Attached files
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EX-32.2 - CERTIFICATION - Legend Media, Inc. | ex32-2.htm |
EX-32.1 - CERTIFICATION - Legend Media, Inc. | ex32-1.htm |
EX-31.2 - CERTIFICATION - Legend Media, Inc. | ex31-2.htm |
EX-31.1 - CERTIFICATION - Legend Media, Inc. | ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________________________ to
____________________________
Commission
file number 333-138479
LEGEND
MEDIA, INC.
(Exact
Name of Registrant as Specified in its Charter)
Nevada
|
87-0602435
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or Organization)
|
Room
624, Gehua Tower A , Qinglong Hutong Building No. 1
Beijing
100007, People’s Republic of China
(Address
of Principal Executive Offices)
(86-10)
8418 6112
(Issuer’s
Telephone Number)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|
Yes
x No
o
|
|
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 filerAccelerated filer o
|
Accelerated
Filer o
|
|
Non-accelerated
filerSmaller reporting company o
(Do
not check if a smaller reporting company)
|
Smaller
Reporting Company x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes o No x
|
Number of
shares outstanding of the registrant's common stock as of February 12,
2010:
112,813,355
shares of Common Stock, US$0.001 par value per share
TABLE
OF CONTENTS
PART
I: FINANCIAL INFORMATION
|
3
|
Item
1. Financial Statements (Unaudited)
|
3
|
CONSOLDIATED
BALANCE SHEETS
|
3
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
|
4
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
5
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
6
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
40
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
54
|
Item
4T. Controls and Procedures
|
54
|
PART
II: OTHER INFORMATION
|
55
|
Item
1. Legal Proceedings
|
55
|
Item
1A. Risk Factors
|
55
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
55
|
Item
3. Defaults Upon Senior Securities
|
55
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
55
|
Item
5. Other Information
|
55
|
Item
6. Exhibits
|
55
|
SIGNATURES
|
56
|
2
PART
I: FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
DECEMBER 31, 2009 and JUNE 30, 2009
ASSETS
|
||||||||
December
31,
|
June
30,
|
|||||||
(unaudited)
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
& cash equivalents
|
$ | 242,554 | $ | 169,343 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $ 295,589 and
$278,043
|
1,804,249 | 1,640,226 | ||||||
for December
31 and June 30, respectively
|
||||||||
Vendor
deposits
|
25,242 | 111,682 | ||||||
Related
party receivable
|
1,566,537 | 341,232 | ||||||
Prepaid
expenses
|
615,808 | 165,100 | ||||||
Deferred
costs
|
1,238,421 | 1,583,115 | ||||||
Other
receivables
|
23,348 | 5,789 | ||||||
Total
current assets
|
5,516,159 | 4,016,487 | ||||||
Property
and equipment, net
|
50,064 | 113,824 | ||||||
Intangible
assets, net
|
6,218,849 | 7,294,089 | ||||||
TOTAL
ASSETS
|
$ | 11,785,072 | $ | 11,424,400 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 1,673,869 | $ | 1,934,080 | ||||
Accrued
liabilities
|
809,412 | 894,046 | ||||||
Accrued
interest
|
658,358 | 502,168 | ||||||
Unearned
revenue
|
887,994 | 1,130,662 | ||||||
Short
term notes payable
|
56,000 | 56,000 | ||||||
Related
party note payable
|
375,733 | 375,733 | ||||||
Related
party payables
|
2,621,554 | 1,673,756 | ||||||
Other
payables
|
364,526 | 439,958 | ||||||
Total
current liabilities
|
7,447,446 | 7,006,403 | ||||||
Commitments
and contingencies
|
- | - | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Legend
Media, Inc. stockholders' equity
|
||||||||
Series
A convertible preferred stock - 20,000,000 shares
authorized,
|
||||||||
par
value $0.001, 2,083,333 shares issued and outstanding
|
||||||||
at
December 31, 2009 and June 30, 2009, respectively
|
2,083 | 2,083 | ||||||
Common
stock - 127,000,000 shares authorized,
|
||||||||
par
value $0.001,
112,813,355 and 111,013,355 shares issued and
outstanding
|
||||||||
at
December 31, 2009 and June 30, 2009, respectively
|
112,813 | 111,013 | ||||||
Additional
paid-in capital
|
70,517,134 | 69,165,562 | ||||||
Accumulated
deficit, deemed dividends related to entities under common
control
|
(56,840,249 | ) | (56,854,346 | ) | ||||
Accumulated
deficit, from operations
|
(9,473,978 | ) | (8,030,961 | ) | ||||
Total
Accumulated deficit
|
(66,314,227 | ) | (64,885,307 | ) | ||||
Other
comprehensive income
|
19,823 | 24,646 | ||||||
Total
Legend Media, Inc stockholders' equity
|
4,337,626 | 4,417,997 | ||||||
Non-controlling
interest
|
- | - | ||||||
Total
stockholders' equity
|
4,337,626 | 4,417,997 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 11,785,072 | $ | 11,424,400 |
The
accompanying notes are an integral part of these consolidated financial
statements.
|
3
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008
(UNAUDITED)
Three
Months Ended December 31,
|
Six
Months Ended December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue
|
$ | 2,767,634 | $ | 2,659,090 | $ | 4,928,065 | $ | 4,983,582 | ||||||||
Cost
of revenue
|
779,495 | 1,523,652 | 1,774,422 | 2,686,334 | ||||||||||||
Gross
profit
|
1,988,139 | 1,135,438 | 3,153,643 | 2,297,248 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
1,284,138 | 656,224 | 2,041,997 | 1,146,866 | ||||||||||||
General
and administrative expenses
|
644,569 | 731,439 | 1,645,569 | 1,677,530 | ||||||||||||
Depreciation
and amortization expense
|
307,064 | 402,675 | 614,026 | 814,549 | ||||||||||||
Total
operating expenses
|
2,235,771 | 1,790,338 | 4,301,592 | 3,638,945 | ||||||||||||
Loss
from Operations
|
(247,632 | ) | (654,900 | ) | (1,147,949 | ) | (1,341,697 | ) | ||||||||
Non-operating
income (expense):
|
||||||||||||||||
Interest
income
|
111 | 504 | 360 | 771 | ||||||||||||
Interest
expense
|
(11,448 | ) | (31,287 | ) | (109,508 | ) | (201,155 | ) | ||||||||
Related
party interest expense
|
(66,913 | ) | (88,712 | ) | (133,293 | ) | (183,734 | ) | ||||||||
Loss
on disposal of fixed assets
|
(28,662 | ) | (3,358 | ) | (28,662 | ) | (3,358 | ) | ||||||||
Foreign
exchange gain (loss)
|
(3,669 | ) | 7,861 | (25,915 | ) | 7,709 | ||||||||||
Gain
on termination of variable interest entity agreements
|
- | - | 578,867 | - | ||||||||||||
Impairment
loss on intangible assets
|
(470,536 | ) | - | (470,536 | ) | - | ||||||||||
Other
|
- | (10,686 | ) | - | (27,654 | ) | ||||||||||
Total
non-operating income (expense)
|
(581,117 | ) | (125,678 | ) | (188,687 | ) | (407,421 | ) | ||||||||
Loss
before income tax
|
(828,749 | ) | (780,578 | ) | (1,336,636 | ) | (1,749,118 | ) | ||||||||
Income
tax
|
89,505 | 116,326 | 106,381 | 293,771 | ||||||||||||
Net
loss
|
(918,254 | ) | (896,904 | ) | (1,443,017 | ) | (2,042,889 | ) | ||||||||
Less:
Loss attributable to noncontrolling interest
|
- | 126,755 | - | 114,023 | ||||||||||||
Net
loss attributable to Legend Media, Inc. common
shareholders
|
(918,254 | ) | (770,149 | ) | (1,443,017 | ) | (1,928,866 | ) | ||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation gain (loss)
|
(26,314 | ) | 11,276 | (4,823 | ) | (70,111 | ) | |||||||||
Comprehensive
loss
|
(944,568 | ) | (758,873 | ) | (1,447,840 | ) | (1,998,977 | ) | ||||||||
Comprehensive
loss attributable to noncontrolling interest
|
- | - | - | - | ||||||||||||
Comprehensive
loss attributable to Legend Media, Inc. common
shareholders
|
$ | (944,568 | ) | $ | (758,873 | ) | $ | (1,447,840 | ) | $ | (1,998,977 | ) | ||||
Weighted
average shares outstanding :
|
||||||||||||||||
Basic
|
112,813,355 | 10,339,775 | 112,109,007 | 10,327,837 | ||||||||||||
Diluted
|
112,813,355 | 10,339,775 | 112,109,007 | 10,327,837 | ||||||||||||
Loss
per share:
|
||||||||||||||||
Basic
|
$ | (0.0081 | ) | $ | (0.0745 | ) | $ | (0.0129 | ) | $ | (0.1868 | ) | ||||
Diluted
|
$ | (0.0081 | ) | $ | (0.0745 | ) | $ | (0.0129 | ) | $ | (0.1868 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
|
4
LEGEND
MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (1,443,017 | ) | $ | (1,928,866 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Depreciation
and amortization
|
614,009 | 814,549 | ||||||
Impairment
of intangible assets
|
470,536 | 150,271 | ||||||
Warrant
expense
|
86,611 | - | ||||||
Fair
value of stock options under ASC 718
|
526,261 | 211,469 | ||||||
Common
stock issued for services
|
450,000 | - | ||||||
Loss
from minority interest in subsidiary
|
- | (114,023 | ) | |||||
Gain
on termination of variable interest entity agreements
|
(573,428 | ) | - | |||||
Change
in allowance for uncollectible accounts
|
135,753 | - | ||||||
Barter
revenues
|
(1,667,357 | ) | (1,226,407 | ) | ||||
Barter
expenses
|
1,209,222 | 547,678 | ||||||
Loss
on write off of assets
|
28,642 | 3,435 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(808,506 | ) | (1,125,820 | ) | ||||
Vendor
deposits
|
86,426 | (19,380 | ) | |||||
Prepaid
expenses
|
(450,907 | ) | (231,552 | ) | ||||
Other
receivables
|
(105,906 | ) | (11,380 | ) | ||||
Accounts
payable
|
(76,009 | ) | (89,087 | ) | ||||
Accrued
liabilities
|
49,389 | 769,018 | ||||||
Other
payables
|
105,478 | 12,730 | ||||||
Related
party payables
|
- | (180,575 | ) | |||||
Unearned
revenue
|
646,655 | 244,632 | ||||||
Accrued
interest
|
156,190 | 64,780 | ||||||
Net
cash used in operating activities
|
(559,958 | ) | (2,108,528 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Long
term deposits, contract guarantees and transaction
deposits
|
- | (153,510 | ) | |||||
Purchase
of property and equipment
|
(834 | ) | (123,542 | ) | ||||
Cash
acquired in acquisition of variable interest entity
|
- | 286 | ||||||
Payment
on termination of variable interest entity
|
(174,239 | ) | - | |||||
Disposition
of cash balances on termination of variable interest
entities
|
(5,439 | ) | - | |||||
Payment
on acquisition of Music Radio Limited
|
- | (740,010 | ) | |||||
Cash
paid for acquisition of News Radio Limited
|
- | (749,990 | ) | |||||
Restricted
cash received
|
- | (14,620 | ) | |||||
Net
cash used in investing activities
|
(180,512 | ) | (1,781,386 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayment
of notes payable
|
- | (360,000 | ) | |||||
Proceeds
from sale of convertible preferred stock
|
- | 1,500,000 | ||||||
Contributed
capital from assumption of obligations
|
300,000 | 60,658 | ||||||
Dividend
to shareholders of HTLG
|
- | (250,170 | ) | |||||
Borrowing
from related parties
|
2,880,951 | - | ||||||
Repayment
to related parties
|
(1,387,125 | ) | - | |||||
Collection
on behalf of the company by related party
|
(980,730 | ) | - | |||||
Net
cash provided by financing activities
|
813,096 | 950,488 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
585 | 6,936 | ||||||
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
73,211 | (2,932,490 | ) | |||||
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
169,343 | 3,372,499 | ||||||
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 242,554 | $ | 440,009 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | - | $ | 170,000 | ||||
Income
taxes paid
|
$ | - | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
|
5
LEGEND
MEDIA, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Organization and Basis of
Presentation
Organization and Line of
Business
Legend
Media, Inc. (the “Company”, “Legend Media”, “We”, “us” or “our”), formerly known
as Noble Quests, Inc., was organized as a Nevada corporation on March 16, 1998,
to sell multi-media marketing and other related services to network marketing
groups. Specifically, the Company assisted network marketers in using marketing
tools such as public relations, advertising, direct mail, collateral
development, electronic communications and promotion tools to increase product
and service awareness.
Well
Chance was incorporated under the laws of the British Virgin Islands (“BVI”) as
an International Business Company on February 22, 2005. The Company is focused
on building a consumer advertising network in the People’s Republic of China
(the “PRC”) focused on the Chinese radio advertising industry and advertising
media that targets the consumer base of China.
On June
4, 2008, the Company and Well Chance entered into a Share Purchase Agreement
(the “News Radio Share Purchase Agreement”) with News Radio Limited (“NRL”), a
BVI company, and Mr. Ju and Ms. Xue Wei (the “News Radio Shareholders”), for the
purchase of radio advertising rights in Beijing, PRC. Pursuant to the News Radio
Purchase Agreement, the Company agreed to (a) issue 67,388 shares of the
Company's common stock with an aggregate value of 2,000,000 Chinese Renminbi
("RMB") (equivalent to US$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 preceding June 4, 2008 on the closing date, (b) pay
RMB5,250,000 (approximately US$755,287 based on the currency exchange rate on
June 5, 2008) payable 28 days after the closing date, and (c) pay RMB1,600,000
(approximately US$230,182 based on the currency exchange rate on June 5, 2008)
payable 90 days after the closing date. In consideration for the purchase of
100% of the common stock of NRL, a wholly owned subsidiary of MRL, the closing
of the transaction contemplated under the News Radio Share Purchase Agreement
occurred on July 21, 2008, which gave the Company effective control of the
PRC-based company that has the exclusive sales contract for the Beijing based
radio channel FM 90.5. The exclusive sales contract provides the Company with
minutes per year of radio advertising airtime. The contract is up for renewal
annually and was terminated pursuant to a termination agreement dated July 20,
2009.
6
On August
4, 2008, Beijing Maihesi International Advertising Co., Ltd. (“Beijing
Maihesi”), a company organized in the PRC and an affiliate of Legend Media,
entered into an Exclusive Advertising Rights Agreement with Beijing Guoguang
Guangrong Advertising Co., Ltd. (the "Beijing Maihesi Agreement"), pursuant to
which Beijing Maihesi acquired 45,990 advertising minutes per year on FM 107.1,
a news and entertainment radio channel broadcasting to the Shenzhen region of
the PRC. The Exclusive Advertising Rights Agreement has an original expiration
date on December 31, 2010 and was terminated pursuant to a termination agreement
dated July 20, 2009.
Considering
the potential business opportunities available and the likelihood that certain
radio business would continue to cause negative cash flow in the near future due
to the global economic depression, the Company restructured its current business
assets and formulated a business plan in response to the global and domestic
economic changes, including (i) the disposal of FM 90.5 and FM107.1 radio
business and (ii) the assignment of FM 92.5 and FM 95.5 radio business to BJ
YSLD.
On
November 28, 2008, the Company entered into and closed an Acquisition Agreement
(the "Airline Advertising Acquisition Agreement") with Well Chance, MRL, and
Music Radio Shareholders Pursuant to the Airline Advertising Acquisition
Agreement, the Company acquired control over BJ YSLD and caused the contribution
of an airline magazine advertising business of Beijing Hongtenglianguang
Advertising Co., Ltd (“HTLG”), a PRC company 100% owned by the Music Radio
Shareholders, to BJ YSLD. 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 Mr.
Ju. The closing gave Legend Media effective control of BJ YSLD, which has an
indirect exclusive advertising agency rights for Xinhua Airline
Magazine. The airline magazine reaches a potential audience
approaching 20 million passengers per year. The exclusive contract
with Xinhua Airline Magazine provides approximately 80 pages of advertising
space per monthly issue.
7
As a
result of the Airline Advertising Acquisition Agreement and the reverse merger
transaction with Well Chance, the historical financial statements presented are
those of Well Chance and BJ YSLD. At the time of the reverse merger,
Well Chance’s historical financials became those of the Company. The
subsequent Airline Advertising Acquisition Agreement, which gave the Company
control of BJ YSLD, was between entities under common control and, as such,
accounted for similarly to a pooling of interests.
Well
Chance conducts its business operations through its 80%-owned
subsidiary, Legend (Beijing) Consulting Co., Ltd., and its wholly-owned
subsidiary, Legend (Beijing) Information and Technology Co., Ltd., each of which
are incorporated under the laws of the PRC.
As of
February 12, 2010, the Company had obtained substantial exclusive sales rights
for advertising on one airline magazine.
Today,
the Company is building a consumer advertising network in China to reach the
affluent and mass affluent consumers in China through radio and airline travel.
Management is focused on key lifestyles of the affluent as a 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 it to expand sales efforts quickly as new inventory
is acquired.
Going
Concern
The
accompanying consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the three months and six months ended
December 31, 2009, the Company generated a net loss of US$1,336,992 and
US$1,443,017, respectively, and has a working capital deficit of US$1,931,287 as
of December 31, 2009. The working capital deficit includes US$
2,621,554 of related party payables and US$1,566,537 of related party
receivables.
As
further described in Note 8, on January 31, 2008, in connection with the Share
Exchange Agreement discussed under Note 1, Legend Media entered into a loan
agreement with RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to which
Well Chance had the right to borrow US$375,733 from RMK as a short-term bridge
loan. The due date on this loan was February 10, 2009. The principal amount of
US$375,733 is currently outstanding and is classified as a related party note
payable. The accrued interest balance for this loan is US$494,283 as of December
31 2009, which is classified as accrued interest. On November 25, 2009, RMK
issued notice to the Company requiring immediate repayment of the loan. The
Company is working with RMK to extend the note, but no outcome has been
reached. RMK is a fund controlled by a shareholder who is also the
CEO of ARC Investment Partners, LLC, a shareholder of the Company. See Note
16.
8
As
further described in Note 1, Legend Media has effective control of BJ YSLD. The
majority of Legend Media’s revenues are derived from BJ YSLD’s indirect
exclusive advertising agency rights for Xinhua Airline Magazine. The previous
exclusive advertising agency rights agreement for Xinhua Airline Magazine (the
“Airline Advertising Agency Agreement”) expires on March 31, 2010. Due to the
lack of sufficient cash flow generated from the business of the Company, it is
unable to come up with the upfront deposit required by the related media company
for the renewal of this Airline Advertising Agency Agreement. Pursuant to an
agreement of understanding entered into among certain major shareholders of the
Company on December 19, 2009 (the “ AOU”), Mr. Ju, the CEO of the Company, has
personally secured the financing necessary and caused such Airline Advertising
Agency Agreement be temporarily entered between HTLG and the media company. The
Company is currently attempting to raise capital to repay Mr Ju the above-said
personal financing. Upon the repayment of such personal financing and subject to
other terms of the AOU, Mr. Ju will cause the Airline Advertising Agency
Agreement be assigned to BJ YSLD. In case capital is raised, considering current
market conditions, the Company may have to issue a significant number of
shares. Further, if capital is not available from the market,
significant shares would have to be issued to Mr. Ju in accordance with the AOU,
who provided the capital necessary to secure the Airline Advertising Agency
Agreement.
These
factors among others may indicate the Company may be unable to continue as a
going concern for a reasonable period of time.
In view
of these matters, realization of profitability is dependent upon the success of
the Company’s future operations and ability to meet its financial requirements
and raise additional capital. Management's plans include negotiation with RMK to
extend the note, repayment of the personal financing for the assignment of the
exclusive right under the Airline Advertising Agency Agreement to BJ YSLD,
further marketing of its advertising network and the expansion of its
advertising sales for 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.
The
accompanying unaudited consolidated financial statements have been prepared in
conformity with US GAAP. The Company’s functional currency is Renminbi ("RMB"),
however, the accompanying consolidated financial statements have been translated
and presented in United States Dollars (“US$”).
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.
Certain
prior period account descriptions were reclassified to conform to the three and
six months ended December 31, 2009.
9
The
accompanying consolidated financial statements include the accounts of Legend
Media and its subsidiaries as follows as of December 31, 2009:
Subsidiary
|
Place
Incorporated
|
%
Owned
|
|||
Well
Chance
|
United
States
|
100
|
|||
Legend
Media Investment Company Limited
|
BVI
|
80
|
|||
Two
subsidiaries of Legend Media Investment Company Limited
|
|||||
Legend
Media Tianjin HK Limited
|
Hong
Kong
|
80
|
|||
Legend
Media (Beijing) Consulting Company Limited
|
PRC
|
80
|
|||
News
Radio Limited
|
BVI
|
100
|
|||
Three
subsidiaries of News Radio Limited
|
|||||
CRI
News Radio Limited
|
Hong
Kong
|
100
|
|||
Legend
Media (Beijing) Information and Technology Co., Ltd.
|
PRC
|
100
|
|||
Beijing
Yinse Lingdong Advertising Co., Ltd.
|
PRC
|
100
|
*
|
Cash and Cash Equivalents
Cash and
cash equivalents include cash on hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
allowance for doubtful accounts is the Company's best estimate of the amount of
probable credit losses in the Company's existing accounts receivable. Management
reviews the composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of
these reserves.
At times,
the Company will record receivables, which have not yet been invoiced, from
advertising contracts. These receivables are recorded in the accompanying
consolidated balance sheet and included in accounts receivable. The unbilled
accounts receivable balance at December 31 and June 30, 2009 was US$ 250,743 and
US$1,285,587, respectively
Prepaid
Expenses
Prepaid
expenses consist of prepayments for legal and consulting services. Prepaid
expenses are amortized over the period in which the services are
performed.
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:
10
3
years
|
|
Office
equipment and furniture
|
3
years
|
Leasehold
improvements
|
1
year
|
The
Company applies FASB ASC 360-10, “Property, Plant, and
Equipment”, which established a “primary asset” approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset. Long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. The Company purchases (i) advertising inventory
in the form of advertising airtime, the unit being minutes, from radio stations
and (ii) advertising pages from airline magazines. The Company then distributes
these minutes and pages under various sales agreements. The Company recognizes
advertising revenue over the term of each sales agreement,
provided evidence of an arrangement exists, the fees are fixed or determinable
and collection of the resulting receivable is reasonably assured. The Company
recognizes deferred revenue when cash has been received on a sales agreement,
but the revenue has not yet been earned. Under these policies, no revenue is
recognized unless persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collection is reasonably
assured. Barter advertising revenues and the offsetting expense are
recognized at the fair value of the advertising as determined by similar cash
transactions. Under PRC regulations, the Company is required to pay certain
taxes on revenues generated. These taxes include:
|
·
|
Business
tax: 5% of revenues generated net of fees paid to advertising agencies and
media companies for services and advertising
inventory;
|
|
·
|
Construction
tax: 3% of revenues generated net of fees paid to advertising agencies and
media companies for services and advertising
inventory;
|
|
·
|
Education
tax: 7% of the business tax;
|
|
·
|
Urban
development tax: 3% of the business tax;
and
|
|
·
|
Flood
insurance tax: 1% of the business
tax.
|
The
Company recognizes these taxes in cost of revenue in the period
incurred.
Cost of
Revenue
The
Company expenses advertising cost monthly according to the terms of the
underlying contracts. The cost of the contract is expensed evenly over the term
of the agreement starting on the date advertising is first expected to take
place. As the advertising inventory does not carry forward, all minutes are
expensed whether sold or not.
11
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with FASB ASC
718 “Compensation-Stock
Compensation.” The Company recognizes in its statements
of operations and other comprehensive income (loss) the grant-date fair
value of stock options and other equity-based compensation issued to employees
and non-employees. As of December 31, 2009,
there were outstanding options to purchase 6,966,820 shares of common stock and
warrants to purchase 11,180,294 shares of common stock.
Income Taxes
The
Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes.” ASC 740
requires a company use the asset and liability method of accounting for income
taxes, whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion, or all of, the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
Concentration of Credit
Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the PRC
and the United States. Certain financial instruments, which subject the Company
to concentration of credit risk, consist of cash, accounts receivable and
related party receivable. 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 December 31, 2009 and June 30, 2009, the Company had deposits in excess of
federally insured limits totaling US$0 and US$7,907, respectively. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant risks on its cash in bank accounts. In terms of accounts
receivable, the Company sells to a wide range of customers. No significant
customer accounted for a significant percentage of the revenue for the years
ended December 31 2008 and 2009. Related party receivable represents certain
customer receivables collected by HTLG on behalf of the Company. Such
receivables account for 21.89% and 50.62% of total accounts receivable as of
December 31, 2009 and June 30, 2009, respectively. See Note 16 for
specific balances and transaction amounts.
Foreign Currency
Transactions and Comprehensive Income
US GAAP
requires recognized revenue, expenses, gains and losses to be 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 US$21,158
and US$24,646 at December 31, 2009 and June 30, 2009, respectively, are
classified as an item of other comprehensive income in the stockholders’ equity
section of the consolidated balance sheets.
12
Basic and Diluted Loss Per
Share
Loss per
share is calculated in accordance with FASB ASC 260, “Earnings Per Share.” Basic loss 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.
Statement of Cash
Flows
In
accordance with FASB ASC 230, “Statement of Cash Flows,”
cash flows from the Company’s operations are calculated based upon the local
currencies using the average translation rates. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.
Segment
Reporting
FASB ASC
280, “Disclosure about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. The Company determined it has one operating segment.
On May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited (LMTICL), a BVI company and a wholly-owned subsidiary
of MRL. As a result of this purchase, the Company recognized initial minority
interest on its consolidated balance sheet of US$15,524. The loss attributed to
minority non-controlling
interest was separately designated in the accompanying statements
of operations and other comprehensive income.
Variable Interest
Entities
In
January 2003, the FASB issued Statement of Financial Accounting Standards Board
Interpretation FSB ASC 810-10-05-8, "Consolidation of VIEs.” ASC
810-10-05-8 states that in general, a VIE is a corporation, partnership, limited
liability corporation, trust or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
On May
30, 2008, the Company purchased 80% of the common stock of LMTICL, and on July
21, 2008, the Company purchased 100% of the common stock of NRL. Additionally,
on November 28, 2008, the Company entered into and closed the Airline
Advertising Acquisition Agreement with Well Chance, MRL, and the Music Radio
Shareholders, pursuant to which the Company acquired control of BJ YSLD, another
variable interest entity. Foreign direct investment and ownership of advertising
companies in the PRC is subject to certain restrictions. Therefore, the Company
acquired control of TJ YSLD (through its purchase of Legend Media Tianjin
Investment Company Limited) and the Company acquired control of Beijing Maihesi
(through its purchase of NRL). The Company structured Legend Media Tianjin
Investment Company Limited and NRL transactions to comply with such
restrictions.
13
The
principal regulations governing foreign ownership in the advertising industry in
China include:
·
|
The
Catalogue for Guiding Foreign Investment in Industry (2007);
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 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 and airline advertising business operates in
China though contractual arrangements with consolidated entities in China.
The Company and its PRC subsidiaries entered into contractual arrangements with
TJ YSLD, Beijing Maihesi and BJ YSLD as well as their respective shareholders
under which:
·
|
The
Company has been able to exert significant control over significant
decisions about the activities of TJ YSLD, Beijing Maihesi and
BJ YSLD,
|
·
|
A
substantial portion of the economic benefits and risks of the operations
of TJ YSLD, Beijing Maihesi and BJ YSLD were transferred to the Company
through a revenue assignment agreement,
and
|
·
|
The
equity owner of TJ YSLD, Beijing Maihesi and BJ YSLD has not had the
obligation to absorb the losses of TJ YSLD Beijing Maihesi or BJ
YSLD.
|
As the
Company has been able to exert significant control over the PRC operating
affiliates and a substantial portion of the economic benefits and risks were
transferred to the Company, it determined that the advertising entities, TJ
YSLD, Beijing Maihesi and BJ YSLD meet the definition of a VIE through July 20,
2009.However, subsequent to the July 20, 2009 termination of the TJ YSLD and
Beijing Maihesi VIE agreements (see Note 11), only BJ YSLD meets the definition
of a VIE. Accordingly, the Company is considered to be the primary beneficiary
of the risks and benefits of equity ownership of TJ YSLD, Beijing Maihesi and BJ
YSLD and thus has consolidated these entities in its accompanying financial
statements through July 20, 2009 and BJ YSLD as of December 31,
2009.
Fair Value of Financial
Instruments and Concentrations
On
January 1, 2008, the Company adopted FASB ASC 820-10, “Fair Value Measurements
and Disclosures.” ASC 820-10 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosures requirements for fair value measures. The carrying amounts reported
in the balance sheets for receivables and current liabilities each qualify as
financial instruments and are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three levels
are defined as follow:
14
·
|
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
December 31, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheets at fair value.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” now known as ASC Topic 825-10 “Financial
Instruments.” ASC Topic 825-10 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings. The Company adopted FASB ASC 825-10 on January 1, 2008. The Company
chose not to elect the option to measure the fair value of eligible financial
assets and liabilities.
In June,
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS No.166”). This statement
removes the concept of a qualifying special-purpose entity Statement 140 and
removes the exception from applying Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, to qualifying
special-purpose entities. SFAS No. 166 has not yet been codified and in
accordance with ASC 105, remains authoritative guidance until such time that it
is integrated in the FASB ASC. SFAS No. 166 is effective for financial asset
transfers occurring after the beginning of an entity’s first fiscal year that
begins after November 15, 2009 and early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(“SFAS No. 167”), which amends the consolidation guidance applicable to variable
interest entities. The amendments affect the overall consolidation analysis
under FASB ASC 810, Consolidation and require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity. SFAS No.
167 has not yet been codified and in accordance with ASC 105, remains
authoritative guidance until such time that it is integrated in the FASB ASC.
SFAS No. 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009, early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162, which is codified in FASB ASC 105, Generally Accepted
Accounting Principles (“ASC 105”). ASC 105 establishes the Codification as the
source of authoritative GAAP in the United States (the “GAAP hierarchy”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification carries the same level of authority and the
GAAP hierarchy will be modified to include only two levels of GAAP,
authoritative and non-authoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of ASC 105 has had no material effect on the Company’s
financial condition or results of operations.
15
In July
2009, the FASB ratified the consensus reached by EITF (Emerging Issues Task
Force) issued EITF No. 09-1, (ASC Topic 470) “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance” (“EITF 09-1”). The
provisions of EITF 09-1, clarify the accounting treatment and disclosure of
share-lending arrangements that are classified as equity in the financial
statements of the share lender. An example of a share-lending arrangement is an
agreement between the Company (share lender) and an investment bank (share
borrower) which allows the investment bank to use the loaned shares to enter
into equity derivative contracts with investors. EITF 09-1 is effective for
fiscal years that begin on or after December 15, 2009 and requires retrospective
application for all arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. Share-lending arrangements that have
been terminated as a result of counterparty default prior to December 15, 2009,
but for which the entity has not reached a final settlement as of December 15,
2009 are within the scope for share-lending arrangements entered into on or
after the beginning of the first reporting period that begins on or after June
15, 2009. The Company does not expect the provisions of EITF 09-1 to have a
material effect on the financial position, results of operations, or cash flows
of the Company.
In
September 2009, the FASB issued ASU 2009-12, Fair Value Measurements and
Disclosures (Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). This ASU provides amendments to Topic
820 for the fair value measurement of investments in certain entities that
calculate net asset value per share (or its equivalent). It is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The Company does not expect the provisions of ASU 2009-12
to have a material effect on the financial position, results of operations or
cash flows of the Company.
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. This update addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than a combined unit and will be
separated in more circumstances that under existing US GAAP. This ASU eliminated
that residual method of allocation for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Company does not expect the provisions of ASU 2009-13
to have a material effect on the financial position, results of operations, or
cash flows of the Company.
In
October 2009, the FASB issued ASU 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements. This ASU changed the accounting
model for revenue arrangements that include both tangible products and software
elements for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. The
Company does not expect the provisions of ASU 2009-14 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
In
October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
This ASU amends the FASB Accounting Standard Codification for EITF 09-1. At the
date of issuance, a share-lending arrangement entered into on an entity’s own
shares in contemplation of a convertible debt offering or other financing is
required to be measured at fair value and recognized as issuance cost in the
financial statements of the entity. ASU No. 2009-15 is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. This ASU is effective for interim or annual periods beginning on
or after June 15, 2009, for share-lending arrangements entered into in those
periods. Arrangements that have been terminated as a result of
counterparty default prior to the effective date of this Issue but for which the
entity had not reached a final settlement as of the effective date are within
the scope of this ASU. The Company does not expect the provisions of ASU 2009-15
to have a material effect on the financial position, results of operations, or
cash flows of the Company.
16
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets, codifies SFAS No. 166, Accounting
for Transfers of Financial Assets, which is a revision to Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. ASU No. 2009-16 eliminates the concept of a “qualifying
special-purpose entity” from Statement No.140 and removes the exception from
applying FASB Interpretation (FIN) No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to qualifying special-purpose entities. As a
result, most securitization entities that previously met the requirements of a
qualifying special-purpose entity under Statement No. 140 that are variable
interest entities (VIEs) are now required to be evaluated under the revised
guidance in the amendment to FIN 46(R). The Company does not expect the
provisions of ASU 2009-16 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with VIEs, codifies
Statement No. 167, Amendments to FASB Interpretation No. 46(R). Among other
provisions, this ASU amends FIN 46(R) to require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a VIE. This analysis identifies the
primary beneficiary of a VIE as the enterprise that has both (a) the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance, and (b) the obligation to absorb losses of the entity that
could potentially be significant to the VIE or the right to receive benefits
from the entity that could potentially be significant to the VIE. Additionally,
ASU No. 2009-17 requires an enterprise to assess whether it has an implicit
financial responsibility to ensure that a VIE operates as designed when
determining whether it has the power to direct the activities of the VIE that
most significantly impact the entity’s economic performance. The Company does
not expect the provisions of ASU 2009-17 to have a material effect on the
financial position, results of operations, or cash flows of the
Company.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a limit on the amount of cash that will be
distributed is not a stock dividend for purposes of applying Topics 505 and 260
for interim and annual periods ending on or after December 15, 2009, and should
be applied on a retrospective basis. The Company does not expect the provisions
of ASU 2010-01 to have a material effect on the financial position, results of
operations, or cash flows of the Company.
In
January 2010, the FASB issued Accounting Standards Update (ASU) 2010-02,
Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership
of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset de-recognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts SFAS 160 (now included in
Subtopic 810-10). For those entities that already adopted SFAS 160, the
amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be
applied retrospectively to the first period that an entity adopted SFAS 160. The
Company does not expect the provisions of ASU 2010-02 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
17
In
January, 2010, the FASB issued ASU 2010-3—Extractive Activities—Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and Disclosures. This article
discusses the ASU’s key provisions and changes in practice. As stated in the
adopting release of the SEC Final Rule, application was contingent on the FASB
conforming its standards to the requirements of the SEC Final Rule. ASU 2010-3
is effective for annual periods ending on or after December 31, 2009 and is
applied prospectively as a change in estimate. However, entities that became
subject to the disclosure requirements of Topic 932 solely due to the change to
the definition of significant oil and gas producing activities are permitted to
apply the disclosure provisions of Topic 932 in annual periods beginning after
December 31, 2009.The Company does not expect the provisions of ASU 2010-3 to
have a material effect on the financial position, results of operations, or cash
flows of the Company.
In
January, 2010, the FASB issued ASU 2010-04, Accounting for Various
Topics—Technical Corrections to SEC Paragraphs. The Company does not expect the
provisions of ASU 2010-4 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
January, 2010, the FASB issued ASU 2010-05 Compensation - Stock Compensation
(Topic 718): Escrowed Share Arrangements and the Presumption of Compensation.
This ASU codifies Emerging Issues Task Force Topic D-110, “Escrowed Share
Arrangements and the Presumption of Compensation,” which was issued on June 18,
2009 to clarify SEC staff views on overcoming the presumption that for certain
shareholders escrowed share arrangements represent compensation. Topic
D-110 concludes that when evaluating whether the presumption of
compensation has been overcome, registrants should consider the substance of the
arrangement, including whether the arrangement was entered into for purposes
unrelated to, and not contingent upon, continued employment. The SEC
staff believes that an escrowed share arrangement in which the shares are
automatically forfeited if employment terminates is compensation. The Company
does not expect the provisions of ASU 2010-5 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
In
January, 2010, the FASB issued ASU 2010-06 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, to
enhance the usefulness of fair value measurements. The amended guidance requires
both the disaggregation of information in certain existing disclosures, as well
as the inclusion of more robust disclosures about valuation techniques and
inputs to recurring and nonrecurring fair value measurements. The Company does
not expect the provisions of ASU 2010-6 to have a material effect on the
financial position, results of operations, or cash flows of the
Company.
In
January, 2010, the FASB issued ASU 2010-07 Not-for-Profit Entities (Topic 958):
Not-for-Profit Entities: Mergers and Acquisitions. Statement 164 is effective
for mergers that occur on or after the beginning of an initial reporting period
beginning after December 15, 2009. It is effective for acquisitions occurring on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2009 (January 1, 2010 for a calendar-year entity).
Application of the Statement’s provisions to mergers or acquisitions before
those dates is prohibited. The Company does not expect the provisions of ASU
2010-7 to have a material effect on the financial position, results of
operations, or cash flows of the Company.
In
February, 2010, the FASB issued ASU 2010-08—Technical Corrections to Various
Topics. The Company does not expect the provisions of ASU 2010-8 to have a
material effect on the financial position, results of operations, or cash flows
of the Company.
18
Note
3 – Prepaid Expenses
Prepaid
expenses consist of the following at the date indicated:
December
31
|
June
30
|
|||||||
(audited)
|
||||||||
Capital
raising
|
$ | - | $ | 60,000 | ||||
Investor
relations
|
323,168 | 93,534 | ||||||
Advances
to suppliers
|
290,998 | - | ||||||
Other
|
1,642 | 11,566 | ||||||
$ | 615,808, | $ | 165,100 |
Capital
raising of US$60,000 relates to a non-refundable retainer payment made to
Susquehanna Financial Group, LLP (“SFG”), an investment banker who was engaged
to assist the Company with raising additional capital. Investor relations at
December 31, 2009 and June 30, 2009 of US$323,168, (including cash payment of
US$60,767 and issuance of 1,800,000
shares valued at US$262,401) and US$93,534 (all paid in cash),
respectively, represent prepayments made to consultants engaged to assist with
future marketing and promotion of the Company.
Note
4 - Deferred Costs and Unearned Revenues
Deferred
costs arise from barter transactions whereby the Company receives services or
goods for future period use in exchange for advertising. Deferred cost was
US$1,238,421 and US$1,583,115 at December 31, 2009 and June 30, 2009,
respectively. Unearned revenue arises from both normal trade sales and barter
trade sales. For barter sales, unearned revenue arises when the Company has
received the goods or services, but has not provided advertising service to
customers. For normal trade sales, unearned revenue arises when a
customer prepays for advertising to be delivered in subsequent periods. Unearned
Revenue of US$887,994 and US$1,130,662, respectively, was recognized in the
accompanying consolidated balance sheets at December 31, 2009 and June 30, 2009,
representing the Company’s entire unearned revenue obligation to deliver
advertising for customers in subsequent periods.
Note
5 – Fixed Assets
Property
and equipment consist of the following at the date indicated:
December
31
|
June
30
|
|||||||
(audited)
|
||||||||
Computer
equipment
|
$ | 35,499 | $ | 85,026 | ||||
Office
equipment and furniture
|
38,746 | 58,820 | ||||||
Leasehold
improvements
|
- | 8,463 | ||||||
$ | 74,245 | $ | 152,309 | |||||
Less: Accumulated
depreciation
|
(24,181 | ) | (38,485 | ) | ||||
$ | 50,064 | $ | 113,824 |
Depreciation
expense for the three months ended December 31, 2009 and 2008 was US$4,690, and
US$8,159, respectively. Depreciation expense for the six months ended December
31, 2009 and 2008 was US$9,300 and US$13,315, respectively.
19
Note
6 – Intangible Assets
Intangible
assets consist of the following at the dates indicated:
December
31
|
June
30
|
|||||||
Original
value
|
(audited)
|
|||||||
FM
92.5 Contract rights
|
$ | 1,709,888 | $ | 1,709,888 | ||||
Exclusivity
agreement
|
7,388,731 | 7,388,731 | ||||||
FM
90.5 Contract rights
|
1,016,206 | 1,016,206 | ||||||
10,114,825 | 10,114,825 | |||||||
Less:
Impairment
|
||||||||
FM
92.5 Contract rights
|
(757,570 | ) | (287,034 | ) | ||||
FM
90.5 Contract rights
|
(774,528 | ) | (774,528 | ) | ||||
(1,532,098 | ) | (1,061,562 | ) | |||||
Less:
Accumulated amortization
|
||||||||
FM
92.5 Contract rights
|
(952,318 | ) | (717,050 | ) | ||||
Exclusivity
agreement
|
(1,169,882 | ) | (800,446 | ) | ||||
FM
90.5 Contract rights
|
(241,678 | ) | (241,678 | ) | ||||
(2,363,878 | ) | (1,759,174 | ) | |||||
Intangibles,
net
|
$ | 6,218,849 | $ | 7,294,089 |
FM
92.5 Contract
The FM
92.5 contract rights primarily arise from an exclusive contract acquired in
connection with the acquisition of LMTICL, which is amortized over 31 months,
from June 1, 2008, the first day of operations by the Company, based on the
duration of the existing advertising agreement that expired December 31, 2008
plus renewal of the advertising agreement. The agreement was renewed January 1,
2009. The contract is for radio channel FM 92.5’s Tianjin
broadcasting, providing exclusive rights to 54 advertising minutes per day or
19,710 minutes per year. The channel is Beijing-based and airs in Tianjin
through a relay facility. The contract is signed between the related VIE of the
Company and the channel’s exclusive national agent. The exclusive agent
subcontracted the rights for the Tianjin market to the related VIE of the
Company. The value was derived as the net present value of the contract’s
earnings before interest, tax, depreciation and amortization (“EBITDA”) over the
contract’s expected term from May 30, 2008 through December 31, 2010, using a
discount rate of 15%. The Company determined a 15% discount rate to reflect the
rate of return the Company expects to earn on the contract, which resulted in a
contract value of US$1,709,888. The US$1,709,888 contract value was reduced by
US$287,034 on June 30, 2009 and US$470,536 on December 31, 2009 to recognize an
impairment loss after forecasting the remaining value of the agreement through
December 31, 2010.
Amortization
expense on this contract for the three months ended December 31, 2009 and
2008 was US$117,634 and US$159,700, respectively, amortization expense on
this contract for the six months ended December 31, 2009 and 2008 was US$235,268
and $344,417, respectively.
20
Exclusivity
Agreement
The
remainder of the purchase price of US$7,388,731 was allocated to an Operating
Agreement among Legend Media (Beijing) Consulting Co., Ltd., TJ YSLD and Mr. Ju
(the "Music Radio Operating Agreement"), entered into in connection with the
Music Radio Share Purchase Agreement. Mr. Ju, is the 80% owner of MRL, which is
the 20% owner of the post-acquisition VIE, TJ YSLD. Pursuant to the terms of the
Operating Agreement, TJ YSLD and Mr. Ju are prohibited from:
·
|
Borrowing
money from any third party or assuming any
debt;
|
·
|
Selling
to any third party or acquiring from any third party any assets,
including, without limitation, any intellectual
rights;
|
·
|
Granting
any security interests for the benefit of any third party through
collateralization of TJ YSLD's
assets;
|
·
|
Assigning
to any third party the agreements entered into by TJ YSLD;
and
|
·
|
Selling,
transferring and disposing of any license held by TJ
YSLD.
|
Amortization
expense on this contract for the three months ended December 31, 2009 and
2008 was US$184,718 and US$56,543, respectively, amortization expense on
this contract for the six months ended December 31, 2009 and 2008 was US$369,437
and US$113,069, respectively
FM
90.5 Contract
The FM
90.5 contract rights capitalized in July 2008 and subsequently impaired on June
30, 2009 primarily relate to an exclusive contract acquired in connection with
the acquisition of NRL which is being amortized over 48-months, beginning July
1, 2008. The contract is for radio channel FM 90.5, providing 126 advertising
minutes per day or 45,990 minutes per year. In July 2009, the Company terminated
the Beijing FM 90.5 contract and during the year ended June 30, 2009 recognized
an impairment loss for the entire amount of the intangible asset.
Amortization
expense for the Company’s intangible assets for the three months ended December
31, 2009 and 2008 was US$302,352 and US$394,516, respectively, amortization
expense for the Company’s intangible assets for the six months ended December
31, 2009 and 2008 was US$604,705 and US$801,234, respectively.
December
31
|
June
30
|
|||||||
(audited)
|
||||||||
Compensation
|
$ | 53,592 | $ | 79,439 | ||||
Revenue
and tax levies
|
221,808 | 171,343 | ||||||
Legal
fees
|
161,303 | 161,303 | ||||||
Payroll
taxes and employee welfare expenses
|
67,434 | 12,617 | ||||||
Income
taxes (PRC)
|
297,613 | 424,574 | ||||||
Other
|
7,662 | 44,770 | ||||||
$ | 809,412 | $ | 894,046 |
21
Note
8 - Notes Payable
Loan
balances consist of the following at the date indicated:
Short
term note payable
|
December
31
|
June
30
|
||||||
(audited)
|
||||||||
Kantor
|
$ | 33,000 | $ | 33,000 | ||||
Blueday
|
23,000 | 23,000 | ||||||
Total
notes payable
|
$ | 56,000 | $ | 56,000 | ||||
Related
party note payable
|
||||||||
RMK
|
$ | 375,733 | $ | 375,733 |
Interest
expense relating to Kantor and Blueday loans in the accompanying statements
of operations and other comprehensive loss was US$11,448 and US$31,827 for
the three months ended December 31, 2009 and 2008, respectively, was US$22,898
and US$201,155 for the six months ended December 31, 2009 and 2008,
respectively. Interest expense relating to RMK loan in the accompanying
statements of operations and other comprehensive loss was US$ 66,913 and
US$ 88,712 for the three months ended December 31, 2009 and 2008, respectively,
was US$133,293 and US$183,734 for the six months ended December 31, 2009 and
2008, respectively.
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 US$375,733 from RMK as a short-term bridge
loan. The advances on the loan occurred in February 2008, and were 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
US$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 US$3,000,000 through an unregistered sale of
its Series A convertible preferred stock. As of December 31, 2009, the note had
not been repaid and the full US$375,733 principal balance and US$494,283 of
accrued interest is outstanding on the RMK note. The Company classified the loan
as short-term in the accompanying balance sheets.
In
addition, pursuant to the RMK loan agreement, Well Chance gave 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 US$2.50 per share. On August 26, 2009, the Company reduced the
exercise price of the warrants from US$2.50 per share to US$0.40 per share. See
Note 12 for description of warrants.
The due
date on this loan was February 10, 2009. The Company worked with RMK to extend
the note, but no outcome has been reached. Related party interest
expense of US$66,913 was been included in the accompanying statements
of operations and other comprehensive loss for the three months ended
December 31, 2009 and 2008, respectively. 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 16.
22
Kantor
and Blueday Loan Agreements
On March
30, 2008, the Company entered into a loan agreement (the "Kantor Loan") with
Jonathan Kantor of US$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 US$2.50 per share. On August 26, 2009, the Company reduced the exercise price
of the warrants from US$2.50 per share to US$0.40 per share. See Note
12.
Also on
March 30, 2008, the Company entered into a loan agreement (the "Blueday Loan”)
with Blueday Limited ("Blueday"), of US$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 US$2.50 per share. On August 26, 2009, the Company reduced
the exercise price of the warrants from US$2.50 per share to US$0.40 per share.
See Note 12.
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 US$50,000 for the Kantor Loan
and US$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 classified the Kantor Loan and the Blueday
Loan as short-term in the accompanying balance sheets.
23
Other
payables consist of the following at the date indicated:
December
31
|
June
30
|
|||||||
(audited)
|
||||||||
Insurance
|
$ | 3,994 | $ | 6,455 | ||||
Office
expenses
|
8,445 | 4,483 | ||||||
Service
commitment to provide advertising pages
|
74,906 | 74,957 | ||||||
Due
related to termination of radio contracts
|
15,061 | 168,360 | ||||||
Duties
and levies
|
262,120 | 185,703 | ||||||
$ | 364,526 | $ | 439,958 |
Note
10 – Basic and Diluted Loss Per Share
For the
three and six months ended December 31, 2009, the Company generated
comprehensive loss in the accompanying consolidated statements
of operations and other comprehensive income of US$944,568, and
US$1,447,840, respectively. For the three and six months ended December 31,
2008, the Company incurred a comprehensive loss in the accompanying statements
of operations and other comprehensive income of US$758,873 and
US$1,998,977, respectively. Therefore, the effect of options,
warrants and convertible instruments outstanding is anti-dilutive during the
three and six months ended December 31, 2009 and 2008.
The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three and six months
ended December 31, 2009 and 2008:
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Per
Share
|
Per
Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic
earnings per share
|
112,813,355 | $ | (0.012 | ) | 10,339,775 | $ | (0.07 | ) |
Six
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Per
Share
|
Per
Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic
earnings per share
|
112,109,007 | $ | (0.013 | ) | 10,327,837 | $ | (0.19 | ) |
24
Note
11 - Variable Interest Entities
At June
30, 2009, the Company consolidated the balance sheets and operations of TJ YSLD,
the VIE controlled under the May 30, 2008 MRL acquisition. On July 21, 2008, the
Company completed the acquisition of NRL, and with the purchase the Company
acquired control of Beijing Maihesi, another VIE. On November 28, 2008, the
Company entered into and closed the Airline Advertising Acquisition Agreement
with Well Chance, MRL, and the Music Radio Shareholders pursuant to which the
Company acquired control of BJ YSLD, another VIE. See Note 14 for acquisition
details. TJ YSLD, BJ YSLD and Beijng Maihesi have been consolidated with the
Company’s financial statements at June 30, 2009.
Termination
Agreement with respect to the Radio Frequency FM 90.5 and FM 107.1
On July
20, 2009, Beijing Maihesi, a company organized in the PRC and an affiliate of
the Company, entered into an agreement (the “Termination Agreement”) with
Beijing Guoguang Guangrong Advertising Co., Ltd. (“Guoguang”), pursuant to which
Beijing Maihesi and Guoguang terminated (i) the Exclusive Advertising Rights
Agreement dated May 5, 2008 by and between Beijing Maihesi and Guoguang, under
which Beijing Maihesi was originally granted the exclusive right to market and
sell all broadcast advertising in connection with the frequency FM 90.5 of China
Radio International in Beijing (the “Beijing Agency Agreement”), and (ii) the
Exclusive Advertising Rights Agreement dated August 4, 2008 by and between
Beijing Maihesi and Guoguang, under which Beijing Maihesi was originally granted
the exclusive right to market and sell all broadcast advertising in connection
with the frequency FM 107.1 of China Radio International in Shenzhen (the
“Shenzhen Agency Agreement”, collectively with the Beijing Agency Agreement, the
“Agency Agreements”).
According
to the Termination Agreement, (i) Beijing Maihesi or its affiliate paid Guoguang
RMB1,150,000 (US$168,335) as compensation for the early termination of the
Beijing Agency Agreement, (ii) Beijing Maihesi agreed to forsake the deposits in
the amount of RMB2,760,000 and RMB1,050,000 under the Beijing Agency Agreement
and Shenzhen Agency Agreement, respectively (which, as of December 31, 2009, was
approximately US$403,788 and US$153,615, respectively), (iii) Guoguang agreed to
forsake the accrued cost for the advertising minutes payable to Guoguang
(approximately RMB 3,592,323, which, as of December 31,2009, was approximately
US$525,557), and (iv) both Beijing Maihesi and Guoguang agreed to waive any
claims and refrain from initiating any legal proceedings against the other party
arising from or in connection with the terminated Agency Agreements. In
addition, the Termination Agreement contains other covenants, agreements and
default and confidentiality provisions that the reader is encouraged to
review.
In
connection with the termination of this VIE agreement, the Company has recorded
a net gain on disposal of VIE of US$459,783 during the six months ended December
31, 2009, which was reduced by a loss on disposal related to the cash paid on
consideration of US$174,239 and loss on disposal of an account receivable
balance due from Beijing Maihesi in the amount of US$1,319,826.
Business
Assignment with respect to the Radio Frequency FM 95.5 and FM 92.5
On July
20, 2009, Atis had agreements with TJ YSLD, with respect to the exclusive right
to market and sell all broadcast advertising in connection with the frequencies
FM 92.5 and FM 95.5 of China National Radio Station Music Radio in Tianjin and
Xi’ an, respectively. To optimize the operations of the Company and save
administrative expenses, the Company completed a restructuring to cause the
termination of such agreement between Atis and TJ YSLD and the execution of a
new agreement on substantially the same terms with BJ YSLD as well as the
termination of the related VIE agreements with TJ YSLD.
25
On July
20, 2009, BJ YSLD entered into a cooperation agreement (the “FM 95.5 Agency
Agreement”) with Atis, pursuant to which (i) BJ YSLD is granted exclusive
right to market and sell all broadcast advertising in connection with the
frequency FM 95.5 of China National Radio Station Music Radio in Xi’an for a
term commencing from June 16, 2009 and ending on December 31, 2010; (ii) the
annual cost for the advertising airtime in the year of 2009 and 2010 is
RMB595,835 and RMB1.1 million respectively (which, as of December 31,
2009, is equal to approximately US$87,171 and US$160,930, respectively); (iii)
BJ YSLD has the right of first refusal to renew the FM 95.5 Agency
Agreement upon expiration; and (iv) BJ YSLD deposited RMB356,667
(approximately US$52,180). In addition, the FM 95.5 Agency
Agreement contains other covenants, agreements and default and
confidentiality provisions that the reader is encouraged to review.
BJ YSLD
entered into a cooperation agreement (the “FM 92.5 Agency Agreement”) with
Atis, pursuant to which (i) BJ YSLD is granted exclusive right to market and
sell all broadcast advertising in connection with the frequency FM 92.5 of China
National Radio Station Music Radio in Tianjin for a term commencing from June
15, 2009 and ending on December 31, 2010; (ii) the 12-month period cost for
advertising airtime is RMB2.5 million (which, as of December 31, 2009,
is equal to approximately US$365,750); (iii) BJ YSLD has the right of first
refusal to renew the FM 92.5 Agency Agreement upon expiration; and (iv) BJ
YSLD deposited RMB500,000 (approximately US$73,150). In addition, the FM
92.5 Agency Agreement contains other covenants, agreements and default and
confidentiality provisions that the reader is encouraged to review.
In
connection with the above-said restructuring, the Company disposed of the assets
and liabilities of the historical TJ YSLD business and, accordingly, recorded a
net gain on disposal of US$119,084 during the six months ended December 31,
2009, which was increased by a gain on disposal of an account payable balance
due to TJ YSLD of US$138,542. The remaining assets retained by the Company and
assigned to BJ YSLD after disposal is the intangible asset associated with the
FM 92.5 advertising rights and the exclusivity agreement, as discussed in Note
6.
Beijing
Maihesi and TJ YSLD had been consolidated in the Company’s financial statements
through July 20, 2009, and subsequent to the termination of the related VIE
agreements with Beijing Maihesi and TJ YSLD, BJ YSLD is the only remaining VIE
included in the Company’s financial statements as of December 31,
2009.
Note
12 - Stock Options and Warrants
Stock
Options
The
Company entered into an employment agreement with Mr. Jeffrey Dash on January
31, 2008. On January 31, 2008, Mr. Dash was appointed President and Chief
Executive Officer of the Company. Pursuant to the employment agreement Mr. Dash
was granted options to purchase 400,000 shares of the Company’s common stock at
an exercise price of US$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
three month. The fair value of the options was US$120. The fair value was
computed using the Black-Scholes model under the following assumptions: (1)
expected life of three years; (2) volatility of 100%, (3) risk free interest of
4.5% and (4) dividend rate of 0%. On August 26, 2009, the Company reduced the
exercise price of the options from US$2.50 per share to US$0.40 per share. The
increase in fair value of the options was US$34,600 is to be vested over the
remaining 16 months of the option term and recognized in compensation expense
accordingly. The new fair value was computed using the Black-Scholes model under
the following assumptions: (1) expected life of three years; (2) volatility of
83%, (3) risk free interest of 4.5% and (4) dividend rate of 0%.
26
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
US$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 87.5% of the options
vesting equally every three months at a rate of 31,818 shares per three months.
The fair value of the options was US$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
US$2.50 per share. The options vest on a quarterly basis (in arrears) over 24
months commencing on the date of each director's appointment to the board. The
fair value of the options was US$355,088. The fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of two
years; (2) volatility of 90%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%. On August 26, 2009, the Company reduced the exercise price of the
options from US$2.50 per share to US$0.40 per share. The increase in fair value
of the options was US$6,056 and was recognized in compensation expense during
the six months ended December 31, 2009 as they are fully vested as of this date.
The new fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of two years; (2) volatility of 83%,
(3) risk free interest of 4.5% and (4) dividend rate of 0%. On November 15,
2008, Richard Vogel resigned as a director of the Company. At the
time of his resignation, he held 31,556 fully vested options and all were
forfeited.
On May
19, 2008, the Company granted options to another director to purchase 80,000
shares of the Company’s common stock with an exercise price of US$3.70 per
share. The options vest on a quarterly basis (in arrears) over 24 months
commencing on the date of the director's appointment to the board. The fair
value of the options was US$155,328. The fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of two
years; (2) volatility of 96%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%. On August 26, 2009, the Company reduced the exercise price of the
options from US$3.70 per share to US$0.40 per share. The increase in fair value
of the options was US$6,424 and was recognized in compensation expense during
the six months ended December 31, 2009 as they are fully vested as of this date.
The new fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of two years; (2) volatility of 83%,
(3) risk free interest of 4.5% and (4) dividend rate of 0%.
On August
26, 2009, the Company granted options, under its stock option plan, to four
employees to purchase 6,325,000 shares of the Company’s common stock with an
exercise price of US$0.20 per share. Thirty percent of the options vest
immediately, and the remaining options vest over 28 months. The fair value of
the options was US$964,563. The fair value was computed using the Black-Scholes
model under the following assumptions: (1) expected life of three years; (2)
volatility of 83%, (3) risk free interest of 4.5% and (4) dividend rate of
0%.
27
Following
is a summary of the stock option activity for the six months ended December 31,
2009:
Weighted
|
Aggregate
|
|||||||||||
Number
of
|
Average
|
Intrinsic
|
||||||||||
Options
|
Exercise
Price
|
Value
|
||||||||||
Outstanding
as of July 1, 2009
|
641,820 | $ | 2.75 | $ | - | |||||||
Granted
|
6,325,000 | 0.20 | - | |||||||||
Forfeited
|
- | - | - | |||||||||
Exercised
|
- | - | - | |||||||||
Outstanding
as of December 31, 2009
|
6,966,820 | $ | 0.43 | $ | - | |||||||
Exercisable
options:
|
||||||||||||
June
30, 2009
|
426,153 | $ | 2.78 | $ | - | |||||||
December
31, 2009
|
2,645,667 | $ | 0.21 | $ | - |
Under the
loan agreement with RMK described in Note 6 at the closing of the share exchange
agreement described in Note 1 the Company issued RMK a warrant to purchase
150,294 shares of the Company’s common stock. The warrant was exercisable upon
issuance and is exercisable until the third anniversary of the issuance date of
the warrant. The warrant exercise price is US$2.50 per share. The relative fair
value of the warrants was US$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 US$375,733 proceeds from the
loan, the fair value of the warrants are recorded as debt discounts and has been
amortized over the term of the loan. On August 26, 2009, the Company reduced the
exercise price of the warrants from US$2.50 per share to US$0.40 per share. The
increase in fair value of the options was US$9,499 and was recognized in
interest expense during the six months ended December 31, 2009. The new fair
value was computed using the Black-Scholes model under the following
assumptions: (1) expected life of 1.46 years; (2) volatility of 83%, (3) risk
free interest of 4.5% and (4) dividend rate of 0%.
On March 30, 2008, and pursuant to the terms of
the Kantor Loan and Blueday Loan described in Note 6, the Company issued to Mr.
Kantor and Blueday warrants to purchase 40,000 and 50,000 shares of the
Company's common stock, respectively, at an exercise price of US$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 US$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 US$100,000 proceeds from the loan, the fair value
of the warrants is recorded as debt discounts and has been amortized over the
term of the loan. The relative fair value of the warrants issued in connection
with the Blueday Loan was US$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 US$250,000 proceeds from the
Blueday note, the relative fair value of the warrants was recorded as debt
discounts and has been amortized over the term of the loan. On August 26, 2009,
the Company reduced the exercise price of the warrants from US$2.50 per share to
US$0.40 per share. The increase in fair value of the options was US$6,012 and
was recognized in interest expense during the six months ended December 31,
2009. The new fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of 1.59 years; (2) volatility of 83%,
(3) risk free interest of 4.5% and (4) dividend rate of 0%.
28
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 US$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
US$554,536 and was determined using the Black-Scholes option pricing model and
the following assumptions: (1) term of four years, (2) a risk
free interest rate of 0.9%, (3) a dividend yield of 0% and (4) volatility
of 96%. Of the US$200,000 proceeds from the loan, the relative fair value
of the warrant is recorded as a debt discount and has been amortized over the
term of the loan. In addition, an embedded beneficial conversion feature was
recorded in accordance with FASB ASC 815 “Derivatives and Hedging.”
The relative fair value of the beneficial conversion feature was US$44,626 and
was classified in additional paid-in capital in the December 31, 2009
consolidated balance sheets.
Between
August 29, 2008 and June 23, 2009, the Company issued warrants to purchase
400,000 shares of the Company's common stock to Maoming in connection with a
preferred stock placement that took place on the same date (see Note 13) and in
connection with its preferred placement on July 1, 2008. The warrants are
immediately exercisable at an exercise price of US$2.50 per share until their
expiration on August 28, 2011 and are exercisable on a cashless basis at any
time after August 29, 2009 and until August 28, 2011, if the common stock
underlying the warrants has not been registered with the SEC by such date. The
relative fair value of the 400,000 warrants issued with the Series A convertible
preferred stock was US$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 US$0%. In addition, since this convertible preferred stock is
convertible into shares of common stock at a one to one ratio, an embedded
beneficial conversion feature would be calculated as a discount to additional
paid in capital in accordance with FASB ASC 815 “Derivatives and Hedging.”
However, the conversion price on the issuance date was greater than the stock
price on that date and thus no intrinsic value arose from the issuance of the
convertible preferred shares. Therefore, no beneficial conversion feature was
recognized on the Company’s accompanying consolidated balance
sheets.
On August
26, 2009, the Company reduced the exercise price of the warrants from US$2.50
per share to US$0.40 per share. The increase in fair value of the options was
US$71,100 and was recognized in interest expense during the six months ended
December 31, 2009. The new fair value was computed using the Black-Scholes model
under the following assumptions: (1) expected life of 1.77 years; (2) volatility
of 83%, (3) risk free interest of 4.5% and (4) dividend rate of 0%.
29
On
November 28, 2008, the Company issued warrants to purchase 10,000,000 shares of
the Company's common stock to Mr. Ju in connection with the Airline Advertising
Acquisition Agreement dated November 28, 2008 that gave effective control of BJ
YSLD to Legend Media, Inc. See Note 14. The warrants were issued in
two tranches with 5,000,000 warrants per tranche. Tranche 1 warrants
are immediately exercisable at US$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 Airline
Advertising Acquisition Agreement was US$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 US$0%. The Tranche 2 warrants are
immediately exercisable at US$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 Airline Advertising Acquisition
Agreement was US$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 US$0%. The Company recorded the relative fair value of the
warrants as a deemed dividend related to pooling of subsidiary, resulting from
the Airline Advertising Acquisition Agreement for BJ YSLD.
On
December 19, 2009, the AOU has been signed among certain major shareholders of
the Company. Pursuant to this AOU, the Company will issue to Mr. Ju warrants to
purchase 3,930,836 shares of the Company’s common shares for each of the
calendar years 2010 and 2011 if the Company achieves a EBITDA target number of
RMB30,000,000 and RMB33,000,000 in connection with the Xinhua Airline Magazine,
respectively. Furthermore, the Company will issue Mr. Ju warrants to purchase
2,000,000 shares of the Company’s common shares if the Company signs an
exclusive agency agreement with another magazine. As of February 12, 2010, none
of the trigger events mentioned in the AOU have been achieved.
Note
13 - Stockholders Equity
Unregistered
Sale of Series A Convertible Preferred Stock
On August
29, 2008, the Company sold 625,000 shares of the Company's Series A convertible
Stock preferred stock, and warrants to purchase 300,000 shares of the Company's
common stock to Maoming for US$1,500,000. Subsequently, on March 4, 2009, the
Company sold 62,500 shares of the Company's Series A convertible Stock preferred
stock, and warrants to purchase 30,000 shares of the Company's common stock to
Maoming for US$150,000. On April 14, the Company sold 104,167 shares
of the Company's Series A convertible Stock preferred stock, and warrants to
purchase 50,000 shares of the Company's common stock to Maoming for
US$250,000. On June 23, 2009, the Company sold 41,667 shares of the
Company's Series A convertible Stock preferred stock, and warrants to purchase
20,000 shares of the Company's common stock to Maoming for US$100,000. The sale
of the Series A convertible preferred stock and warrants to Maoming occurred
pursuant to the terms of a Securities Purchase Agreement (the "Maoming Purchase
Agreement") dated March 31, 2008. The transaction contemplated under Maoming
Purchase Agreement closed in connection with the Company’s previously announced
acquisition of its second media advertising business operating in the China
NRL.
The
warrants issued to Maoming are immediately exercisable at US$2.50 per share
until their expiration on August 28, 2011 and are exercisable on a cashless
basis at any time after August 29, 2009 until August 28, 2011 if the common
stock underlying the warrants has not been registered with the SEC by such date.
See Note 9. On August 26, 2009, the Company reduced the exercise price of the
warrants from US$2.50 per share to US$0.40 per share.
30
Common
Shares Issued for Investment in News Radio, Limited
On July
21, 2008, the Company closed the acquisition of NRL, pursuant to 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
RMB 2,000,000. On July 21, 2008, the acquisition was closed and the amount was
settled at 104,427 common shares with a value of US$293,800 based on the
currency exchange rate used. See Note 14 for acquisition of NRL.
Series
B Convertible Preferred Stock Issued in connection with BJ YSLD and Conversion
to Common Stock
As
consideration for the acquisition of BJ YSLD, the Company issued 5,033,680
shares of its newly created Series B convertible preferred stock to Mr. Ju, the
beneficial owner of BJ YSLD. Each share of the Series B convertible preferred
stock was initially convertible into 20 shares of common stock, or 100,673,600
shares of common stock, representing 90.6% of the issued and outstanding common
stock of the Company on an as-converted basis (not including the Company’s
outstanding Series A convertible preferred stock, warrants or options). Under
the terms of the Series B convertible preferred stock, all shares of this Series
B convertible preferred stock are to be automatically converted into fully paid
and non assessable shares of common stock on the date that the Company amends
its Articles of Incorporation such that there is a sufficient number of shares
of common stock authorized by the Company to allow full conversion of all
outstanding shares of the Series B convertible preferred stock into shares of
common stock. Further, the holders of the Series B convertible preferred stock
are entitled to the same voting rights as if they were common stockholders of
the Company, based on the number of shares of common stock into which the
holder’s aggregate number of shares of the Series B convertible preferred stock
are convertible. The Series B convertible preferred stock was converted into
common stock on December 21, 2008, the date that the Company amended its
Articles of Incorporation and authorized a sufficient number of shares to
satisfy the conversion. The Series B convertible preferred stock
converted into 100,673,600 shares of common stock.
Deemed
Dividend Arising from the Acquisition Agreement for the effective control of BJ
YSLD
The
Company recorded the Airline Advertising Acquisition Agreement, pursuant to
which the Company obtained effective control of BJ YSLD, as a deemed dividend in
the amount of US$51,561,046, which represents the US$51,343,536 value of the
100,673,600 shares of common stock into which the Series B Preferred Stock was
convertible, less the net book value of BJ YSLD net liabilities of US$217,510 on
the date of acquisition. The closing gave Legend Media effective control of BJ
YSLD, a PRC-based company that has indirect exclusive advertising agency rights
for Xinhua Airline Magazine, the airline magazine for Hainan Airline
Group.
Dividend
Paid to Owner for Account Balances Retained After Acquisition of BJ
YSLD
Pursuant
to the Airline Advertising Acquisition Agreement, the HTLG balances for cash,
accounts receivable, related party payables remained with HTLG after the HTLG
airline business became controlled by BJ YSLD on November 30,
2008. The net debit balance of the transaction was US$1,322,226 which
was recorded against retained earnings as a dividend. On March 31, 2009, the
US$1,322,226 dividend was reduced by US$429,957 to US$892,510 to reflect the tax
obligations of HTLG that were to remain with HTLG. The US$429,957 credit to
retained earnings was offset against accrued liabilities and
payables.
31
Note
14 - Acquisition
Acquisition
of NRL
On July
21, 2008, the Company had Well Chance purchase 100% of the common stock of NRL.
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
MRL. As a result of the acquisition, the Company obtained control of the
following subsidiaries of the Company:
•
|
News
Radio Limited (100%-owned)
|
|
•
|
CRI
News Radio Limited (100%-owned)
|
|
•
|
Legend
Media (Beijing) Information and Technology Co., Ltd.
(100%-owned)
|
|
•
|
Beijing
Maihesi International Advertising Co., Ltd. (100%-controlled as
VIE)
|
At July
21, 2008, the Company delivered to the News Radio Shareholders shares of the
Company's common stock, with an aggregate value of RMB2,000,000 (equivalent of
US$287,728 based on the currency exchange rate on June 5, 2008). The amount was
settled at US$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 proceeding June 4,
2008 (68,388 shares were actually delivered). In addition, (i) within 28 days
after closing of the purchase of NRL, the Company is obligated to pay
RMB5,250,000 (equivalent of US$755,287 based on the currency exchange rate on
June 5, 2008). Subsequently on July 21, 2008, the acquisition was closed and
settled at US$771,225, pay RMB1,600,000 (equivalent of US$230,182 based on the
currency exchange rate on June 5, 2008.) Subsequently on July 21, 2008, the
acquisition was closed and settled at US$235,040 based on the currency exchange
rate on that date. As of December 31, 2008, the Company delivered the 104,427
shares associated with the News Radio Share Purchase Agreement.
During
the year ended June 30, 2009, the Company paid US$749,990 towards the purchase
of NRL, and at December 31, 2009 and June 30, 2009, the Company recognized the
remaining US$256,275 in Related Party Payables in its consolidated balance
sheets, respectively. See Note 13.
In
addition, the News Radio Shareholders will receive additional, performance-based
consideration within 30 days of each of year-end 2008, 2009 and 2010 based on
the net revenues and net income for such periods of Beijing Maihesi, 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 US$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 preceding 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 US$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 preceding 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 US$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 preceding 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 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 were RMB 3,334,050 and
net loss was RMB 6,131,817. For the 12-month period ending December 31, 2009,
the net revenues of Beijing Maihesi were RMB 2,228,565 and net loss was RMB
9,146,532. None of the above performance target was achieved so there were
neither cash paid nor shares issued accordingly.
32
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, Legend
Media (Beijing) Information and Technology Co., Ltd. ("Legend Media IT"), wholly
owned by CRI News Radio Limited, a Hong Kong Company, entered into an Exclusive
Technical, Operational, Business Consulting and Services Agreement (the "News
Radio Service Agreement") with Beijing Maihesi 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 Maihesiin
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 agreed to several important covenants in the News Radio Service
Agreement, including (but not limited to), agreeing not to appoint any member of
Beijing Maihesis 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. to Legend Media IT as a guarantee of
Beijing Maihesi 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 at nominal value to the
extent permitted applicable laws and regulations; and (c) agreed not to dispose
of or encumber any of his equity interest in Beijing Maihesi without Legend
Media IT’s prior written consent.
On July
20, 2009, the Company terminated its radio advertising agreements with respect
NRL. See Note 11 for disposal of the VIE associated with NRL.
Acquisition
Agreement for the effective control of BJ YSLD
On
November 28, 2008, the Company entered into and closed the Airline Advertising
Acquisition Agreement with Well Chance, MRL, and the Music Radio Shareholders.
Pursuant to the Airline Advertising Acquisition Agreement, the Company acquired
control over BJ YSLD and caused the contribution of the airline advertising
business of HTLG to BJ YSLD. BJ YSLD and HTLG were under common
control. In exchange for the acquisition of control, the Company issued
5,033,680 shares of its newly-created Series B convertible Preferred Stock, to
the Music Radio Shareholders and two warrants to purchase an aggregate of
10,000,000 shares of the Company's common stock, to Mr. Ju. As a result of the
acquisition, the Company obtained 100% control of BJ YSLD.
33
In
determining the consideration to be paid in the Airline Advertising 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 Airline Advertising Acquisition Agreement was calculated based on an
aggregate purchase price of RMB275,000,000, a currency exchange rate of RMB6.829
to US$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 preceding closing, and (b) US$0.40. Because 75% of
the weighted average trading price for the common stock during the period was
US$0.3440, the per share issue price used was US$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 Mr. Ju upon closing of the Airline Advertising Acquisition
Agreement is immediately exercisable for 5,000,000 shares of common stock at an
exercise price of US$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 Mr. Ju upon closing of the Airline Advertising
Acquisition Agreement is immediately exercisable for 5,000,000 shares of common
stock at an exercise price of US$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 Airline Advertising 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 “Airline Advertising Acquisition Services Agreement”)
with BJ YSLD, a company owned by Xue Wei and Ju Bingzhen, the father of Mr. Ju.
Ju Bingzhen and Xue Wei are also parties to the Airline Advertising Acquisition
Services Agreement. Pursuant to the Airline Advertising Acquisition Services
Agreement, Legend Media IT became the exclusive provider of technical,
operational, business consulting and other services to BJ YSLD in exchange for a
service fee and bonus as described in more detail in the Airline Advertising
Acquisition Services Agreement. The financial results of BJ YSLD will be
consolidated with the Company's financial statements. The term of the Airline
Advertising Acquisition 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 Airline Advertising Acquisition
Services Agreement. BJ YSLD agreed to several important covenants in the Airline
Advertising Acquisition Services Agreement, including (but not limited to),
agreeing not to appoint any member of BJ YSLD’s senior management without Legend
Media IT’s consent and to grant Legend Media IT certain informational rights. In
addition, pursuant to the Airline Advertising Acquisition Services Agreement,
each of Ju Bingzhen and Xue Wei: (a)agreed to pledge his/her equity interests
(representing 100% of the equity interest) in BJ YSLD to Legend Media IT as a
guarantee of BJ YSLD’s fulfillment of its obligations under the Airline
Advertising Acquisition Services Agreement; (b) granted to Legend Media IT or
its designee an option to purchase any or all of their equity interest in BJ
YSLD at nominal value to the extent permitted under applicable laws and
regulations; and (c) agreed not to dispose of or encumber any of their equity
interest in BJ YSLD without Legend Media IT’s prior written
consent.
34
Legend
Media IT also entered into the Music Radio Operating Agreement with BJ YSLD and
the Music Radio Shareholders to secure the performance of the parties'
obligations under the Airline Advertising Acquisition Services Agreement.
Pursuant to the terms of the Music Radio Operating Agreement: (a) BJ YSLD, Ju
Bingzhen and Xue Wei agreed not to, or to cause BJ YSLD not to, conduct any
transactions which may have a material adverse effect on BJ YSLD's assets,
obligations, rights or operations without Legend Media IT’s prior written
consent; (b) BJ YSLD, Ju Bingzhen and Xue Wei granted Legend Media IT certain
informational rights; (c) BJ YSLD, Ju Bingzhen and Xue Wei agreed to (i) submit
BJ YSLD’s annual budget and monthly cash requirement plans to Legend Media IT
for approval, (ii) obtain Legend Media’s approval for withdrawals from BJ YSLD’s
bank accounts, and (iii) accept corporate policies and guidance from Legend
Media IT with respect to the appointment and dismissal of senior management,
daily operations and management and financial administrative systems; (d) BJ
YSLD, Ju Bingzhen and Xue Wei agreed to appoint or cause to be appointed the
individuals nominated by Legend Media IT to become directors, general manager,
chief financial officer or other senior management of BJ YSLD and (e) each of Ju
Bingzhen and Xue Wei entered into an Authorization Agreement (the "Music Radio
Authorization Agreement") pursuant to which each authorized Jeffrey Dash, the
Company's Chief Financial Officer, to exercise his voting rights with respect to
shares of BJ YSLD at BJ YSLD’s stockholders' meetings. The term of the Music
Radio Operating Agreement is 10 years with an automatic renewal for another
10-year term unless any party provides written notice to the other parties that
it does not wish to renew the Music Radio Operating Agreement. The term of each
of the Music Radio Authorization Agreements is 10 years but it terminates
automatically upon the earlier termination of the Airline Advertising
Acquisition Services Agreement.
For the
purpose of this acquisition and pursuant to the Airline Advertising Acquisition
Agreement, the accounts receivable and accounts payable of HTLG related to the
airline advertising business that occurred on or preceding November 30, 2008
shall remain with HTLG. The transaction is between parties under common control
and has been accounted for in a manner similar to a pooling of interests. As a
result of the transaction described above, the historical financial statements
presented are a combination of BJ YSLD and the airline magazine advertising
business of HTLG, and the financial statements of the Company have been restated
to report the results of operations for the period in which the transfer occurs
as though the transfer of net assets or exchange of equity interests had
occurred at July 1, 2007. This required the historical financial statements of
the Company be restated to reflect the consolidation of BJ YSLD under a method
similar to a pooling of interests. The Company recorded the acquisition as a
deemed dividend of US$51,561,046, which represents the US$51,343,536 value of
the 100,673,600 common stock into which the Series B convertible preferred stock
was convertible, less the net book value of BJ YSLD net liability of US$217,510
on the date of acquisition. The closing of the Airline Advertising Acquisition
Agreement gives the Company effective control of BJ YSLD, a PRC-based company
that has the indirect exclusive advertising agency rights for Xinhua Airline
Magazine, the airline magazine for Hainan Airline Group.
Note
15 - Commitments and Contingencies
Leases
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 was required to make
monthly payments of RMB104,103 (approximately US$15,230 per month, based on the
exchange rate as of December 31, 2009). The contract is not renewed as of the
report date and the Company continues to pay monthly rental of RMB104,103 to the
lessor after the expiration of the lease contract.
On
January 10, 2009, the Company entered into a two-year lease for premises in
Shanghai, China. Under the terms of the lease, the Company is
required to make monthly payments of RMB 42,580 (approximately US$6,230 per
month, based on the exchange rate as of December 31, 2009).
On
February 28, 2009, the Company entered into a one-year lease for corporate
housing in Qingdao, China. Under the terms of the lease, the Company
is required to make monthly payments of RMB 1,667 (approximately US$244 per
month, based on the exchange rate as of December 31, 2009).
35
On March
18, 2009, the Company entered into a one-year lease for corporate housing in
Haikou, China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 1,800 (approximately US$265 per month, based on the
exchange rate as of December 31, 2009).
On June
25, 2009, the Company entered into a one-year lease for corporate housing and
premises in Shenzhen, China. Under the terms of the lease, the Company is
required to make monthly payment of RMB 2,600 (approximately US$ 380 per month,
based on the exchange rate as of December 31, 2009).
On
October 4, 2009, the Company entered into a one-year lease for corporate
premises in Beijing, China. Under the terms of the lease, the Company is
required to make monthly payments of RMB 2,100 (approximately US$ 307 per month,
based on the exchange rate as of December 31, 2009).
On
October 11, 2009, the Company a entered into one-year lease for premises in
Beijing, China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 2,900 (approximately US$ 424 per month, based on the
exchange rate as of December 31, 2009).
On
October 16, 2009, the Company entered into a half-year lease for premises in
Beijing, China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 2,320 (approximately US$ 340 per month, based on the
exchange rate as of December 31, 2009).
On
October 27, 2009, the Company renewed a one-year lease for corporate housing in
Sanya, China. Under the terms of the lease, the Company is required
to make monthly payments of RMB 1,600 (approximately US$234 per month, based on
the exchange rate as of December 31, 2009).
On
November 1, 2009, the Company entered into a two-year lease for premises in
Tianjin, China. Under the terms of the lease, the Company is required to make
monthly payments of RMB 10,518 (approximately US$ 1,539 per month, based on the
exchange rate as of December 31, 2009).
At
December 31, 2009, total future minimum lease payments under operating leases
were as follows:
Amount
|
||||
12
months ending December 31, 2010
|
$ | 287,573 | ||
12
months ending December 31, 2011
|
17,354 | |||
$ | 304,927 |
During
the three months ended December 31, 2009 and 2008, the Company had rent expense
of US$75,573 and US$106,275, during the six months ended December 31, 2009 and
2008, the Company had rent expense of US$183,504 and US$223,052.
36
Note 16 - Related Party
Transactions
Significant
balances and transactions with related parties are as follows:
a. Amounts
due to/due from related parties
Related
Party
|
December
31,
|
June
30,
|
||||||||
Related
Party Payable
|
(audited)
|
|||||||||
Mr.
Ju and affiliates (including his wife, Wei Xue)
|
$ | 2,516,726 | $ | 1,673,756 | 1 | |||||
Maoming
|
104,828 | - | 4 | |||||||
$ | 2,621,554 | $ | 1,673,756 | |||||||
Related
Party Receivable
|
||||||||||
HTLG
|
1,566,537 | 341,232 | 2 | |||||||
$ | 1,566,537 | $ | 341,232 | |||||||
Related
Party Note Payable
|
||||||||||
RMK
|
375,733 | 375,733 | 3 | |||||||
$ | 375,733 | $ | 375,733 | |||||||
Accrued
interest payable
|
||||||||||
RMK
|
494,283 | 360,990 | ||||||||
$ | 494,283 | $ | 360,990 |
Book
values of the above related party payables and receivables conform to fair
values as they are due on demand.
1 Mr.
Ju and his wife Ms. Xue Wei, are the major beneficial owners of the Company’s
common stock. Mr. Ju and Ms. Xue Wei are also controlling
shareholders of HTLG and BJ YSLD.
2 HTLG
is controlled by Mr. Ju and his wife, Ms. Xue Wei. Further, pursuant
to the Airline Advertising Acquisition Agreement dated November 28, 2008, the
Company gained effective control over the airline magazine advertising product
line of HTLG.
3 RMK
is a fund controlled by a shareholder, who is also the CEO of ARC Investment
Partners, a shareholder of the Company.
4 Maoming
is a shareholder of the Company.
b.
Expenses paid by related parties on behalf of the Company:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||||
Party
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
Mr.
Ju and affiliates
(including
his wife, Ms. Xue Wei)
|
$ | 69,825 | 1 | $ | - | $ | 154,891 | $ | - | |||||||||
HTLG
|
$ | 1,405,576 | 2 | $ | 106,975 | $ | 1,738,636 | $ | 131,734 | |||||||||
Maoming
|
$ | 104,828 | 3 | $ | - | $ | 104,828 | $ | - |
1 Includes
US$45,722 for an office in Beijing that the Company rents from Mr. Ju; the rent
per month is US$15,241 which is based on fair market value.
2 Comprises
rent, commissions and media related expenses.
3 Comprises
fees for professional services.
37
c. Short
term loans or advances to the Company to assist with working capital
shortfalls:
Three
Months Ended
|
Six
Months Ended
|
||||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||
Party
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||
Mr.
Ju and affiliates (including his wife, Ms.Xue Wei)
|
$ | 878,400 | $ | - | $ | 901,860 | $ | - |
d. Cash
collected on behalf of the Company:
Three
Months Ended
|
Six
Months Ended
|
||||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
||||||||||||||
Party
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||
HTLG
|
$ | 792,154 | $ | - | $ | 980,731 | $ | - |
e.
Interest accrued on loans:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||||
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||||
Party
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
RMK
|
$ | 66,913 | 1 | $ | 66,913 | $ | 133,293 | $ | 133,826 |
1 Accrued
interest relates to the RMK loan note, see also Note 8.
Note
17 – Income Taxes
On
March 16, 2007, the National People’s Congress enacted the Enterprise
Income Tax Law (the “New Income Tax Law”), effective on January 1, 2008,
replacing the separate income tax laws for domestic enterprises and
foreign-invested enterprises, by adopting a unified income tax rate of 25% for
most enterprises. In accordance with the implementation rules of the New Income
Tax Law, the Company’s various PRC entities are subject to the same statutory
25% tax rate.
No
provision for taxation has been made for Legend Media (Beijing) Consulting
Company Limited and Legend Media (Beijing) Information and Technology Co., Ltd.
for the three and six months ended December 31, 2009 and 2008, as they did not
generate any taxable profits during the periods.
As income
taxes are not calculated on a consolidated basis the individual entities may be
subject to tax in cases where the group is not profitable.
38
Note
18 – Segment Information
Based on
FASB ASC 280 “Segment
Reporting,” the Company identified one operating segment. The Company is
only able to disaggregate
revenue and cost of revenue data by product line. Further disaggregation is
impracticable, because the Company’s customers and distribution methods overlap
and management reviews its business as a single operating segment. Assets
overlap between the two product lines as well. Thus, discrete financial
information is not available by more than one operating segment.
Note
19 - Correction of error in financial statements for the three months ended
September 30, 2009
In July
2009, the Company terminated the VIE agreements with TJ YSLD and Beijing
Maihesi. To reflect these terminations, the Company made elimination entries to
take out the two VIE entities from the consolidation. Some of the entries were
inadvertently recorded twice resulting in overstatement of gain on termination
of VIE agreement of US$419,957 and understatement of APIC of
US$419,957. The error has been corrected in the accompanying
consolidated statements of operations for the six months ended December 31,
2009.
The
correction has resulted in the net loss attributable to Legend Media Inc.
Shareholders for the three months ended September 30, 2009 to increase from
US$106,026 as previously reported to US$525,983, with no tax
effect. Accordingly, the cumulative effect of the change on retained
earnings was a decrease of US$419,957. Finally, basic and diluted
loss per share also increased from US$0.001 as previously reported to US$0.005.
We will be amending the first quarter ended September 30, 2009 Form
10-Q.
Note
20- Subsequent Events
In
reviewing subsequent events, management considers events that take place up to
and including February 12, 2010.
39
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 based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs.
These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions described in Part II Item 1A under the caption “Risk Factors” and
elsewhere in this Quarterly Report on Form 10-Q. In addition, our past results
of operations do not necessarily indicate our future results. New risk factors
emerge from time to time and it is not possible for us to predict all such risk
factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any risk factor, or combination of risk factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
Except as
otherwise required by applicable laws, we undertake no obligation to publicly
update or revise any forward-looking statements or the risk factors described in
this Quarterly Report on Form 10-Q or in the documents we incorporate by
reference, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this Quarterly Report on
Form 10-Q. You should not rely upon forward-looking statements as
predictions of future events or performance. We cannot assure you that the
events and circumstances reflected in the forward-looking statements will be
achieved or occur. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
Executive
Overview
Legend
Media, formerly known as Noble Quests, Inc., was organized as a Nevada
corporation on March 16, 1998, to sell multi-media marketing services and other
related services to network marketing groups. Specifically, we assisted network
marketers in using marketing tools such as public relations, advertising, direct
mail, collateral development, electronic communications and promotion tools to
increase product and service awareness.
On
January 31, 2008, the Company entered into a Share Exchange Agreement with Well
Chance and Well Chance's sole shareholder, which was accounted for as a
reverse acquisition under the purchase method because the Well Chance
shareholder obtained control of the Company. Accordingly, the share exchange was
recorded as a recapitalization of Well Chance, with Well Chance being treated as
the continuing entity.
Well
Chance was incorporated under the laws of the British Virgin Islands as an
International Business Company on February 22, 2005. Well Chance was formed to
create a business that principally engaged in the development and management of
a technology platform that deploys advertisements across its various advertising
media.
40
We
expanded our business in February 2008 to focus on building a consumer
advertising network in the PRC focused on the Chinese radio advertising and air
travel based advertising . We conduct our business operations through our 80%
owned subsidiary Legend (Beijing) Consulting Co., Ltd. and our wholly
owned subsidiary Legend (Beijing) Information and Technology Co., Ltd., each of
which are incorporated under the laws of the PRC.
As of
February 12, 2010, we secured the exclusive rights to 39,420 minutes of radio
advertising annually in Tianjin and Xi’an. The Company also has
rights to sell advertising content for an airline magazine which has the
potential to reach 20 million Chinese consumers. Management has
identified several other opportunities to acquire additional advertising rights
and expects continued expansion of air travel and radio advertising assets as
well as other targeted media platforms in China.
Critical
Accounting Policies and Estimates
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements in this Quarterly Report on Form 10-Q, we
believe that the accounting policies described below are the most critical to
aid you in fully understanding and evaluating this management discussion and
analysis.
Going
Concern
The
accompanying consolidated financial statements were prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the three months and six months ended
December 31, 2009, the Company generated a net loss of US$1,336,992 and
US$1,443,017, respectively, and has a working capital deficit of US$1,931,287 as
of December 31, 2009. The working capital deficit includes US$
2,621,554 of related party payables and US$1,566,537 of related party
receivables.
As
further described in Note 8, on January 31, 2008, in connection with the Share
Exchange Agreement discussed under Note 1, Legend Media entered into a loan
agreement with RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to which
Well Chance had the right to borrow US$375,733 from RMK as a short-term bridge
loan. The due date on this loan was February 10, 2009. The principal amount of
US$375,733 is currently outstanding and is classified as a related party note
payable. The accrued interest balance for this loan is US$494,283 as of December
31 2009, which is classified as accrued interest. On November 25, 2009, RMK
issued notice to the Company requiring immediate repayment of the loan. The
Company is working with RMK to extend the note, but no outcome has been
reached. RMK is a fund controlled by a shareholder who is also the
CEO of ARC Investment Partners, LLC, a shareholder of the Company. See Note
16.
As
further described in Note 1, Legend Media has effective control of BJ YSLD. The
majority of Legend Media’s revenues are derived from BJ YSLD’s indirect
exclusive advertising agency rights for Xinhua Airline Magazine. The previous
exclusive advertising agency rights agreement for Xinhua Airline Magazine (the
“Airline Advertising Agency Agreement”) expires on March 31, 2010. Due to the
lack of sufficient cash flow generated from the business of the Company, it is
unable to come up with the upfront deposit required by the related media company
for the renewal of this Airline Advertising Agency Agreement. Pursuant to an
agreement of understanding entered into among certain major shareholders of the
Company on December 19, 2009 (the “ AOU”), Mr. Ju, the CEO of the Company, has
personally secured the financing necessary and caused such Airline Advertising
Agency Agreement be temporarily entered between HTLG and the media company. The
Company is currently attempting to raise capital to repay Mr Ju the above-said
personal financing. Upon the repayment of such personal financing and subject to
other terms of the AOU, Mr. Ju will cause the Airline Advertising Agency
Agreement be assigned to BJ YSLD. In case capital is raised, considering current
market conditions, the Company may have to issue a significant number of
shares. Further, if capital is not available from the market,
significant shares would have to be issued to Mr. Ju in accordance with the AOU,
who provided the capital necessary to secure the Airline Advertising Agency
Agreement.
41
These
factors among others may indicate the Company may be unable to continue as a
going concern for a reasonable period of time.
In view
of these matters, realization of profitability is dependent upon the success of
the Company’s future operations and ability to meet its financial requirements
and raise additional capital. Management's plans include negotiation with RMK to
extend the note, repayment of the personal financing for the assignment of the
exclusive right under the Airline Advertising Agency Agreement to BJ YSLD,
further marketing of its advertising network and the expansion of its
advertising sales for 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.
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.
In
January 2003, the FASB issued Statement of Financial Accounting Standards Board
Interpretation FSB ASC 810-10-05-8, "Consolidation of VIEs.” ASC
810-10-05-8 states that in general, a VIE is a corporation, partnership, limited
liability corporation, trust or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (2) has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
On May
30, 2008, the Company purchased 80% of the common stock of LMTICL, and on July
21, 2008, the Company purchased 100% of the common stock of NRL. Additionally,
on November 28, 2008, the Company entered into and closed the Airline
Advertising Acquisition Agreement with Well Chance, MRL, and the Music Radio
Shareholders, pursuant to which the Company acquired control of BJ YSLD, another
variable interest entity. Foreign direct investment and ownership of advertising
companies in the PRC is subject to certain restrictions. Therefore, the Company
acquired control of TJ YSLD (through its purchase of Legend Media Tianjin
Investment Company Limited) and the Company acquired control of Beijing Maihesi
(through its purchase of NRL). The Company structured Legend Media Tianjin
Investment Company Limited and NRL 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 (2007);
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.
42
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 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 and airline advertising business operates in
China though contractual arrangements with consolidated entities in China.
The Company and its PRC subsidiaries entered into contractual arrangements with
TJ YSLD, Beijing Maihesi and BJ YSLD as well as their respective shareholders
under which:
·
|
The
Company has been able to exert significant control over significant
decisions about the activities of TJ YSLD, Beijing Maihesi and
BJ YSLD,
|
·
|
A
substantial portion of the economic benefits and risks of the operations
of TJ YSLD, Beijing Maihesi and BJ YSLD were transferred to the Company
through a revenue assignment agreement,
and
|
·
|
The
equity owner of TJ YSLD, Beijing Maihesi and BJ YSLD has not had the
obligation to absorb the losses of TJ YSLD Beijing Maihesi or BJ
YSLD.
|
As the
Company has been able to exert significant control over the PRC operating
affiliates and a substantial portion of the economic benefits and risks were
transferred to the Company, it determined that the advertising entities, TJ
YSLD, Beijing Maihesi and BJ YSLD meet the definition of a VIE through July 20,
2009.However, subsequent to the July 20, 2009 termination of the TJ YSLD and
Beijing Maihesi VIE agreements (see Note 8), only BJ YSLD meets the definition
of a VIE. Accordingly, the Company is considered to be the primary beneficiary
of the risks and benefits of equity ownership of TJ YSLD, Beijing Maihesi and BJ
YSLD and thus has consolidated these entities in its accompanying financial
statements through July 20, 2009 and BJ YSLD as of December 31,
2009.
The
Company applies FASB ASC 360-10, “Property, Plant, and
Equipment”, which established a “primary asset” approach to determine the
cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset. Long-lived assets to be disposed of
are reported at the lower of carrying amount or fair value less cost to sell.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. The Company purchases (i) advertising inventory
in the form of advertising airtime, the unit being minutes, from radio stations
and (ii) advertising pages from airline magazines. The Company then distributes
these minutes and pages under various sales agreements. The Company recognizes
advertising
revenue over the term of
each sales agreement, provided evidence of an arrangement exists, the fees are
fixed or determinable and collection of the resulting receivable is reasonably
assured. The Company recognizes deferred revenue when cash has been received on
a sales agreement, but the revenue has not yet been earned. Under these
policies, no revenue is recognized unless persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is reasonably assured. Barter advertising revenues and the offsetting
expense are recognized at the fair value of the advertising as determined by
similar cash transactions. Under PRC regulations, the Company is required to pay
certain taxes on revenues generated. These taxes include:
43
|
·
|
Business
tax: 5% of revenues generated net of fees paid to advertising agencies and
media companies for services and advertising
inventory;
|
|
·
|
Construction
tax: 3% of revenues generated net of fees paid to advertising agencies and
media companies for services and advertising
inventory;
|
|
·
|
Education
tax: 7% of the business tax;
|
|
·
|
Urban
development tax: 3% of the business tax;
and
|
|
·
|
Flood
insurance tax: 1% of the business
tax.
|
The
Company recognizes these taxes in cost of revenue in the period
incurred.
Cost of
Revenue
The
Company expenses advertising cost monthly according to the terms of the
underlying contracts. The cost of the contract is expensed evenly over the term
of the agreement starting on the date advertising is first expected to take
place. As the advertising inventory does not carry forward, all minutes are
expensed whether sold or not.
Foreign Currency
Transactions and Comprehensive Income
US GAAP
requires recognized revenue, expenses, gains and losses to be 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 US$21,158
and US$24,646 at December 31, 2009 and June 30, 2009, respectively, are
classified as an item of other comprehensive income in the stockholders’ equity
section of the consolidated balance sheets.
In June,
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS No.166”). This statement
removes the concept of a qualifying special-purpose entity Statement 140 and
removes the exception from applying Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, to qualifying
special-purpose entities. SFAS No. 166 has not yet been codified and in
accordance with ASC 105, remains authoritative guidance until such time that it
is integrated in the FASB ASC. SFAS No. 166 is effective for financial asset
transfers occurring after the beginning of an entity’s first fiscal year that
begins after November 15, 2009 and early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(“SFAS No. 167”), which amends the consolidation guidance applicable to variable
interest entities. The amendments affect the overall consolidation analysis
under FASB ASC 810, Consolidation and require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity. SFAS No.
167 has not yet been codified and in accordance with ASC 105, remains
authoritative guidance until such time that it is integrated in the FASB ASC.
SFAS No. 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009, early adoption is prohibited. The adoption of
this amendment will have no material effect on the Company’s financial condition
or results of operations.
44
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162, which is codified in FASB ASC 105, Generally Accepted
Accounting Principles (“ASC 105”). ASC 105 establishes the Codification as the
source of authoritative GAAP in the United States (the “GAAP hierarchy”)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification carries the same level of authority and the
GAAP hierarchy will be modified to include only two levels of GAAP,
authoritative and non-authoritative. ASC 105 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of ASC 105 has had no material effect on the Company’s
financial condition or results of operations.
In July
2009, the FASB ratified the consensus reached by EITF (Emerging Issues Task
Force) issued EITF No. 09-1, (ASC Topic 470) “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance” (“EITF 09-1”). The
provisions of EITF 09-1, clarify the accounting treatment and disclosure of
share-lending arrangements that are classified as equity in the financial
statements of the share lender. An example of a share-lending arrangement is an
agreement between the Company (share lender) and an investment bank (share
borrower) which allows the investment bank to use the loaned shares to enter
into equity derivative contracts with investors. EITF 09-1 is effective for
fiscal years that begin on or after December 15, 2009 and requires retrospective
application for all arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. Share-lending arrangements that have
been terminated as a result of counterparty default prior to December 15, 2009,
but for which the entity has not reached a final settlement as of December 15,
2009 are within the scope for share-lending arrangements entered into on or
after the beginning of the first reporting period that begins on or after June
15, 2009. The Company does not expect the provisions of EITF 09-1 to have a
material effect on the financial position, results of operations, or cash flows
of the Company.
In
September 2009, the FASB issued ASU 2009-12, Fair Value Measurements and
Disclosures (Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). This ASU provides amendments to Topic
820 for the fair value measurement of investments in certain entities that
calculate net asset value per share (or its equivalent). It is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued. The Company does not expect the provisions of ASU 2009-12
to have a material effect on the financial position, results of operations or
cash flows of the Company.
In
October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. This update addressed the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than a combined unit and will be
separated in more circumstances that under existing US GAAP. This ASU eliminated
that residual method of allocation for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Company does not expect the provisions of ASU 2009-13
to have a material effect on the financial position, results of operations, or
cash flows of the Company.
In
October 2009, the FASB issued ASU 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements. This ASU changed the accounting
model for revenue arrangements that include both tangible products and software
elements for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. The
Company does not expect the provisions of ASU 2009-14 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
45
In
October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
This ASU amends the FASB Accounting Standard Codification for EITF 09-1. At the
date of issuance, a share-lending arrangement entered into on an entity’s own
shares in contemplation of a convertible debt offering or other financing is
required to be measured at fair value and recognized as issuance cost in the
financial statements of the entity. ASU No. 2009-15 is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. This ASU is effective for interim or annual periods beginning on
or after June 15, 2009, for share-lending arrangements entered into in those
periods. Arrangements that have been terminated as a result of
counterparty default prior to the effective date of this Issue but for which the
entity had not reached a final settlement as of the effective date are within
the scope of this ASU. The Company does not expect the provisions of ASU 2009-15
to have a material effect on the financial position, results of operations, or
cash flows of the Company.
In
December 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets, codifies SFAS No. 166, Accounting
for Transfers of Financial Assets, which is a revision to Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. ASU No. 2009-16 eliminates the concept of a “qualifying
special-purpose entity” from Statement No.140 and removes the exception from
applying FASB Interpretation (FIN) No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, to qualifying special-purpose entities. As a
result, most securitization entities that previously met the requirements of a
qualifying special-purpose entity under Statement No. 140 that are variable
interest entities (VIEs) are now required to be evaluated under the revised
guidance in the amendment to FIN 46(R). The Company does not expect the
provisions of ASU 2009-16 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with VIEs, codifies
Statement No. 167, Amendments to FASB Interpretation No. 46(R). Among other
provisions, this ASU amends FIN 46(R) to require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a VIE. This analysis identifies the
primary beneficiary of a VIE as the enterprise that has both (a) the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance, and (b) the obligation to absorb losses of the entity that
could potentially be significant to the VIE or the right to receive benefits
from the entity that could potentially be significant to the VIE. Additionally,
ASU No. 2009-17 requires an enterprise to assess whether it has an implicit
financial responsibility to ensure that a VIE operates as designed when
determining whether it has the power to direct the activities of the VIE that
most significantly impact the entity’s economic performance. The Company does
not expect the provisions of ASU 2009-17 to have a material effect on the
financial position, results of operations, or cash flows of the
Company.
In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash (A Consensus of
the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a limit on the amount of cash that will be
distributed is not a stock dividend for purposes of applying Topics 505 and 260
for interim and annual periods ending on or after December 15, 2009, and should
be applied on a retrospective basis. The Company does not expect the provisions
of ASU 2010-01 to have a material effect on the financial position, results of
operations, or cash flows of the Company.
46
In
January 2010, the FASB issued Accounting Standards Update (ASU) 2010-02,
Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership
of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810-10 and removes the potential conflict between guidance in that
Subtopic and asset de-recognition and gain or loss recognition guidance that may
exist in other US GAAP. An entity will be required to follow the amended
guidance beginning in the period that it first adopts SFAS 160 (now included in
Subtopic 810-10). For those entities that already adopted SFAS 160, the
amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be
applied retrospectively to the first period that an entity adopted SFAS 160. The
Company does not expect the provisions of ASU 2010-02 to have a material effect
on the financial position, results of operations, or cash flows of the
Company.
In
January, 2010, the FASB issued ASU 2010-3—Extractive Activities—Oil and Gas
(Topic 932): Oil and Gas Reserve Estimation and Disclosures. This article
discusses the ASU’s key provisions and changes in practice. As stated in the
adopting release of the SEC Final Rule, application was contingent on the FASB
conforming its standards to the requirements of the SEC Final Rule. ASU 2010-3
is effective for annual periods ending on or after December 31, 2009 and is
applied prospectively as a change in estimate. However, entities that became
subject to the disclosure requirements of Topic 932 solely due to the change to
the definition of significant oil and gas producing activities are permitted to
apply the disclosure provisions of Topic 932 in annual periods beginning after
December 31, 2009.The Company does not expect the provisions of ASU 2010-3 to
have a material effect on the financial position, results of operations, or cash
flows of the Company.
In
January, 2010, the FASB issued ASU 2010-04, Accounting for Various
Topics—Technical Corrections to SEC Paragraphs. The Company does not expect the
provisions of ASU 2010-4 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
In
January, 2010, the FASB issued ASU 2010-05 Compensation - Stock Compensation
(Topic 718): Escrowed Share Arrangements and the Presumption of Compensation.
This ASU codifies Emerging Issues Task Force Topic D-110, “Escrowed Share
Arrangements and the Presumption of Compensation,” which was issued on June 18,
2009 to clarify SEC staff views on overcoming the presumption that for certain
shareholders escrowed share arrangements represent compensation. Topic D-110
concludes that when evaluating whether the presumption of compensation has been
overcome, registrants should consider the substance of the arrangement,
including whether the arrangement was entered into for purposes unrelated to,
and not contingent upon, continued employment. The SEC staff believes
that an escrowed share arrangement in which the shares are automatically
forfeited if employment terminates is compensation. The Company does not expect
the provisions of ASU 2010-5 to have a material effect on the financial
position, results of operations, or cash flows of the Company.
In
January, 2010, the FASB issued ASU 2010-06 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, to
enhance the usefulness of fair value measurements. The amended guidance requires
both the disaggregation of information in certain existing disclosures, as well
as the inclusion of more robust disclosures about valuation techniques and
inputs to recurring and nonrecurring fair value measurements. The Company does
not expect the provisions of ASU 2010-6 to have a material effect on the
financial position, results of operations, or cash flows of the
Company.
47
In
January, 2010, the FASB issued ASU 2010-07 Not-for-Profit Entities (Topic 958):
Not-for-Profit Entities: Mergers and Acquisitions. Statement 164 is effective
for mergers that occur on or after the beginning of an initial reporting period
beginning after December 15, 2009. It is effective for acquisitions occurring on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2009 (January 1, 2010 for a calendar-year entity).
Application of the Statement’s provisions to mergers or acquisitions before
those dates is prohibited. The Company does not expect the provisions of ASU
2010-7 to have a material effect on the financial position, results of
operations, or cash flows of the Company.
In
February, 2010, the FASB issued ASU 2010-08—Technical Corrections to Various
Topics. The Company does not expect the provisions of ASU 2010-8 to have a
material effect on the financial position, results of operations, or cash flows
of the Company.
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 shareholder 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. The subsequent Airline Advertising Acquisition Agreement,
leading to the control of BJ YSLD in November 2008, was accounted for similarly
to a pooling of interest as there was common control. Therefore, the
Company's historical financial information includes that of BJ
YSLD.
48
Comparison of Three Months
Ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Amount
|
%
of Revenue
|
Amount
|
%
of Revenue
|
|||||||||||||
REVENUE
|
$ | 2,767,634 | 100.0 | % | $ | 2,659,090 | 100.0 | % | ||||||||
COST
OF REVENUE
|
779,495 | 28.16 | % | 1,523,652 | 57.30 | % | ||||||||||
GROSS
PROFIT
|
1,988,139 | 71.84 | % | 1,135,438 | 42.70 | % | ||||||||||
OPERATING
EXPENSES
|
2,235,771 | 80.78 | % | 1,790,338 | 67.33 | % | ||||||||||
LOSS
FROM OPERATIONS
|
(247,632 | ) | (8.95 | %) | (654,900 | ) | (24.63 | %) | ||||||||
TOTAL
NON-OPERATING EXPENSE
|
(581,117 | ) | (21.00 | %) | (125,678 | ) | (4.73 | %) | ||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(828,749 | ) | (29.94 | %) | (780,578 | ) | (29.36 | %) | ||||||||
PROVISION
FOR INCOME TAXES
|
89,505 | 3.23 | % | 116,326 | 4.37 | % | ||||||||||
NET
LOSS
|
(918,254 | ) | (33.18 | %) | (896,904 | ) | (33.73 | %) | ||||||||
NET
LOSS ATTRIBUTABLE TO LEGEND MEDIA, INC. COMMON
SHAREHOLDERS
|
(918,254 | ) | (33.18 | %) | (770,149 | ) | (28.96 | %) | ||||||||
OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||
Foreign
currency translation adjustment
|
(26,314 | ) | (0.95 | %) | 11,276 | 0.42 | % | |||||||||
COMPREHENSIVE
LOSS
|
$ | (944,568 | ) | (34.13 | %) | $ | (758,873 | ) | (28.54 | %) |
Revenues. Our
revenue included sales of radio advertising and airline magazine advertising.
During the three months ended December 31, 2009, we had revenues of $2,767,634,
compared to US$2,659,090 for the three months ended December 31, 2008,
an increase of US$108,544. The increase is attributable to increasing
demand for airline magazine advertising offset by a reduction in demand for
radio business advertising.
Cost of
revenue. Cost of sales decreased to US$779,495, for the three
months ended December 31, 2009, compared to US$1,523,652, for the three months
ended December 31, 2008, a decrease of US$744,157 or 49%. The majority of the
decrease is a result of the termination of underperforming advertising
assets. Management has taken several steps to reduce costs associated
with poor performing advertising assets. These efforts are expected
to help the Company reach profitability in the coming quarters. The
Company’s costs of revenue are largely fixed and, thus, any efforts made to cut
costs that do not materially impact revenue results have significant impact on
gross profit and profitability.
Gross
Profit. Gross profit was US$1,988,139 for the three months
ended December 31, 2009 compared to US$1,135,438 for the three months ended
December 31, 2008, an increase of US$852,701 or 75%. The overall gross profit
increase for the three months ended December 31, 2009 is attributable to the
cost of revenue reduction. The elimination of underperforming assets
had a significant beneficial impact on gross profit.
The gross
margin for the three months ended December 31, 2009 and 2008 was 72% and 43%,
respectively. As with the overall gross profit, the gross margin
increase was the product of an improved business structure.
49
Management
expects margins to continue to improve as sales increase.
Operating
Expenses. Operating expenses increased to US$2,235,771
for the three months ended December 31, 2009, compared to US$1,790,338 for the
three months ended December 31, 2008. The increase is the result of a
US$627,914 increase in selling expense offset by a US$86,870 decrease in general
and administrative expenses and a US$95,611 decrease in depreciation and
amortization expenses. Current period increase of selling expenses is
mainly due to the increase in barter transaction volume. Materials transferred
in for barter transaction were recorded in selling expense when
consumed.
As a
percentage of revenue, selling, general and administrative expenses are expected
to decrease as some of the costs will not need to increase to handle future
growth.
Depreciation
and amortization decreased to US$307,064 for the three months ended December 31,
2009, compared to US$402,675 for the three months ended December 31, 2008, a
decrease of US$95,611. The majority of the difference is related to a
reduced amount of intangible assets to amortize as compared to the previous as
the Company took an impairment charge to the FM 92.5 contract right in the last
quarter ended June 30, 2009.
Loss from Operations. As a
result of the above, loss from operations was US$247,632 for the three months
ended December 31, 2009 compared to US$654,900 for the three months ended
December 31, 2008, a difference of US$407,268. As a percentage of revenues, loss
from operations was 9% for the three months ended December 31, 2009 compared to
25% for the three months ended December 31, 2008.
Non-operating Income and
Expense. Non-operating expense for the three months ended December 31,
2009 was US$581,117 as compared to US$125,678 for the three months ended
December 31, 2008. The difference of US$455,439 can be attributed to
nonrecurring losses resulting from the impairment of the Company’s intangible
asset.
Income (Loss) before Provision for
Income Taxes. Loss before provision for income taxes was US$828,749 for
the three months ended December 31, 2009 as compared to US$780,578 for the three
months ended December 31, 2008, a difference of US$48,171.
Net Loss attributable to Legend
Media, Inc. common shareholders. As a result of the
foregoing, net loss attributable to Legend Media, Inc. common shareholders
decreased to US$918,254 for the three months ended December 31, 2009 compared to
US$770,149 for the three months ended December 31, 2008, a difference of
US$148,105. The respective net negative margins are 33% and 29 % for
the three months ended December 31, 2009 and 2008, respectively. The loss for
the three months ended December 31, 2009 was mainly due to the increase of fixed
advertising costs related to the radio advertising product line being more than
expected radio advertising sales, the overall increase in selling, general and
administrative expenses, goodwill impairment. Management believes the
Company's operations will generate net income in the future due to fixed nature
of many of the expenses and expectations of continued revenue
growth.
50
Comparison of Six Months Ended
December 31, 2009 and 2008:
2009
|
2008 | |||||||||||||||
Amount
|
%
of Revenue
|
Amount
|
%
of Revenue
|
|||||||||||||
REVENUE
|
$ | 4,928,065 | 100.0 | % | $ | 4,893,582 | 100.0 | % | ||||||||
COST
OF REVENUE
|
1,774,422 | 36.01 | % | 2,686,334 | 53.90 | % | ||||||||||
GROSS
PROFIT
|
3,153,643 | 63.99 | % | 2,297,248 | 46.10 | % | ||||||||||
OPERATING
EXPENSES
|
4,301,592 | 87.29 | % | 3,638,945 | 73.02 | % | ||||||||||
LOSS
FROM OPERATIONS
|
(1,147,949 | ) | (23.29 | %) | (1,341,697 | ) | (26.92 | %) | ||||||||
NON-OPERATING
EXPENSE
|
(188,687 | ) | (3.83 | %) | (407,421 | ) | (8.18 | %) | ||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(1,336,636 | ) | (27.12 | %) | (1,749,118 | ) | (35.10 | %) | ||||||||
PROVISION
FOR INCOME TAXES
|
106,381 | 2.16 | % | 293,771 | 5.89 | % | ||||||||||
NET
LOSS
|
(1,443,017 | ) | (29.28 | %) | (2,042,889 | ) | (40.99 | %) | ||||||||
NET
LOSS ATTRIBUTABLE TO LEGEND MEDIA, INC. COMMON
SHAREHOLDERS
|
(1,443,017 | ) | (29.28 | %) | (1,928,866 | ) | (38.70 | %) | ||||||||
OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||
Foreign
currency translation adjustment
|
4,823 | 0.10 | % | (70,111 | ) | (1.41 | %) | |||||||||
COMPREHENSIVE
LOSS
|
$ | (1,447,840 | ) | (29.38 | %) | $ | (1,998,977 | ) | (40.11 | %) |
Revenues. Our
revenue included sales of radio advertising and airline magazine advertising.
During the six months ended December 31, 2009, we had revenues of US$4,928,065,
compared to US$4,983,582 for the six months ended December 31, 2008, a decrease
of US$55,517. The decrease is attributable to a reduction in radio
advertising business in first and second quarters of fiscal year
2010.
Cost of
revenue. Cost of sales decreased to US$1,774,422, for the six
months ended December 31, 2009, compared to US$2,686,334, for the six months
ended December 31, 2008, a decrease of US$911,912 or 34%. The majority of the
decrease is a result of the termination of underperforming advertising
assets. Management has taken several steps to reduce costs associated
with poor performing advertising assets. These efforts are expected
to help the Company reach profitability in the coming quarters. The
Company’s costs of revenue are largely fixed and, thus, any efforts made to cut
costs that do not materially impact revenue results have significant impact on
gross profit and profitability.
Gross
Profit. Gross profit was US$3,153,643 for the six months ended
December 31, 2009 compared to US$2,297,248 for the six months ended December 31,
2008, an increase of US$856,395 or 37%. The overall gross profit increase for
the six months ended December 31, 2009 is attributable to the cost of revenue
reduction. The elimination of underperforming assets had a significant
beneficial impact on gross profit.
The gross
margin for the six months ended December 31, 2009 and 2008 were 64% and 46%,
respectively. As with the overall gross profit, the gross margin
increase was the product of an improved business structure.
51
Management
expects margins to continue to improve as sales increase.
Operating
Expenses. Operating expenses increased to US$4,301,592
for the six months ended December 31, 2009, compared to US$3,638,945 for the six
months ended December 31, 2008. The increase is the result of a
US$895,131 increase in selling expense offset by a US$31,961 decrease in general
and administrative expenses and a US$200,523 decrease in depreciation and
amortization expenses. Current period increase in selling
expenses is mainly due to the increase in barter transaction volume. Materials
transferred in for barter transaction were recorded in selling expense when
consumed.
As a
percentage of revenue, selling, general and administrative expenses are expected
to decrease as some costs will not need to increase to handle future growth,
except bad debt provision increased slightly according to the aging growth of
the Accounts Receivable balances.
Depreciation
and amortization decreased to US$614,026 for the six months ended December 31,
2009, compared to US$814,549 for the six months ended December 31, 2008, a
decrease of US$200,523. The majority of the difference is related to
a reduced amount of intangible assets to amortize as compared to the previous as
the Company took an impairment charge to the FM 92.5 contract right in the last
quarter ended June 30, 2009.
Loss from Operations. As a
result of the above, loss from operations totaled US$1,147,949 for the six
months ended December 31, 2009 as compared to US$1,341,697 for the six months
ended December 31, 2008, a difference of US$193,748. As a percentage of
revenues, loss from operations was 23% for the six months ended December 31,
2009 compared to 27% for the six months ended December 31, 2008.
Non-operating Income and
Expense. Non-operating expense for the six months ended December 31, 2009
was US$188,687 as compared to US$407,421 for the six months ended December 31,
2008. The difference, US$218,734 can be attributed to nonrecurring gains
resulting from the restructuring of the Company’s operating units and the
resulting of termination of certain VIE agreements offset with loss from
impairment of an intangible asset.
Income (Loss) before Provision for
Income Taxes. Loss before provision for income taxes was US$1,336,636 for
the six months ended December 31, 2009 as compared to US$1,749,118 for the six
months ended December 31, 2008, a difference of US$412,482.
Net Loss attributable to Legend
Media, Inc. common shareholders. As a result of the
foregoing, net loss attributable to Legend Media, Inc. common shareholders
decreased to US$1,443,017 for the six months ended December 31, 2009 compared to
US$1,928,866 for the six months ended December 31, 2008, a difference of
US$485,849. The respective net negative margins are 29 % and 39 % for
the six months ended December 31, 2009 and 2008, respectively. The loss for the
six months ended December 31, 2009 was mainly due to the increase of fixed
advertising costs related to the radio advertising product line being more than
expected radio advertising sales, the overall increase in selling, general and
administrative expenses, goodwill impairment and the gains on the disposal of
contracts. Management believes the Company's operations will generate
net income in the future due to fixed nature of many of the expenses and
expectations of continued revenue growth.
52
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth a summary of our cash flows for the six months
periods ended as indicated below:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Net
cash used in operating activities
|
$ | (559,958 | ) | $ | (2,108,528 | ) | ||
Net
cash used in investing activities
|
(180,512 | ) | (1,781,386 | ) | ||||
Net
cash provided by financing activities
|
813,096 | 950,488 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
585 | 6,936 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
73,211 | (2,932,490 | ) | |||||
Cash
and cash equivalents at the beginning of year
|
169,343 | 3,372,499 | ||||||
Cash
and cash equivalents at the end of year
|
242,554 | 440,009 |
Operating
Activities
Net cash
used in operating activities was US$559,958 in the six months ended
December 31, 2009 compared to US$2,108,528 in the period ending December 31,
2008. Our cash flow have improved in the six months ended December 31
2009 which is largely attributable to better collection of accounts
receivable.
Cash
flows from Investing and Financing Activities
Cash used
in investing activities in the six months ended December 31, 2009 was
US$180,512, which is mainly for termination of certain VIE agreements, compared
with US$1,781,386 for the period ended December 31, 2008, which is mainly for
acquisition of certain radio business. Cash used by financing activities was
US$813,096 for the six months ended December 31, 2009. The cash
provided by financing activities was obtained by the contribution of capital by
shareholders to the operating entity in China. Although the business
continues to develop and generate an increasing amount of cash, the Company may
have to raise additional funds to finance any continued losses and the existing
commitments. The Company has outstanding notes payable of US$375,733, which is a
loan from a related party, RMK. The accrued interest balance for this loan is
US$494,283 as of December 31, 2009. The Company will have to raise additional
fund to finance further expansion in China. Also see going concern note
reproduced earlier in this section.
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.
53
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
In
response to a series of delayed fillings in previous periods and the accounting
error in the quarter ended September 30, 2009 (Note 19), management has made
steps to improve financial statement close procedures. With the exception of the
matters noted above there were no changes in our internal control over financial
reporting that occurred during the quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
54
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
With the
exception of the matters referred to in the going concern note included in Note
1, there have been no material changes to the risk factors previously disclosed
in the Company's Annual Report on Form 10-K for the year ended June 30,
2009. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
See Going
Concern of Note 1 in the Notes to Consolidated Financial
Statements.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibits:
31.1
|
Section 302
Certification of Principal Executive Officer and Principal Financial
Officer.*
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section 1350.*
|
*
|
Filed
herewith
|
55
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
LEGEND MEDIA, INC.
Date:
February 12, 2010
|
By:
|
/s/ Ju BaoChun | |
Ju BaoChun | |||
Chief Executive Officer | |||
Date:
February 12, 2010
|
By:
|
/s/ Jeffrey Dash | |
Jeffrey Dash | |||
Chief Financial Officer | |||
56