjin Yinse Lingdong Advertising Co., Ltd. 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 Tianjin Yinse
Lingdong Advertising Co., Ltd. for a fee equal to RMB105,000 per month and
a variable portion equal 15% of revenues earned and collected per
month.
|
|
3
|
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
7.
|
b. During
the periods indicated below, the Company closed several acquisitions with a
related party; those transactions created related party payables as
follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,528,285 |
|
|
$ |
- |
|
c. During
the periods indicated below, services, mostly sales related, where provided by a
related party that generated related party payables:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Beijing
Hongtenglianguang Advertising Co., Ltd,
|
|
$ |
2,725 |
|
|
$ |
- |
|
|
$ |
633,805 |
|
|
$ |
- |
|
d.
Related parties paid for expenses on behalf of the company; the expenses paid
included rent, commission and media related expenses:
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
|
$ |
24,233 |
|
|
$ |
23,124 |
|
|
$ |
24,233 |
|
|
$ |
97,906 |
|
Beijing
Hongtenglianguang Advertising Co., Ltd,
|
|
|
192,076 |
|
|
|
14,208 |
|
|
|
693,713 |
|
|
|
30,667 |
|
|
|
$ |
216,309 |
|
|
$ |
37,332 |
|
|
$ |
717,946 |
|
|
$ |
128,573 |
|
e.
Related parties provided short term loans / advances to the Company to assist
with working capital shortfalls:
|
Three months ended
|
|
Nine months ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
BaoChun Ju and
affiliates (including his wife, Wei Xue, and Music Radio,
Ltd.)
|
|
$ |
17,568 |
|
|
$ |
- |
|
|
$ |
17,568 |
|
|
$ |
283,848 |
|
Beijing
Hongtenglianguang Advertising Co., Ltd,
|
|
|
368,466 |
|
|
|
133,553 |
|
|
|
431,399 |
|
|
|
150,178 |
|
|
|
$ |
386,034 |
|
|
$ |
133,553 |
|
|
$ |
448,967 |
|
|
$ |
434,026 |
|
Note
15 – Segment Information
Based on
FAS 131, the Company has 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.
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
dollars)
|
|
|
(in
dollars)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine advertising sales
|
|
$ |
2,127,386 |
|
|
$ |
1,193,507 |
|
|
$ |
5,581,334 |
|
|
$ |
2,226,248 |
|
Radio
advertising sales
|
|
|
503,238 |
|
|
|
103,670 |
|
|
|
2,032,871 |
|
|
|
1,028,203 |
|
Other
product lines
|
|
|
- |
|
|
|
8,383 |
|
|
|
- |
|
|
|
9,044 |
|
|
|
$ |
2,630,624 |
|
|
$ |
1,305,560 |
|
|
$ |
7,614,205 |
|
|
$ |
3,263,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine advertising sales
|
|
$ |
696,569 |
|
|
$ |
505,470 |
|
|
$ |
1,976,429 |
|
|
$ |
1,355,780 |
|
Radio
advertising sales
|
|
|
750,685 |
|
|
|
44,305 |
|
|
|
2,157,159 |
|
|
|
627,510 |
|
Other
product lines
|
|
|
- |
|
|
|
128,955 |
|
|
|
- |
|
|
|
139,131 |
|
|
|
$ |
1,447,254 |
|
|
$ |
678,730 |
|
|
$ |
4,133,588 |
|
|
$ |
2,122,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine advertising sales
|
|
$ |
1,430,817 |
|
|
$ |
688,037 |
|
|
$ |
3,604,905 |
|
|
$ |
870,468 |
|
Radio
advertising sales
|
|
|
(247,447 |
) |
|
|
59,365 |
|
|
|
(124,288 |
) |
|
|
400,693 |
|
Other
product lines
|
|
|
- |
|
|
|
(120,572 |
) |
|
|
- |
|
|
|
(130,087 |
) |
|
|
$ |
1,183,370 |
|
|
$ |
626,830 |
|
|
$ |
3,480,617 |
|
|
$ |
1,141,074 |
|
Note
16- Subsequent Event s (unaudited)
None.
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 t
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, 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, for the purpose of selling 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 Ms.
Shannon McCallum-Law, the majority stockholder, sole director and Chief
Executive Officer of the Company, Well Chance Investments Limited (“Well
Chance”) and Well Chance's sole shareholder (the "Well Chance Shareholder").
Pursuant to the terms of the Share Exchange Agreement, the Company acquired all
of the issued and outstanding shares of Well Chance's common stock in exchange
for the Company’s issuance of 1,200,000 shares of its common stock to the Well
Chance Shareholder on the basis of 1,200 shares of its common stock for every
one share of Well Chance common stock held. The Share Exchange Agreement closed
on February 5, 2008.
Concurrently
with the closing of the transactions under the Share Exchange Agreement and as a
condition thereof, we entered into an agreement with Ms. McCallum-Law, pursuant
to which she returned to us for cancellation 2,419,885 of the 5,119,885 shares
of our common stock owned by her. Ms. McCallum-Law was not compensated for the
cancellation of the shares. In addition, we issued (i) 4,100,000 shares of our
common stock to certain affiliates of Well Chance for $87,740 and (ii) 200,000
shares in exchange for consulting services performed in connection with this
transaction. Upon completion of the foregoing transactions, we had 8,200,000
shares of common stock issued and outstanding.
The
exchange of shares with the Well Chance Shareholder was accounted for as a
reverse acquisition 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.
Effective
as of February 14, 2008, the Company changed its name from Noble Quests, Inc. to
Legend Media, Inc. 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. Well Chance expanded its business in
February 2008 to focus 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, a British
Virgin Islands company, and all of the shareholders of Music Radio Limited (the
“Music Radio Shareholders”), for the purchase of exclusive radio advertising
rights in Tianjin, PRC. Pursuant to the Music Radio Share Purchase Agreement,
Well Chance, for consideration consisting of (a) 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) US$2,000,000, agreed to
purchase 80% of the common stock of Legend Media Tianjin Investment Company
Limited, a British Virgin Islands company and a wholly owned subsidiary of Music
Radio Limited. The closing of the Music Radio Share Purchase
Agreement occurred on May 30, 2008, and the Company secured effective control of
the exclusive sales contract for the Tianjin, PRC based radio channel. Tianjin,
PRC is a large city with a population of 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. Because the region is one of the most economically developed and
urbanized regions in the PRC, the Company believes that the radio station is
well situated to target the expanding middle and upper class in the
PRC.
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 British Virgin
Islands company, for consideration consisting of (a) shares of the Company's
common stock with an aggregate value of 2,000,000 Chinese Renminbi ("RMB")
(approximately $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”) that 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. Beijing is a metropolis in northern PRC with a population of
over 17 million. As with Tianjin, it is one of four municipalities in the PRC
with status as a province in the PRC's administrative structure. Beijing is the
PRC's second largest city, after Shanghai, and is recognized as the political,
educational, and cultural center of the PRC. Beijing has a rapidly developing
economy with an expanding affluent population. In 2008, retail sales in Beijing
exceeded $67 billion.
Beijing
is of strategic importance to the Company’s objective of building a market
leading brand position in the radio advertising industry. The exclusive sales
contract for Beijing FM 90.5 is for four years (two years plus a two year
option) and grants Legend Media, through its operating affiliate, Beijing
Maihesi International Advertising Co., Ltd., the right to be the exclusive
advertising agent for the channel, under which the Company has the exclusive
rights to manage and sell all advertising minutes for the radio station. The
contract provides Legend Media with an additional 45,990 of radio advertising
minutes per year. The exclusive rights to sell advertising also extend to
program sponsorship which the Company expects will provide additional
advertising inventory for sale.
On August 4, 2008,
Beijing Merci International
Advertising Co., Ltd., a company organized in the PRC and an affiliate of the
Company, 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 on August 31, 2008 and expires on September 30, 2010. In
February 2009, the Company decided to terminate the Beijing Merci Agreement. The decision
to do so was based on a) a determination that the operations by the radio
channel in Shenzhen could be considered invalid by the Chinese authorities and b)
management's decision to make a strategic shift towards larger, more established
opportunities. The Company notified Beijing Guo Guangrong Advertising Co., Ltd.
of its decision to terminate the agreement based on breach of contract and made
an immediate request for the return of all deposits and payments. Subsequent to attempts
Beijing Merci International Advertising Co., Ltd and Beijing Guo Guangrong
Advertising Co., Ltd. to settle the dispute, Beijing Merci
International Advertising Co., Ltd
began the process of entering into arbitration. We are requesting immediate
termination of all contractual obligations under the Beijing Merci Agreement and repayment
of approximately $500,000 paid to Beijing Guo Guangrong Advertising Co., Ltd.
under the Beijing Merci Agreement. Because the outcome of the arbitration is
uncertain, for the period ending March 31, 2009, the Company has accrued all
expenses under the Beijing Merci Agreement.
On
October 28, 2008, Tianjin Yinse Lingdong Advertising Co., Ltd., 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 Tianjin Yinse Lingdong Advertising Co., Ltd. agreed to acquire 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, a developing metropolis with a
population of over eight million.
On
November 28, 2008, the Company entered into and closed an Acquisition Agreement
(the "Music Radio Acquisition Agreement") with Well Chance, Music Radio Limited,
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 Beijing Yinse Lingdong Advertising Co., Ltd (“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 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
YSLD, a PRC-based company, and 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.
In
determining the amount of consideration to be paid in connection with 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 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 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).
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 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
YSLD, was between entities under common control and, as such, has been accounted
for similarly to a pooling of interests.
As of
March 31, 2009, the Company had an annual radio advertising inventory of 85,410
minutes and an annual airline advertising inventory of 960 pages which combined
had a reach of approaching 60 million people.
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.
Due to
PRC regulatory restriction on foreign investment in the advertising industry, we
operate our business in China through Tianjin Yinse Lingdong Advertising Co.,
Ltd., Beijing Maihesi International Advertising Co., Ltd. and
YSLD. Our relationships with these operating affiliates and their
shareholders are governed by a series of contractual arrangements that allow us
to effectively control and derive a substantial portion of the economic benefits
from them. Accordingly, we treat Tianjin Yinse Lingdong Advertising Co., Ltd.,
Beijing Maihesi International Advertising Co., Ltd. and YSLD as variable
interest entities and have consolidated their financial results in our financial
statements in accordance with generally accepted accounting principles in the
United States.
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 in fully understanding and evaluating this management discussion and
analysis.
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.
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of Legend
Media and its subsidiaries as follows:
Subsidiary
|
|
Place
Incorporated
|
|
% Owned
|
|
Well
Chance
|
|
United
States
|
|
|
100 |
|
Legend
Media Investment Company Limited
|
|
PRC
|
|
|
80 |
|
Three
subsidiaries of Legend Media Investment Company Limited
|
|
|
|
|
|
|
Legend
Media Tianjin HK Limited
|
|
PRC
|
|
|
80 |
|
Legend
Media (Beijing) Consulting Company Limited
|
|
PRC
|
|
|
80 |
|
Tianjin
Yinse Lingdong Advertising Co., Ltd
|
|
PRC
|
|
|
80
|
* |
News
Radio Limited
|
|
PRC
|
|
|
100 |
|
Four
subsidiaries of News Radio Limited
|
|
|
|
|
|
|
CRI
News Radio Limited
|
|
PRC
|
|
|
100 |
|
Legend
Media (Beijing) Information and Technology Co., Ltd.
|
|
PRC
|
|
|
100 |
|
Beijing
Mahiesi Advertising International Co., Ltd.
|
|
PRC
|
|
|
100
|
* |
Beijing
Yinse Lingdong Advertising Co., Ltd.
|
|
PRC
|
|
|
100
|
* |
*Variable
Interest Entities: See heading entitled “Variable Interest Entities”
below.
Variable Interest
Entities
In
January 2003, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin ("ARB") No. 51 ("FIN 46"). In December 2003, the FASB modified
FIN 46 (“FIN 46R”) to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a company
should include the assets, liabilities, non-controlling interests and results of
activities of a VIE in its consolidated financial statements.
FIN 46R
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, Music Radio Limited, and the Music Radio Shareholders, pursuant to which
the Company acquired control of 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 Tianjin Yinse Lingdong
Advertising Company, Ltd., and the Company acquired control of Beijing Mahiesi
Advertising International Co., Ltd. (through its purchase of News Radio
Limited). The Company structured the Music Radio Limited 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. The Company
and its newly acquired PRC subsidiaries have entered into contractual
arrangements with Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD as well as their respective
shareholders under which:
|
·
|
the
Company is able to exert significant control over significant decisions
about the activities of Tianjin Yinse Lingdong Advertising Company,
Ltd., Beijing Mahiesi Advertising International Co., Ltd. and
YSLD;
|
|
·
|
a
substantial portion of the economic benefits and risks of the operations
of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing Mahiesi
Advertising International Co., Ltd. and YSLD have been transferred to the
Company through a revenue assignment agreement;
and
|
|
·
|
the
equity owner of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD does not have the
obligation to absorb the losses of Tianjin Yinse Lingdong Advertising
Company, Ltd., Beijing Mahiesi Advertising International Co., Ltd. or
YSLD.
|
As the
Company is 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,
Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing Mahiesi Advertising
International Co., Ltd. and YSLD meet the definition of a VIE. Further, the
Company is considered to be the primary beneficiary of the risks and benefits of
equity ownership of Tianjin Yinse Lingdong Advertising Company, Ltd., Beijing
Mahiesi Advertising International Co., Ltd. and YSLD and thus has consolidated
these entities in its accompanying financial statements as of March 31,
2009.
Intangible
Assets
Intangible
assets consist of contract rights purchased in the May 30, 2008 acquisition of
Legend Media Tianjin Investment Company Limited, the entity controlling the
advertising rights to Tianjin FM 92.5, and the July 21, 2008 acquisition of News
Radio Limited, the entity controlling the advertising rights to Beijing FM
90.5.
Intangible
assets consist of the following at the dates indicated:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
FM
92.5 Contract rights
|
|
$ |
1,709,888 |
|
|
$ |
2,174,428 |
|
Exclusivity
agreement
|
|
|
7,388,731 |
|
|
|
6,999,353 |
|
FM
90.5 Contract rights
|
|
|
1,016,206 |
|
|
|
- |
|
|
|
|
10,114,825 |
|
|
|
9,173,781 |
|
Less
Accumulated amortization
|
|
|
(1,344,439 |
) |
|
|
(128,471 |
) |
Intangibles,
net
|
|
$ |
8,770,386 |
|
|
$ |
9,045,310 |
|
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 being amortized over the 31 month contract period, 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 as of January 1,
2009. The contract is with Tianjin FM 92.5 and 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 has 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 change in value of
the FM92.5 contract and the exclusivity agreement from June 30, 2008 to March
31, 2009 is a result of foreign currency translation at each balance sheet date
and a reallocation of the value between these two intangible assets subsequent
to June 30, 2008. At the May 30, 2008 purchase date, the Company
initially applied a 10% discount rate to calculate the net present value of the
FM 92.5 contract’s EBITDA. However, the Company subsequently determined that a
15% discount rate more 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 remaining intangible asset value of $7,338,731 attributable to
the May 30, 2008 acquisition was then reallocated to the exclusivity
agreement. Amortization expense on this contract for the
three and nine months ended March 31, 2009 was $165,473 and $509,890,
respectively.
The
remainder of the purchase price of $7,388,731 was allocated to an Operating
Agreement among Legend Media (Beijing) Consulting Co., Ltd., Tianjin Yinse
Lingdong Advertising Co., Ltd. and Ju Baochun, 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 Music Radio Limited,
which is the 20% owner of the post-acquisition VIE, Tianjin Yinse Lingdong
Advertising Co., Ltd. Pursuant to the terms of the Operating Agreement, Tianjin
Yinse Lingdong Advertising Co., Ltd. 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 Tianjin Yinse Lingdong Advertising Co., Ltd.'s
assets;
|
|
·
|
Assigning
to any third party the Operating Agreement entered into by Tianjin Yinse
Lingdong Advertising Co., Ltd.'s ;
and
|
|
·
|
Selling,
transferring and disposing of any license held by Tianjin Yinse Lingdong
Advertising Co., Ltd.
|
Amortization
expense on this contract for the three and nine months ended March 31, 2008
was $184,718 and $528,556, respectively.
The FM
90.5 contract rights 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 is
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
the three and nine months ending March 31, 2009 of $64,543 and $177,612,
respectively, has been included in amortization expense in the accompanying
consolidated statements of operations and other comprehensive income
(loss). See Note 12.
Amortization
expense for the Company’s intangible assets for the three months ended March 31,
2009 and 2008 was $416,247 and $0, respectively, and amortization expense for
the Company’s intangible assets for the nine months ended March 31, 2009 and
2008 was $1,216,058 and $0, respectively.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission ("SEC"). Staff Accounting Bulletin (“SAB”) 104. The
Company purchases advertising inventory in the form of advertising airtime, the
unit being minutes, from radio stations and advertising pages from airline
magazines. The Company then distributes 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 March 31, 2009 and
2008 was $729,557 and $0 respectively, and barter revenue for the nine months
ended March 31, 2009 and 2008 was $1,955,962 and $47,613, respectively. Barter
expense for the three months ended March 31, 2009 and 2008 was $407,119 and $0,
respectively, and barter expense for the nine months ended March 31, 2009 and
2008 was $954,796 and $47,613, respectively. 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 calculated business
tax;
|
·
|
Urban
development tax: 3% of the calculated business tax;
and
|
·
|
Flood
insurance tax: 1% of the calculated business
tax.
|
The
Company recognizes these taxes in cost of revenue in the period
incurred.
Cost of
Revenue
The
Company expenses the cost of advertising 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 or not sold. Cost of
revenue for the three months ended March 31, 2009 and 2008 was $1,447,254 and
$678,730, respectively. Advertising costs for the nine months ended
March 31, 2009 and 2008 was $4,133,588 and $2,122,421,
respectively.
Minority Interest in
Subsidiaries
On May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, a British Virgin Island company and a wholly-owned
subsidiary of Music Radio Limited. As a result of this purchase, the Company
recognized initial minority interest on its consolidated balance sheet of
$15,524. The income (loss) attributed to minority interest has been separately
designated in the accompanying statements of operations and other
comprehensive income (loss).
Recent
Pronouncements
In
December 2007, the SEC issued SAB 110, which expresses the views of the SEC
staff regarding the use of a “simplified” method, as discussed in the previously
issued SAB 107, in developing an estimate of expected term of “plain
vanilla” share options in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123(R), “Share-Based Payment” ("SFAS No. 123(R)").
In particular, the SEC staff indicated in SAB 107 that it will accept a
company’s election to use the simplified method, regardless of whether the
company has sufficient information to make more refined estimates of expected
term. At the time SAB 107 was issued, the SEC staff believed that more
detailed external information about employee exercise behavior (e.g., employee
exercise patterns by industry and/or other categories of companies) would, over
time, become readily available to companies. Therefore, the SEC staff stated in
SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007. The SEC staff understands that
such detailed information about employee exercise behavior may not be widely
available by December 31, 2007. Accordingly, the SEC staff will continue to
accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. Upon the Company’s adoption of
SFAS No. 123(R), the Company elected to use the simplified method to
estimate the Company’s expected term.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R changes how a
reporting enterprise accounts for the acquisition of a business. SFAS
No. 141R requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS 141R is effective for fiscal years beginning on or after December 15,
2008 and early adoption and retrospective application is prohibited. The Company
believes adopting SFAS 141R will significantly affect its financial statements
for any business combination completed after June 30, 2009.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 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. SFAS 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company adopted SFAS 159 on July 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” (“SFAS 160”) which is an amendment of ARB
No. 51. This statement clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. This
statement changes the way the consolidated income statement is presented, thus
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both parent and the noncontrolling
interest. This statement is effective for the fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Based on current conditions, the Company does not expect the
adoption of SFAS 160 to have a significant effect on its results of operations
or financial position.
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on the
Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”).
This statement changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP. This statement will not have an impact on
the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60” (“SFAS
163”).The scope of SFAS 163 is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this statement, issued by enterprises
included within the scope of Statement No. 60. Accordingly, this statement does
not apply to financial guarantee contracts issued by enterprises excluded from
the scope of Statement No. 60 or to some insurance contracts that seem similar
to financial guarantee insurance contracts issued by insurance enterprises (such
as mortgage guaranty insurance or credit insurance on trade receivables). SFAS
163 also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This statement
will not have an effect on the Company’s financial statements.
In June
2008, the FASB issued EITF Issue 07-5 “Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). EITF
No. 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS 133 “Accounting for
Derivatives and Hedging Activities” specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF No. 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a)
scope exception. The Company has not yet determined the affect EITF No. 07-5 on
its financial statements.
In April
2008, the FASB issued FSP 142-3 “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”), which amends the factors a company should consider when
developing renewal assumptions used to determine the useful life of an
intangible asset under SFAS 142. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. SFAS 142 requires companies to consider whether
renewal can be completed without substantial cost or material modification of
the existing terms and conditions associated with the asset. FSP 142-3 replaces
the previous useful life criteria with a new requirement—that an entity consider
its own historical experience in renewing similar arrangements. If historical
experience does not exist then the Company would consider market participant
assumptions regarding renewal including: 1) highest and best use of the asset by
a market participant, and 2) adjustments for other entity-specific factors
included in SFAS 142. The Company is currently evaluating the impact that
adopting FSP No.142-3 will have on its financial statements.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” ("FSP 157-3")
which clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 became effective on October 10, 2008, and its adoption did not
have a material impact on the financial position or results for the three and
nine months ending March 31, 2009.
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 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 YSLD.
In the Company’s Annual Report for the
fiscal year ended June 30, 2008, the Report of the Independent Registered Public
Accounting Firm includes an explanatory paragraph that describes substantial
doubt about the Company’s ability to continue as a going concern. The Company’s
interim consolidated financial statements for the nine months ended March 31,
2009 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company incurred a net loss and utilized net cash
in operating activities of approximately $3,344,440 and $2,659,945,
respectively, for the nine months ended March 31, 2009.
These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. We expect to continue to
incur losses from operations in 2009. While we expect increased sales of both
radio advertising and airline magazine advertising to help increase revenues,
such increases for the near term may only provide limited additional cash flow
from such sales and will require increases in sales and marketing expenses. The
Company’s ability to continue as a going concern depends on the success of
management’s plans to bridge such cash shortfalls in 2009 including the
following:
|
1.
|
Aggressively pursuing additional
fund raising activities in
2009;
|
|
2.
|
Continuing to advance sales and
marketing efforts for the Company's products to begin achieving additional
sales of such products in 2009, thereby generating cash flow from such
sales;
|
|
3.
|
Attempting to work with the
Company's lenders to renew and/or extend scheduled payments under such
loans;
|
|
4.
|
Continuing to monitor cost
control initiatives to conserve
cash.
|
Comparison
of Three Months Ended March 31, 2009 and March 31, 2008
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
|
REVENUE
|
|
$ |
2,630,624 |
|
|
|
100.0 |
% |
|
$ |
1,305,560 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
1,447,254 |
|
|
|
55.0 |
% |
|
|
678,730 |
|
|
|
52.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,183,370 |
|
|
|
45.0 |
% |
|
|
626,830 |
|
|
|
48.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,745,938 |
|
|
|
66.4 |
% |
|
|
871,890 |
|
|
|
66.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(562,568 |
) |
|
|
(21.4 |
)% |
|
|
(245,060 |
) |
|
|
(18.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE, NET
|
|
|
(644,116 |
) |
|
|
(24.5 |
)% |
|
|
(64,525 |
) |
|
|
(4.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(1,206,684 |
) |
|
|
(45.9 |
)% |
|
|
(309,585 |
) |
|
|
(23.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
208,890 |
|
|
|
7.9 |
% |
|
|
36,126 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,415,574 |
) |
|
|
(53.8 |
)% |
|
|
(345,711 |
) |
|
|
(26.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(70,127 |
) |
|
|
(2.7 |
)% |
|
|
10,442 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
|
|
(1,485,701 |
) |
|
|
(56.5 |
)% |
|
|
(335,269 |
) |
|
|
(25.7 |
)% |
Revenues. Our
revenue includes revenues from sales of radio advertising and airline magazine
advertising. During the three months ended March 31, 2009, we had
revenues of $2,630,624 compared to revenues of $1,305,560 for the three months
ended March 31, 2008, an increase of $1,325,064 or 101.5% The increase is
attributable to the increase in sales of both airline magazine advertising and
radio advertising, with airline magazine advertising sales leading the
way. Details of the changes for the three months ended March 31, 2009
and 2008 are as follows:
|
Three
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine advertising sales
|
|
$ |
2,127,386 |
|
|
$ |
1,193,507 |
|
|
$ |
933,879 |
|
|
|
78.2 |
% |
Radio
advertising sales
|
|
|
503,238 |
|
|
|
103,670 |
|
|
|
399,568 |
|
|
|
385.4 |
% |
Other
product lines
|
|
|
- |
|
|
|
8,383 |
|
|
|
(8,383 |
) |
|
|
|
* |
|
|
$ |
2,630,624 |
|
|
$ |
1,305,560 |
|
|
$ |
1,325,064 |
|
|
|
101.5 |
% |
*not meaningful
Management
believes that sales will continue to grow as we expand our sales efforts
and look for opportunities with larger scale.
Cost of Revenue. Cost of revenue
increased to $1,447,254
for the three months ended March 31, 2009, as compared to $678,730 for the three months
ended March 31, 2008, an increase of $768,524 or
113.2%. The majority of the increase is a direct result of the
expansion of the Company’s radio advertising inventory. Airline
magazine advertising sales also increased but at a much slower
rate. The details are as follows:
|
Three
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
$ |
696,569 |
|
|
$ |
505,470 |
|
|
$ |
191,099 |
|
|
|
37.8 |
% |
Radio
advertising direct costs
|
|
|
750,685 |
|
|
|
44,305 |
|
|
|
706,380 |
|
|
|
1,594.4 |
% |
Other
product lines
|
|
|
- |
|
|
|
128,955 |
|
|
|
(128,955 |
) |
|
|
|
* |
|
|
$ |
1,447,254 |
|
|
$ |
678,730 |
|
|
$ |
768,524 |
|
|
|
113.2 |
% |
*not meaningful
The
increase in radio advertising costs is largely a result of additional radio
inventory and its associated fixed cost. Since July 1, 2008, the
Company has signed three contracts for additional radio advertising
minutes. The increase in airline magazine costs can be attributed to
a) increased advertising inventory and b) the costs to print magazines, which
are paid by the Company. Management expects costs to diminish
in the coming quarter as the Company works to restructure existing
contracts. The costs that remain fixed are expected to grow slowly in
the coming quarters as a large portion of the costs are fixed.
Gross
Profit. Gross profit was $1,183,370 for the three months ended
March 31, 2009 as compared to $626,830 for the three months ended March 31,
2008, an increase of $556,540 or 88.8%. The overall gross
profit increase for the three months ended March 31, 2009 is attributable to a
significant increase in sales of the airline magazine advertising product line
offset by a year over year decrease in gross profit for the radio advertising
product line which was a product of increased sales offset by a larger increase
in direct cost. The details of which are as follows:
|
Three
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
$ |
1,430,817 |
|
|
$ |
688,037 |
|
|
$ |
742,780 |
|
|
|
108.0 |
% |
Radio
advertising direct costs
|
|
|
(247,447 |
) |
|
|
59,365 |
|
|
|
(306,812 |
) |
|
|
|
* |
Other
product lines
|
|
|
- |
|
|
|
(120,572 |
) |
|
|
120,572 |
|
|
|
|
* |
|
|
$ |
1,183,370 |
|
|
$ |
626,830 |
|
|
$ |
556,540 |
|
|
|
88.8 |
% |
*not meaningful
Radio
advertising’s year over year gross profit decrease for the three months ended
March 31, 2009 is attributable to the increase of fixed costs related to
additional radio advertising inventory versus the previous year. The
expansion of the radio business, a key strategic objective, requires the
increase of fixed costs for media assets. The Company purchases radio
advertising minutes on a "use it or lose it" basis which means a large portion
of costs of revenue are fixed. Management is working to restructure
existing contracts and add more cost advantageous contracts in the coming
quarters. Management expects radio advertising gross profit to
improve as sales improve and fixed costs are reduced.
The gross
margin for the three months ended March 31, 2009 and 2008 were 45.0% and 48.0%,
respectively. As with the overall gross profit, the gross margin
decrease was the product of an improved airline magazine advertising margin
offset by a decrease of the radio advertising product line margin, the details
of which are as follows:
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
|
67.3 |
% |
|
|
57.6 |
% |
|
|
9.6 |
% |
Radio
advertising direct costs
|
|
|
(49.2 |
)% |
|
|
57.3 |
% |
|
|
|
* |
Other
product lines
|
|
|
- |
|
|
|
- |
|
|
|
|
* |
|
|
|
45.0 |
% |
|
|
48.0 |
% |
|
|
(3.0 |
)% |
Management
expects margins to quickly improve for the radio advertising product line as
sales increase and fixed costs are reduced. The airline magazine
gross margin is also expected to increase as a large portion of direct costs are
fixed.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased to
$1,745,938 for the three months ended March 31, 2009, as compared to $871,890
for the three months ended March 31, 2008, an increase of $874,048 or
100.2%. The significant increase is attributable to the overall
expansion of the business and the resulting expansion of selling costs, staff
costs and other overhead.
Selling
expenses increases accounted for $680,384 of the year over year
difference. The increase is a combination of increased a) commissions
resulting from higher revenue and b) marketing expenses.
General
and Administrative expenses increased by $193,664. The increase is a
direct result of increased operations in China offset by a decrease in corporate
overhead. General and administrative costs in China increased by
$377,839 while corporate expenses decreased by $184,175. The increase
in China is directly attributed to the expansion of operations in China
including in Beijing, Tianjin, Xi’an and
Hainan. Corporate expenses decreased as the Company completed
the reverse acquisition with Well Chance as described above during the period
ended March 31, 2008.
The
Company expensed $41,618 related to the vesting of options to purchase common
stock during the three months ended March 31, 2009.
Management
expects selling, general and administrative expenses to grow at a far slower
pace as we believe there is excess capacity for expansion within the Company's
existing operations.
Loss from Operations. As a
result of the above, loss from operations totaled $562,568 for the three months
ended March 31, 2009 as compared to loss from operations of $245,060 for the
three months ended March 31, 2008, a difference of $317,508 or (129.6)% As a
percentage of revenues, loss from operations was (21.4)% for the three months
ended March 31, 2009 as compared to (18.8)% for the three months ended March 31,
2008.
Non-operating Expense.
Non-operating expense for the three months ended March 31, 2009 and 2007 were
$644,116 and $64,525, respectively. The difference, $579,591 or
(898.2)%, can be largely attributed to $414,734 of amortization expense related
to intangible assets, $107,936 of expense associated with a period correction of
minority interests and $31,876 of additional interest expense.
Income (Loss) before Provision
for Income Taxes. As a result of the foregoing, loss before provision for
income taxes was $1,206,684 for the three months ended March 31, 2009 as
compared to a loss of $309,585 for the three months ended March 31, 2008, a
decrease of $897,099 or ( 289.8)%.
Net Income (Loss). As a
result of the foregoing, net loss increased to $1,415,574 for the three months
ended March 31, 2009 as compared to a net loss of $113,094 for the three months
ended March 31, 2008, a decrease of $1,069,863 or ( 309.5)%. The respective net
margins are ( 53.8)% and (26.5) % for the three months ended March
31, 2009 and 2008. The net loss for the three months ended March 31, 2009 was
mainly due to the increase of fixed advertising costs related to the radio
advertising product line and the overall increase in selling, general and
administrative expenses. Management believes that the Company's
operations will generate net income at an increasing rate due to the fixed
nature of many of the expenses and expectations of continued revenue
growth. The Company has invested in its sales organization and
expects the benefits of such investment to come quickly.
Comparison
of Nine Months Ended March 31, 2009 and March, 2008
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
Amount
|
|
|
% of
Revenue
|
|
|
|
(in dollars, except percentages)
|
|
|
|
|
|
REVENUE
|
|
$ |
7,614,205 |
|
|
|
100.0 |
% |
|
$ |
3,263,495 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
4,133,588 |
|
|
|
54.3 |
% |
|
|
2,122,421 |
|
|
|
65.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
3,480,617 |
|
|
|
45.7 |
% |
|
|
1,141,074 |
|
|
|
35.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,570,334 |
|
|
|
60.0 |
% |
|
|
1,457,426 |
|
|
|
44.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,089,717 |
) |
|
|
(14.3 |
)% |
|
|
(316,352 |
) |
|
|
(9.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE, NET
|
|
|
(1,752,062 |
) |
|
|
(23.0 |
)% |
|
|
(65,870 |
) |
|
|
(2.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,841,779 |
) |
|
|
(37.3 |
)% |
|
|
(382,222 |
) |
|
|
(11.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
502,661 |
|
|
|
6.6 |
% |
|
|
36,126 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(3,344,440 |
) |
|
|
(43.9 |
)% |
|
|
(418,348 |
) |
|
|
(12.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(70,877 |
) |
|
|
(0.9 |
)% |
|
|
- |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
|
|
(3,415,317 |
) |
|
|
(44.9 |
)% |
|
|
(418,348 |
) |
|
|
(12.8 |
)% |
Revenues. Our
revenue includes revenues from sales of radio advertising and airline magazine
advertising. During the nine months ended March 31, 2009, we had
revenues of $7,614,205compared to revenues of $3,263,495 for the nine months
ended March 31, 2008, an increase of $____ or 133.3%. The increase is
attributable to the increase in sales of both airline magazine advertising and
radio advertising with airline magazine advertising sales leading the
way. For details of the changes for the nine months ended March 31,
2009 are as follows:
|
Nine
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine advertising sales
|
|
$ |
5,581,334 |
|
|
$ |
2,226,248 |
|
|
$ |
3,355,086 |
|
|
|
150.7 |
% |
Radio
advertising sales
|
|
|
2,032,871 |
|
|
|
1,028,203 |
|
|
|
1,004,668 |
|
|
|
97.7 |
% |
Other
product lines
|
|
|
- |
|
|
|
9,044 |
|
|
|
(9,044 |
) |
|
|
|
* |
|
|
$ |
7,614,205 |
|
|
$ |
3,263,495 |
|
|
$ |
4,350,710 |
|
|
|
133.3 |
% |
*not meaningful
Management
believes that sales will continue to grow as we expand our sales efforts and
look for opportunities with larger scale.
Cost of Sales. Cost of sales
increased to $4,133,588 for the nine months ended March 31, 2009, as compared to
$2,122,421 for the nine months ended March 31, 2008, an increase of $2,011,167
or 94.8%. Details for the nine months ended March 31, 2009 are as
follows:
|
Nine
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
$ |
1,976,429 |
|
|
$ |
1,355,780 |
|
|
$ |
620,649 |
|
|
|
45.8 |
% |
Radio
advertising direct costs
|
|
|
2,157,159 |
|
|
|
627,510 |
|
|
|
1,529,649 |
|
|
|
243.8 |
% |
Other
product lines
|
|
|
- |
|
|
|
139,131 |
|
|
|
(139,131 |
) |
|
|
|
* |
|
|
$ |
4,133,588 |
|
|
$ |
2,122,421 |
|
|
$ |
2,011,167 |
|
|
|
94.8 |
% |
*not meaningful
The
increase in radio advertising costs is largely a result of additional radio
inventory and its associated fixed cost. Since July 1, 2008, the
Company has signed three contracts for additional radio advertising
minutes. The increase in airline magazine costs can be largely
attributed to the costs of printing the magazine, which are paid by the
Company. Management expects costs to diminish in the coming quarter
as the Company works to restructure existing contracts. The costs
that remain fixed are expected to grow slowly in the coming quarters as a large
portion of the costs are fixed.
Gross Profit. Gross profit
was $3,480,617 for the nine months ended March 31, 2009 as compared to
$1,141,074 for the nine months ended March 31, 2008, an increase of $2,339,543
or 205.0%. The overall gross profit increase for the nine months
ended March 31, 2009 is attributable to a significant increase in sales of the
airline magazine advertising product line offset by a year over year decrease in
gross profit for the radio advertising product line, the details of which are as
follows:
|
Nine
months ended
|
|
|
|
|
|
|
|
|
March
31,
|
|
Change
|
|
|
2009
|
|
2008
|
|
Amount
|
|
|
%
|
|
|
(in
dollars, except percentages)
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
$ |
3,604,905 |
|
|
$ |
870,468 |
|
|
$ |
2,734,437 |
|
|
|
314.1 |
% |
Radio
advertising direct costs
|
|
|
(124,288 |
) |
|
|
400,693 |
|
|
|
(524,981 |
) |
|
|
|
* |
Other
product lines
|
|
|
- |
|
|
|
(130,087 |
) |
|
|
130,087 |
|
|
|
|
* |
|
|
$ |
3,480,617 |
|
|
$ |
1,141,074 |
|
|
$ |
2,339,543 |
|
|
|
205.0 |
% |
*not
meaningful
Radio
advertising’s year over year gross profit decrease for the nine months ended
March 31, 2009 is attributable to the increase of fixed costs related to
additional radio advertising inventory versus the previous year. The
expansion of the radio business, a key strategic objective, requires the
increase of fixed costs for media assets. The Company purchases radio
advertising minutes on a "use it or lose it" basis which means a large portion
of costs of revenue are fixed. Management is working to restructure
existing contracts and add more cost advantageous contracts in the coming
quarters. Management expects radio advertising gross profit to improve as sales
improve and fixed costs are reduced.
The gross
margin for the nine months ended March 31, 2009 and 2008 were 45.7% and 35.0%,
respectively. As with the overall gross profit, the gross margin
increase from airline magazine advertising is being offset by a decrease of the
radio advertising product line, the details of which are as
follows:
|
|
Nine months ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
Airline
magazine direct costs
|
|
|
64.6 |
% |
|
|
39.1 |
% |
|
|
25.5 |
% |
Radio
advertising direct costs
|
|
|
(6.1 |
)% |
|
|
39.0 |
% |
|
|
|
* |
Other
product lines
|
|
|
- |
|
|
|
(1,438.4 |
)% |
|
|
|
* |
|
|
|
45.7 |
% |
|
|
35.0 |
% |
|
|
10.7 |
% |
*not
meaningful
Management
expects margins to quickly improve for the radio advertising product line as
sales increase. The airline magazine gross margin is also expected to
increase as a majority of direct costs are fixed.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased to
$4,570,334 for the nine months ended March 31, 2009, as compared to $1,457,426
for the nine months ended March 31, 2008, an increase of $3,112,908 or
213.6%. The significant increase is attributable to the reverse
acquisition with Well Chance described above, the cost of being public and the
overall expansion of the business and the resulting expansion of selling costs,
staff costs and other overhead.
Selling
expenses increases accounted for $1,374,691 of the year over year
difference. The increase is a combination of increased a) commissions
resulting from higher revenue and b) marketing expenses.
General
and Administrative expenses increased by $1,738,217, of which $731,644 can be
attributed to corporate overhead. The significant increase in
corporate overhead is attributable to the cost of being public for an additional
two quarters versus the previous year, the closing of three transactions and the
associated professional fees and the increase in the scale of the
operation. The remaining increase of $1,006,573 is solely
attributable to the expansion of operations in China.
The
Company expensed $253,807 related to the vesting of options to purchase common
stock during the nine months ended March 31, 2009.
Management
expects selling, general and administrative expenses to grow at a far slower
pace as we believe there is excess capacity for expansion within the Company's
existing operations.
Loss from Operations. As a
result of the above, loss from operations totaled $1,089,717 for the nine months
ended March 31, 2009 as compared to loss from operations of $316,352 for the
nine months ended March 31, 2008, a difference of $773,365 or ( 244.5)%. As a
percentage of revenues, loss from operations was (14.3)% for the nine months
ended March 31, 2009 as compared to (9.7)% for the nine months ended March 31,
2008.
Non-operating Expense.
Non-operating expense for the nine months ended March 31, 2009 and 2007 was
$1,752,062 and $65,870, respectively. The difference, $1,686,192 or
___%, can be largely attributed to $1,215,968 of amortization expense
related to intangible assets and an additional $416,765 of additional interest
expense.
Income (Loss) before Provision
for Income Taxes. As a result of the foregoing, loss before provision for
income taxes was $2,841,779 for the nine months ended March 31, 2009 as compared
to a loss of $382,222 for the nine months ended March 31, 2008, a decrease of
$2,459,557 or ( 643.5)%.
Net Income (Loss). As a
result of the foregoing, net loss increased to $3,344,440 for the nine months
ended March 31, 2009 as compared to a net loss of $418,348 for the nine months
ended March 31, 2008, a decrease of $2,926,092 or ( 699.4)%. The respective net
margins are (43.9)% and (12.8) % for the nine months ended March 31, 2009 and
2008. The net loss for the nine months ended March 31, 2009 was mainly due to
the increase of fixed advertising costs related to the radio advertising product
line and the overall increase in selling, general and administrative
expenses. Management believes that the Company's operations will
generate net income at an increasing rate due to the fixed nature of many of the
expenses and expectations of continued revenue growth. The Company
has invested in its sales organization and expects the benefits of such
investment to come quickly.
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth a summary of our cash flows for the periods indicated
below:
|
|
Nine
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
$ |
(2,659,945 |
) |
|
$ |
(167,368 |
) |
Net
cash used in investing activities
|
|
|
(1,618,049 |
) |
|
|
(244 |
) |
Net
cash provided by financing activities
|
|
|
1,100,488 |
|
|
|
844,861 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
4,613 |
|
|
|
23,344 |
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
(3,172,893 |
) |
|
|
700,593 |
|
Cash
and cash equivalents at the beginning of period
|
|
|
3,372,499 |
|
|
|
164,100 |
|
Cash
and cash equivalents at the end of period
|
|
|
199,606 |
|
|
|
864,693 |
|
Operating
Activities
Net cash
used in operating activities was $2,659,945 in the nine months ended March 31,
2009 compared with net cash used in operating activities of $167,368 in
comparable period ending March 31, 2008. Our revenues have not
reached a level sufficient to support our operations. We funded our
losses through available cash in part from the issuance of Series A convertible
preferred stock.
Investing
and Financing Activities
Cash used
in investing activities in the nine months ended March 31, 2009 was $1,618,049
compared with $244 for the comparable period for the previous year and consisted
primarily of a $740,010 payment of amounts due for the acquisition of Legend
Media Tianjin Investment Company and a $749,990 payment of amounts due for the
acquisition of News Radio Limited. Cash provided by financing
activities was $1,100,488 for the nine months ended March 31,
2009. The cash provided by financing activities was obtained by the
issuance of $1,650,000 in its Series A convertible preferred stock to Maoming
China Fund and $60,658 of contributed capital from payment of obligations by
shareholders, offset by $360,000 in repayments on notes payable and $250,170 in
dividends paid to the shareholders of YSLD as part of the Music Radio
Acquisition Agreement. 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 currently due; $375,733 of which amount is a loan from a related
party, RMK Emerging Growth Fund LP, from which the Company expects to receive
continued support and extension. As of March 31, 2009, no demand
letters for payment have been received by the Company. Furthermore,
the Company will have to raise additional funds to finance further its 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.
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 March 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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
In
addition to the other information set forth in this Form 10-Q and the risk
factors identified below, you should carefully consider the factors discussed in
Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-KSB
for the year ended June 30, 2008, which could materially affect our business,
financial condition or future results. The risks described in our Annual Report
on Form 10-KSB and herein are not the only risks we face. 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. There are no material changes to the risk
factors included in our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2008 during the nine months ended March 31, 2009, except for the
following additional risk factors:
Our
business has been and may continue to be adversely affected by conditions in the
global financial markets and economic conditions generally.
Our
business is materially affected by conditions in the global financial markets
and economic conditions generally. In the past year, these conditions have
changed suddenly and negatively. The ongoing financial crisis and the loss of
confidence in the stock market has increased our cost of funding and limited our
access to some of our traditional sources of liquidity, including secured and
unsecured borrowings as well as equity financings. Increases in funding costs
and limitations on our access to liquidity have negatively impacted our ability
to grow our business. In addition, the deteriorating general economic conditions
globally have caused a decline in spending on advertising. This has caused a
slow down in our sales and delays in signing up new customers. Overall, the
business environment is adverse for our business and there can be no assurance
that these conditions will improve in the near term. Until they do, we expect
our results of operations to be adversely affected.
Our
business has been and may continue to be adversely affected by disruptions in
the credit markets, including reduced access to credit and higher costs of
obtaining credit.
Widening
credit spreads, as well as significant declines in the availability of credit,
have adversely affected our ability to borrow on a secured and unsecured basis
and may continue to do so. Disruptions in the credit markets make it harder and
more expensive to obtain funding for our businesses. If our available funding is
limited or we are forced to fund our operations at a higher cost, these
conditions may require us to curtail our business activities and increase our
cost of funding, both of which could reduce our profitability and prevent or
hamper our growth through acquisitions.
Our Independent Registered Public
Accounting Firm added an emphasis paragraph to their audit report contained in
our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2008
describing an uncertainty related to our ability to continue as a going
concern.
Due to
our continued losses and limited capital resources our Independent Registered
Public Accounting Firm has issued a report that describes an uncertainty related
to our ability to continue as a going concern. The auditors’ report discloses
that we did not generate significant revenues during the fiscal year ended June
30, 2008, we incurred a net loss of approximately $2,013826, and consumed cash
in operating activities of approximately $830,681 during such period. These
conditions raise substantial doubt about our ability to continue as a going
concern and may make it difficult for us to raise capital. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Ju
Baochun, one our directors, currently owns approximately 91% of our outstanding
common stock. As a result, Mr. Ju will have the ability to significantly impact
virtually all corporate actions requiring shareholder approval, including the
following actions:
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election
of our directors;
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•
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the
amendment of our organizational documents;
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•
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the
merger of our company or the sale of our assets or other corporate
transactions; and
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controlling
the outcome of any other matter submitted to the security holders for
vote.
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The interests of Mr. Ju may differ from
the interests of our other shareholders. Further, Mr. Ju's beneficial stock
ownership may discourage potential investors from investing in shares of our
common stock due to the lack of influence they could have on our business
decisions, which in turn could reduce our stock price.
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:
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31.1
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Rules
13a-14 and 15d-14 of the Securities Exchange Act of
1934
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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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.
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LEGEND MEDIA, INC.
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Date:
May 19, 2009
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By:
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/s/
Jeffrey Dash
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Jeffrey
Dash
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Chief Executive Officer (Principal Executive Officer) and
Chief Financial Officer (Principal Financial and Accounting Officer)
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