UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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(Mark
One)
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
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For
the fiscal year ended June 30, 2008
OR
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
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For
the transition period from
to
Commission
file number 333-138479
LEGEND
MEDIA, INC.
(Name
of
Small Business Issuer in Its Charter)
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Nevada
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87-0602435
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(State
or Other Jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or Organization)
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9663
Santa Monica Blvd. #952, Beverly Hills, CA 90210
(Address
of Principal Executive Offices)
(310) 933-6050
(Issuer’s
Telephone Number)
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
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Common
Stock, $.001 par value
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(Title
of Class)
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Check
whether the issuer is not required to file reports pursuant to Section
13
or Section 15(d) of the Exchange Act.
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o
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Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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Yes
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No
o
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Check
if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference
in
Part III of this Form 10-KSB or any amendment to this Form
10-KSB.
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o
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act).
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Yes
o
No
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The
issuer's revenues for its most recent fiscal year were $155,970.
The
aggregate market value of the registrant’s voting and non-voting common equity
held by non-affiliates was $10,850,000. The aggregate market value was
calculated using the price at which the common equity was last sold on October
10, 2008.
Determination
of stock ownership by non-affiliates was made solely for the purpose of this
requirement, and the registrant is not bound by these determinations for any
other purpose.
On
October 10, 2008 there were 10,339,775 shares of common stock
outstanding
Documents
Incorporated By Reference
The
issuer has not incorporated by reference into this Annual Report on Form 10-KSB:
(1) any annual report to the issuer’s securities holders, (2) any
proxy or information statement, or (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act.
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Transitional
Small Business Disclosure Format (check one):
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Yes
o
No
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LEGEND
MEDIA, INC
ANNUAL
REPORT ON FORM 10-KSB
FOR
THE YEAR ENDED JUNE 30, 2008
TABLE
OF CONTENTS
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3
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Item
1. Description
of Business
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3
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Item
1A. Risk
Factors
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14
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Item 2.
Description
of Property
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30
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Item 3.
Legal
Proceedings
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30
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Item 4.
Submission
of Matters to a Vote of Security Holders
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30
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PART
II
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31
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Item
5. Market for Common Equity, Related Stockholder Matters and
Small
Business Issuer Purchases of Equity
Securities
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31
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Item 6.
Management’s
Discussion and Analysis or Plan of
Operations
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32
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Item
7. Financial Statements
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43
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Item
8. Changes In and Disagreements with Accountants On Accounting
and
Financial Disclosure
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43
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Item
8A(T). Controls and Procedures
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43
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Item
8B. Other Information
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44
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PART
III
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45
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Item
9. Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange
Act.
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45
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Item
10. Executive
Compensation
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46
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Item
11. Security
Ownership Of Certain Beneficial Owners And Management And Related
Stockholder Matters
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49
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Item
12. Certain
Relationships and Related Transactions And Director
Independence
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50
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51
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Item
14. Principal
Accountant Fees and Services
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54
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2
PART
I
Item
1. Description
of Business
Special
Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-KSB 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-KSB and the documents we
incorporate by reference, including statements regarding our future financial
position, business strategy and plans and objectives of management for future
operations, are forward-looking statements. The words “believe,” “may,”
“estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,”
“target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as
they relate to us, are intended to identify forward-looking statements within
the meaning of the “safe harbor” provisions of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy and financial
needs.
These
forward-looking statements are subject to a number of risks, uncertainties
and
assumptions described under the caption “Risk Factors” and elsewhere in this
Annual Report on Form 10-KSB. 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 Annual Report on Form 10-KSB 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 Annual Report on
Form 10-KSB. 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.
Description
of Business
Legend
Media, Inc., formerly known as Noble Quests, Inc. (hereinafter referred to
as
the “Company,” “Legend Media,” “we,” “us,” or “our” ), was organized as a Nevada
corporation on March 16, 1998, for the purpose of selling multi-media marketing
services and other related services to network marketing groups. Specifically,
the Company assisted network marketers in using marketing tools such as public
relations, advertising, direct mail, collateral development, electronic
communications and promotion tools to increase product and service awareness.
However, due to a combination of factors including slow sales development,
the
weakening United States economy and opportunities beyond the borders of the
United States, our management decided that it was in the best interest of the
Company to shift focus abroad and find an alternative business strategy focused
on more lucrative markets. In an effort to substantiate stockholder value,
we
investigated various industries and companies with the intent that if such
investigations lead to a suitable opportunity, we would merge with a target
company with the intent that the target company be the long term operating
unit
of the business. The existing multi-media marketing services business would
continue until such a time it no longer had value to the enterprise.
3
Concurrently
with the closing of the transactions under the Share Exchange Agreement and
as a
condition thereof, the Company entered into an agreement with Ms. McCallum-Law,
pursuant to which she returned to the Company for cancellation 2,419,885 of
the
5,119,885 shares of the Company’s common stock owned by her. Ms. McCallum-Law
was not compensated in any way for the cancellation of the shares. In addition,
the Company issued 4,100,000 shares of its common stock to certain affiliates
of
Well Chance for $87,740 in cash and 200,000 shares in exchange for consulting
services performed in connection with this transaction. Upon completion of
the
foregoing transactions, the Company had an aggregate of 8,200,000 shares of
common stock issued and outstanding.
The
exchange of shares with the Well Chance Shareholder was accounted for as a
reverse acquisition under the purchase method of accounting because Well Chance
obtained control of Legend Media. Accordingly, the share exchange was recorded
as a recapitalization of Well Chance, with Well Chance being treated as the
continuing entity.
As
a
result of the reverse merger transactions described above, the historical
financial statements presented are those of Well Chance, the operating entity.
Effective
as of February 14, 2008, Noble Quests, Inc. changed its name to Legend Media,
Inc.
Well
Chance was incorporated under the laws of the British Virgin Islands as an
International Business Company on February 22, 2005. Well Chance was formed
to
create a business that principally engaged in the development and management
of
a technology platform that deploys advertisements across its various advertising
media. Well Chance expanded its business in February 2008 to focus on building
a
consumer advertising network in the People’s Republic of China (the “PRC”)
focused on the Chinese radio advertising industry. Well Chance
conducts
its
business operations through its 80% owned subsidiary Legend
(Beijing) Consulting Co., Ltd. and its wholly owned subsidiary Legend (Beijing)
Information and Technology Co., Ltd., each of which are incorporated under
the
laws of the PRC.
Due
to
PRC regulatory restriction on foreign investment in the advertising industry,
we
operate our business in China through Tianjin Yinse Lingdong Advertising Co.,
Ltd. and Beijing Maihesi International Advertising Co., Ltd.
Our
relationships with both of these operating affiliates and their shareholders
are
governed by a series of contractual arrangements that allow us to effectively
control and derive economic benefits from them. Accordingly, we treat Tianjin
Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi International
Advertising Co., Ltd. as variable interest entities and have consolidated their
financial results in our financial statements in accordance with generally
accepted accounting principles in the United States.
Today,
the Company is building a consumer advertising network in the PRC
focused
on the Chinese radio advertising industry. On
May 8,
2008, the Company and Well Chance entered into a Share Purchase Agreement with
Music Radio Limited, a British Virgin Islands company, and all of the
shareholders of Music Radio Limited, for the purchase of exclusive radio
advertising rights in Tianjin, PRC. Pursuant to the Share Purchase Agreement,
Well Chance, for consideration consisting of (a)
shares of the Company's common stock with an aggregate value of US$7,160,714
based on the weighted average trading price of the Company's common stock for
the 90 trading days immediately preceding May 8, 2008 (1,892,559 shares), and
(b) US$2,000,000, agreed
to
purchase 80% of the common stock of Legend Media Tianjin Investment Company
Limited, a British Virgin Islands company and a wholly owned subsidiary of
Music
Radio Limited. The stock and cash consideration was paid into escrow to be
released to the sellers, if at all, in two installments upon (a) the renewal
of
a radio advertising contract, and (b) the achievement of certain financial
benchmarks (provided that the condition under (a) first has been satisfied).
The
closing of the Share Purchase Agreement occurred on May 30, 2008, and the
Company secured effective control of the exclusive sales contract for the
Tianjin, PRC based radio channel. Tianjin, PRC is a large city with a population
of over 11.5 million. Administratively, it is a municipality that has
provincial-level status, reporting directly to the central government. There
are
a total of four such cities in the PRC with Beijing, Shanghai and Chongqing
making up the other three. Tianjin's urban area is the third largest in the
PRC,
ranked only after Shanghai and Beijing.
The
exclusive sales contract provides the Company with 19,710 minutes per year
of
advertising space. The contract is up for renewal this year and expires December
31, 2008. However, as provided in the Share Purchase Agreement, as amended,
a
portion of the escrowed consideration for the transaction will not be paid
to
the sellers unless the contract is renewed. The channel reaches over 11.5
million people in the Tianjin area. Because the region is one of the most
economically developed and urbanized in the PRC, the Company believes that
the
radio station is well situated to take advantage of the expanding middle and
upper class in the PRC. Provided that a portion of the escrowed consideration
is
released upon renewal of the exclusive sales contract, the balance of the
escrowed consideration will be released based on certain financial benchmarks
set forth in the Share Purchase Agreement.
4
As
management plans to focus the maximum amount of its time and resources on
expanding the Company's radio advertising inventory in the RPC, the Company
has
entered into a Sales and Marketing Agreement with Beijing Hongteng Lianguang
Advertising Co., Ltd., a related party company owned by Ju Baochun, who is
one
of the sellers in the Music Radio Limited transaction and also a stockholder
of
Legend Media, pursuant to which Beijing Hongteng Lianguang Advertising Co.,
Ltd.
handled all sales and marketing for Legend Media through September 30, 2008.
Currently, Beijing Hongteng Lianguang Advertising Co., Ltd. continues to provide
services to Legend Media. However, Legend Media, through its operating
affiliates, has taken larger responsibility for the sales and marketing process.
The Sales and Marketing Agreement can be cancelled with one month's notice
and
outsources the entire sales, marketing, production and administrative functions
related to the exclusive advertising contract for the Tianjin radio station.
As
part of the plan to establish its own operations in Tianjin, Legend Media,
through its variable interest entity in the PRC, Tianjin
Yinse Lingdong Advertising Co., Ltd.,
leased
an office in Tianjin. The office has been furnished and equipped and is
currently being used by Beijing Hongteng Lianguang Advertising Co., Ltd. for
the
purpose of developing Legend Media’s brand presence in Tianjin and improving the
quality of the presentation made to existing and prospective
customers.
On
July
21, 2008, Legend Media closed a transaction pursuant to which Well Chance
purchased 100% of the common stock of News Radio Limited, a British Virgin
Islands company, for consideration consisting of (a) shares
of
the Company's common stock with an aggregate value of 2,000,000 Chinese Renminbi
("RMB") (approximately $287,728 based on the currency exchange rate on June
5,
2008) based on the weighted average trading price of the common stock for the
30
trading days immediately before June 4, 2008 (67,388 shares) payable on the
closing date, (b) RMB5,250,000 (approximately $755,287 based on the currency
exchange rate on June 5, 2008) payable 28 days after the closing date, and
(c)
RMB1,600,000 (approximately $230,182 based on the currency exchange rate on
June
5, 2008) payable 90 days after the closing date.
The
transaction occurred pursuant to the terms of a Share Purchase Agreement that
the Company entered into on June 4, 2008 with Well Chance and all of the
shareholders of News Radio Limited. The closing gives Legend Media effective
control of the PRC-based company that has the exclusive sales contract for
the
Beijing, PRC based radio channel FM 90.5. Beijing is a metropolis in northern
PRC with a population of over 17 million. As with Tianjin, it is one of four
municipalities in the PRC with status as a province in the PRC's administrative
structure. Beijing is the PRC's second largest city, after Shanghai, and is
recognized as the political, educational, and cultural center of the PRC.
Beijing has a rapidly developing economy with an expanding affluent population.
In 2007, retail sales in Beijing exceeded $55 billion.
Beijing
is of strategic importance to the Company’s objective of building a market
leading brand position in the radio advertising industry. The exclusive sales
contract for Beijing FM 90.5 is for four years (two years plus a two year
option) and grants Legend Media, through its operating affiliate, Beijing
Maihesi International Advertising Co., Ltd.,
the
right to be the exclusive advertising agent for the channel, under which the
Company has the exclusive rights to manage and sell all advertising minutes
for
the radio station. The contract provides Legend Media with an additional 45,990
of radio advertising minutes per year. The exclusive rights to sell advertising
also extend to program sponsorship which the Company expects will provide
additional advertising inventory for sale. The exclusive sales contract was
originally entered into by News Radio Limited in May 2008 so as of July 3,
2008
the business was still in the start up phase but in the process of opening
an
office and expanding staff. The Company plans to hire its own staff while still
using third party sales and marketing companies in an effort to maximize first
year performance.
The
exclusive contract
for Beijing FM 90.5 is
with a
subsidiary of China Radio International, the owner of the radio channel. As
part
of the exclusive sales agreement, Legend Media, through its operating affiliate,
is provided with the first right of refusal to be the exclusive agent for
Beijing FM 90.5 as it expands its content to frequencies outside of Beijing.
On
August
4, 2008, Beijing Merci International Advertising Co., Ltd., a company organized
in the PRC and an affiliate of Legend Media, entered into an Exclusive
Advertising Rights Agreement with Beijing Guo Guangrong Advertising Co., Ltd.,
pursuant to which Beijing Merci International Advertising Co., Ltd. agreed
to
acquire 45,990 advertising minutes per year on FM 107.1, a news and
entertainment radio station that broadcasts to the Shenzhen region of the PRC.
The Exclusive Advertising Rights Agreement closed on August 31, 2008. The
exclusive contract gives Legend Media an additional 45,990 minutes of radio
advertising targeting Shenzhen, a metropolis adjacent to Hong Kong with a
population of over 12 million. Shenzhen is one of the wealthiest and most
economically diverse cities in the PRC.
5
As
of
September 30, 2008, the Company had a combined annual inventory of 111,690
minutes of radio advertising with a combined potential audience of over 40
million people. The Company currently maintains two operating offices in Beijing
and rents an office in Tianjin for use by the outsourced sales and marketing
team.
Business
Strategy
Our
objective is to become the dominant radio advertising company in the PRC by
promoting radio advertising in the PRC to the point that it becomes a top
marketing medium comparable to television, outdoor advertising, the internet
and
print. Our plan to achieve this objective involves six key strategic
principles:
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I.
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Rapidly
Expand Inventory:
We
intend to acquire radio advertising time by entering into contracts
while
the radio industry is still materially undervalued, in our opinion.
As the
industry gains traction, we expect that the cost of acquiring radio
advertising time will increase.
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We
have
divided the PRC into strategic regions in an effort to attempt to implement
an
effective growth strategy. The regions are as follows:
| a. |
Beijing
Region (Northeast China with a main office in Beijing
Municipality);
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| b. |
Shanghai
Region (Southeast China with a main office in Shanghai
Municipality);
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| c. |
Shenzhen
Region (South China with a main office in Shenzhen, Guangdong
Province);
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| d. |
Zhengzhou
Region (Central China with a main office in Zhengzhou, Henan Province);
and
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| e. |
Chongqing
Region (West China with a main office in Chongqing
Municipality).
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Our
expansion strategy is to establish an office in each of these regions. Our
first
choice in establishing an office is through a strategic acquisition. However,
we
are prepared to use existing staff and management to open new offices in regions
where suitable acquisitions are not available. We achieved the first part of
our
strategy with the acquisition of a Beijing based business. This business is
managing the Company’s advertising time for the Beijing based radio station as
well as for the Tianjin based radio station. We expect to use this office for
further expansion throughout the region.
We
are
continuously exploring new acquisitions of radio advertising time. Management
uses a fact based evaluation method to determine the value of the available
advertising rights. The criteria used include:
| a. |
Whether
the contract offers rights to all or a majority of radio stations
in the
market (comparing the number of stations with advertising rights
with the
total number of radio stations in the
market);
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| b. |
Population
reach of a particular radio
channel;
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| c. |
Value
of the population being targeted:
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| i. |
Overall
GDP of the market area;
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| ii. |
GDP
per capita of the market area;
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| iii. |
Retail
sales of the market area;
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| iv. |
GDP
growth in the market area;
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| v. |
Car
ownership in the market area; and
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| vi. |
Car
ownership growth rates in the market area.
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| d. |
Contract
cost per minute;
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| e. |
Historical
advertising sales of the radio
channel;
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| f. |
Term
of the agreement; and
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| g. |
Estimated
time to break-even, which should not be greater than six
months.
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We
expect
to generate revenue growth from not only building inventory of radio advertising
minutes but also improving the utilization rate of those acquired minutes and
benefiting from increased advertising rates that we can charge for those
minutes.
6
| II. |
Focus
Short Term Efforts on Improving Existing Sales:
Contracts acquired, for the most part, have an existing revenue stream.
These revenue streams are expected to cover 80% - 90% of the contract
cost
without any sales improvement. The
Company will focus immediate attention on improving the existing
sales by:
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a.
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Creating
a collective database of customers that can be targeted for all radio
properties;
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b.
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Sending
top sales people to new markets on temporary assignment to help assess
and
improve sales skills;
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| c. |
Implementing
active training programs for all sales
people;
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| d. |
Immediately
reviewing and refining pricing and discounting
policies;
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| e. |
Tracking
inventory utilization and providing improved information to the sales
force; and
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| f. |
Implementing
company-wide sales force automation.
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The
Company believes it is strategically imperative to improve existing sales
efforts to reach a quick cash flow neutral position. In addition to the
financial benefit, the Company does not plan to rapidly expand its national
sales efforts and industry promotion until at least 1,000,000 minutes are under
contract. In doing so, the Company expects to have enough of a foothold on
the
market to ensure a market leading position before its promotion of the industry
brings new competitors into the space.
|
III.
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National
Sales Effort: As
the local sales efforts are being improved, the Company expects to
begin
building the next generation sales force. The Company anticipates
that the
new sales force will be led by a seasoned media sales executive and
be
focused on:
|
|
a.
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Promoting
the value of using radio advertising to large brands in (and entering)
China; and
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b.
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Promoting
the value of selling radio advertising to the large advertising agencies.
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Currently
valued at $15.7 billion, the total advertising industry in China is still young
and rapidly developing. To develop the radio advertising market, we anticipate
that our new sales force will effectively become industry promoters. We expect
that they will take the lead with major brands and advertising companies on
promoting the “value proposition” of radio advertising. We believe that our
national sales team will be in the position to close sales with the major
national brands as the message is delivered and if and when interest for radio
increases. As described above, we do not plan to launch an active national
promotion until a critical mass of inventory is acquired because we believe
that
early promotion will drive up the cost of the acquired inventory and bring
competitors into the space.
|
IV.
|
Champion
the Industry through business-to-business Marketing: After
the launch of the national sales team, Legend Media also expects
to take a
proactive approach to marketing the radio industry in its entirety
as well
as the Company itself. We expect that the marketing campaign will
be
completely business-to-business and target marketing decision makers
at
the top brands and the media buyers at the top advertising agencies.
As
with any new product entering the market, demand needs to be created.
By
championing the industry, we expect that the overall value of the
industry
will increase with Legend Media being the market leader.
|
We
believe that increased exposure of radio advertising will drive up the rates
that we will be able to charge for our radio advertising minutes resulting
in
both increased revenue and profitability. This is likely to increase the value
of advertising rights throughout the industry and therefore result in a higher
cost of entry to future competitors.
|
V.
|
Promote
the Radio Channels and Influence Content: Legend
Media does not intend to be a content company but expects to help
radio
channels better understand consumers’ expectations. In doing so, we expect
that both the radio channels and Legend Media will benefit. Further,
Legend Media intends to work with the radio stations to promote them
through active community outreach programs and events. The radio
stations
need to use the “interactivity” of radio to promote the stations and
ultimately drive up advertising value. Legend Media plans to be an
active
consultant to the radio station on how to implement such strategies.
Currently, in the Chinese radio market, radio stations are not actively
promoted through other channels such as outdoor advertising or event
promotion. Legend Media views the promotion of radio stations as
a key to
long term success of the
business.
|
7
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VI.
|
Find
a Use for Unsold Inventory:
We estimate that the overall radio advertising industry in China
operates
at an inventory utilization rate (sold minutes divided by the total
available advertising minutes) of less than 25%. Exact numbers are
hard to
determine as the reporting structure of the industry is limited.
Our
management is looking to alternative strategies to use the unsold
minutes
without disrupting Legend’s core business of radio advertising sales. The
Company is cautious when using price to increase utilization as it
is
likely to have a negative long term impact on the overall value of
the
industry. The Company plans to look at several alternatives for the
use of
the unsold inventory including:
|
|
a.
|
Partnering
with alternative media companies, such as mobile phone short message
service (“SMS”)\ marketing companies to promote the SMS service while
building a direct marketing solution. The SMS partner would be a
strategic
addition as it could also provide an increased level of interactivity
to
the radio content and advertising
content;
|
|
b.
|
Partnering
with a third party to sell products, such as working on a commission
basis
with an online retail outlet;
|
|
c.
|
Launching
a Company owned direct marketing and product selling entity and taking
advantage of the unsold minutes by:
|
| i. |
Selling
products;
|
| ii. |
Promoting
Company owned “community” based websites;
and
|
| iii. |
Building
marketing databases through radio promoted
contests.
|
|
d.
|
Partnering
with a charitable organization such as the Red Cross, to utilize
some of
the unsold minutes to enhance community
relations.
|
Market
Overview
The
radio
industry in the PRC currently consists of 273 commercial radio stations with
over 2,300 channels and 394.7 million listening households. The average daily
listening time per adult is 89.5 minutes. The size of China’s radio advertising
industry in terms of advertising sales reached $426 million in 2007 with a
17%
compound annual growth rate ("CAGR") from 2002 to 2007.
Source:
“Global Entertainment and Media Outlook 2007-2011”,
PriceWaterhouseCoopers
The
forecast for the future of China’s radio advertising sales varies across sources
with a low estimate of RMB4.70 billion1
(approximately US$689 million at the current exchange rate2)
and a
high estimate of RMB10.15 billion3
(approximately US$1,487 million at the current exchange rate) by 2009.
1“Global
Entertainment and Media Outlook 2007-2011”,
PriceWaterhouseCoopers
2
Current
exchange rate here and throughout the annual report is based on the rate as
of
September 15, 2008
3“This Year, Next Year China Media Forecasts 2008”, GroupM
3“This Year, Next Year China Media Forecasts 2008”, GroupM
8
The
expected growth of the radio advertising industry is a byproduct of the overall
economic performance and the rapid expansion of the total advertising market
in
China.
China’s
economy is rapidly expanding and is not forecasted to slow down in the
foreseeable future
From
2002
to 2007, China’s economy grew at a CAGR of 15% reaching US$3.25 trillion in 2007
and is now forecasted to continue to grow at a CAGR of 14% through
2012,4
becoming
the third largest economy in the world by 2008 and eclipsing number two, Japan,
soon after. The rapid expansion in China's economy has lead to the expansion
of
affluence and the rise of the middle class in China.
|
o
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By
2015, it is estimated that there will be 27 million households in
the PRC
earning over RMB100,000 (approximately $14,650 at the current exchange
rate), growing to 41 million households by 2025;
|
|
o
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In
2006, the PRC had 310,000 US$ millionaires and that number is estimated
to
grow to 609,000 by 2011, the highest number in the world and primarily
consisting of first generation of US$ millionaires;
and
|
|
o
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By
2011, it is estimated that there will be 16 million high net-worth
individuals in the PRC with $6.2 trillion in total assets.5
|
The
expanding personal wealth of the Chinese population is rapidly creating the
world’s largest consumer market. In 2007, the PRC’s retail sales growth rate hit
a 10 year high at 16.8% to RMB8.9 trillion (US$1.24 trillion).
Source:
National Bureau of Statistics of China and ChinaDaily.com, 9/27/2006 “Retail
Sales Growth in Coming Year”
The
rapidly increasing retail sales are expanding the brand presence of
international and domestic brands. As the existing brands expand nationally
and
new brands enter the market, advertising spending has and is forecasted to
continue to increase as brands compete for the fastest growing consumer market
in the world.
China’s
economy is rapidly expanding and expected to expand further
In
2007,
China’s media expenditures hit RMB197.5 billion (US$28.9 billion at current
exchange rates) and is forecasted to exceed RMB287.9 billion (US$42.2 billion
at
current exchange rates)6
by 2009.
The year-over-year percentage change in 2007, compared to 2006, was 18.3% and
is
expected to be 22.0% and 19.5% for 2008 and 2009, respectively. As the
advertising market in China continues to mature, net
advertising investment-to-GDP ratio is approaching the worldwide average of
0.94% and has nearly doubled since 2001 (0.7% in 2007 vs. 0.4% in 2001).
4
International Monetary Fund, “World Economic Outlook”
5“HSBC
joins race to cash in on China's new millionaires “, Reuters March 31,
2008
6“This
Year, Next Year China Media Forecasts 2008”, GroupM
9
China
is
one of the most, if not the most, challenging markets in the world. Similar
to
the United States, China is large with cultural diversity within its borders.
China can be viewed as a collection of diverse and complex markets each with
populations exceeding most countries. The complexity in the market is creating
challenges in the advertising market while forcing an increase in advertising
investment by brands. We expect that brands, international and domestic alike,
will continue to invest in advertising in China as they look to expand ways
to
reach and engage customers.
Radio
Advertising is underutilized, undervalued and an opportunity
While
the
overall advertising industry has exploded, the radio industry has fallen behind
posting 2007 revenue of $426 million.7
Radio
advertising as a percentage of total advertising in China is currently 2.6%
and
is forecasted to improve to 3.5% by 2009.8
Even by
2009, the ratio is predicted to fall short of the worldwide average of
8.1%
and
those of the United States, 11.8%, and Western Europe, 5.6%. Also, while GDP
of
the United States is 4.3 times that of China’s, radio advertising spending in
the United States is 52.4 times that of China’s, at US$22 billion in 2007.
The
combined impact of macro level influences is the expectation that radio
advertising in China has explosive growth ahead of it as the radio advertising
market commercializes.
Adding
to
the opportunity in the radio industry is the relative low cost to advertisers
compared to alternative media. In 2007, the average cost per 1,000 impressions
for radio was $0.78 while TV, outdoor, newspapers and magazines cost advertisers
materially more.9
The
relative low cost provides radio with an added value proposition to attract
new
customers to the industry. Further, we expect that the relative low cost
provides additional revenue growth opportunities for us as rates will increase
over time as they become more in line with the alternatives.
The
radio
advertising industry’s forecasted growth is also being driven by the increased
mobility of the Chinese population. Currently, there are over 28 million
privately owned vehicles in China. This number is expected to increase to over
48 million by 2010.10
The
increased car ownership has also given rise to an increase in radio listenership
and the importance of radio as a means to reach the affluent class in China.
As
with the United States, which has a radio advertising industry valued at US$22
billion, China’s radio industry should increasingly become a larger portion of
total advertising spending. The increased number of cars and the resulting
dramatic increase in traffic will provide advertisers with a way to reach
consumers in a captive environment with a chance for repetitive messaging.
Management expects the coming five years to be the years of the largest growth
rate of radio advertising sales in the history of the industry in China.
Products
and Services
Legend
Media currently owns the exclusive rights to manage and sell 306
minutes of advertising per day, or 111,690 minutes per year. The exclusive
rights to sell advertising also extend to program sponsorship which provides
additional revenue opportunities. The minutes are distributed between our
Tianjin based channel, FM 92.5, and our Beijing based channel, FM 90.5.
Legend
Media has an exclusive sales contract to act as the exclusive advertising agent
for Tianjin channel FM 92.5. The exclusive sales contract provides 54
minutes per day, or 19,710 minutes per year. The channel is based in Beijing
and
through a relay facility airs in Tianjin. Legend Media’s exclusive sales
contract is with the channel's exclusive agent. The Tianjin contract, which
was
acquired through the Company’s acquisition of Music Radio Limited, is cash flow
positive and achieving gross margins of over 52%.
Through
our acquisition of News Radio Limited, we have secured a strategic partnership
with China Radio International, under which we have the exclusive rights to
manage, promote and sell all the advertising inventory for China Radio
International’s Beijing channel FM 90.5. Effectively, we are the 100% owner of
126
minutes of advertising per day, or 45,990 minutes per year.
7 “Global
Entertainment and Media Outlook 2007-2011”,
PriceWaterhouseCoopers
8 “This
Year, Next Year China Media Forecasts 2008”, GroupM
9 Source:
Internal estimates based on data from ZenithOptimedia and National Bureau
of
Statistics of China
10 National
Bureau of Statistics of China, Xinhua Economic News, Google Finance and internal
calculations
10
We
added
an additional 126 minutes per day, or 45,990 per year, with our latest contract
for the exclusive sales and advertising rights to FM 107.1 in Shenzhen. The
combined stations reach over 40 million people in three of China’s most
developed markets.
We
maintain offices in Beijing and Tianjin. In Beijing, we have two offices that
are responsible for sales, production and administration. One of the offices
in
Beijing focuses on the administrative functions while the other office is
strictly radio sales and production focused. The Tianjin office is not staffed
by Legend Media at this time as management felt outsourcing the sales process
was a more efficient solution to allow management to remain focused on
expansion.
The
Company manages the radio operation as one business and promotes the sharing
of
customer data and trends with each channel managed. As the number of contracted
channels increases, the discipline of sharing should provide the Company with
economies of scale and a competitive edge in the market.
Legend
Media has not planned on entering the content development business but does
have
access to helping the stations gear content towards listeners’ needs and
expectations. Content production is expensive and adds an unnecessary level
of
complexity at a time when management is focusing on rapid inventory expansion
to
achieve a long term dominant market position. At this time, management has
no
expectations of entering the content production business but prefers the role
of
advisor and influencer.
Customers
Currently,
we target local brands looking to increase reach in the territory covered by
the
applicable radio channel. Our focus has been on real estate, automobiles and
financial services, the largest of which is the real estate sector which
accounts for 67% of the revenue to date. The automobile industry and financial
service sectors account for 31% combined. Our customers are top tier advertisers
and include Imported Volkswagen Car Co., Ltd., China Construction Bank Co.,
Ltd.
Tianjin Branch, Tianjin Wanke Realestate Co., Ltd. and Tianjin Xingguang Canlan
Entertainment Co., Ltd.
Customers
purchase radio advertising either directly from us, through an advertising
agent
or through our exclusive sales and marketing partner for the Tianjin business.
Management
has begun to establish relationships with the tier 1 advertising agencies in
China and plans to use them to acquire new customers at the point Legend Media
has a significant inventory base. Management plans to expand our real estate
advertising client base while balancing the sector mix with additional
automobile, consumer goods, and financial services brands. As real estate only
makes up 4% of China's national radio advertising sales, the Company plans
to
use current real estate sales as a base to expand into the more prominent
automobile, financial services and leisure industries. The Company is reliant
on
the real estate industry, and our large customers are associated with that
industry. A significant downturn in the real estate market and the subsequent
loss of a few of our larger customers would have a material adverse effect
on
our business. Management is looking to diversify our customer base to minimize
the impact of any one industry or customer group on the overall performance
of
the business.
Competition
The
radio
advertising industry is highly fragmented and has not had a dominant national
force in the market as of yet. And while there is competition amongst radio
advertising sales companies, the Company views its competition as coming from
alternative advertising media, especially outdoor advertising. As radio is
only
2.6% of the entire advertising industry in China, the primary competition issue
is one of promoting the value proposition of radio advertising versus the
alternatives. One of Legend Media’s key strategic goals is to market the
industry as a whole to maximize the value of the industry.
Currently,
in the radio advertising industry specifically, there are hundreds of companies
selling radio advertising. The most successful of which is the agency owned
by
the Beijing Radio Station which is the number one radio station in China.
Outside of Beijing Radio Station, the four largest competitors to Legend Media
are and are expected to continue to be Yuan Chuan Radio, based in Shanghai,
Beijing Universal Chief Advertising, based in Beijing, Simulcast (a joint
venture between Beijing Radio and Phoenix Satellite TV), based in Beijing,
and
Xinhua Finance Media Limited, based in Shanghai. We believe that the market
remains wide open for a dominant market leader as the largest of the competitors
only controls an estimated 350,000 minutes annually.
11
The
Company views the keys to successfully competing as being a) staying focused
on
expanding inventory first, b) always promoting the industry and c) moving
quickly as the opportunity will not last forever.
Sales
and Marketing
The
Company views all employees as being part of the sales and marketing process
as
the Company’s stated purpose is to sell radio advertising. The organization is
structured along those lines with the view that every point of contact from
the
first contact to invoicing is a chance to exceed customer expectations and
encourage future sales.
As
of
September 30, 2008, we have a total staff of 38 with 23 dedicated to sales.
Each
member of the team focuses their efforts on a specific radio channel while
being
managed by a common executive across the enterprise. The sales efforts for
each
radio channel are collected at the corporate level and where appropriate
customers and sales leads are shared with other radio channels ensuring the
maximum opportunity to cross sell and service the customer’s needs.
Legend
Media also has sales and marketing relationships that help the sales process
by
using existing relationships to promote the Company’s advertising inventory.
These customers are also added to the group level customer management system
to
achieve maximum service levels and cross selling opportunities.
Seasonality
The
radio
advertising industry in China is seasonal and, for the most part, tracks
consumer spending and the resulting advertising trends. The advertising cycle
in
China typically peaks toward the end of each calendar year with a decline during
January and February due to the Chinese Lunar New Year. Currently, the biggest
seasonal impact on radio advertising is the Chinese Lunar New Year as the market
is still developing and less impacted by other seasonal influences that impact
the advertising industry as a whole.
Government
Regulation
The
PRC
government views the media industry as an industry of national importance.
This
means that the media industry is extensively regulated, including radio,
television, newspapers, magazines and advertising. The regulations imposed
structure our decisions and the Company is committed to following all imposed
regulations.
The
key
regulations relevant to the Company’s activities in China are:
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The
laws and regulations that govern investments of capital, especially
foreign capital, in the media industry. Under the PRC laws, “foreign”
includes Hong Kong, Taiwan and Macau. As a result of the restrictions,
we
operate our business in China through a series of contractual arrangements
which provide effective control over the PRC entities without direct
ownership;
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The
laws and regulations specifically related to advertising as whole
and
radio advertising specifically; and
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Regulations
on foreign currency exchange.
|
Limitations
on Foreign Ownership in the Advertising Industry
The
principal regulations governing foreign ownership in the advertising industry
in
China include:
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The
Catalogue for Guiding Foreign Investment in Industry (2004); and
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The
Administrative Regulations on Foreign-invested Advertising Enterprises
(2004).
|
These
regulations set the guidelines by which foreign entities may 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 a
foreign company must have at least three years of direct operations in the
advertising industry outside of China.
12
Because
we have not been involved in advertising outside of China for the required
number of years, our domestic PRC operating subsidiaries, which are considered
foreign invested, are currently ineligible to apply for the required advertising
services licenses in China. Our PRC operating affiliates hold the requisite
licenses to provide advertising services in China and they are owned or
controlled by PRC citizens designated by us. Our radio advertising business
operates in China though contractual arrangements with consolidated entities
in
China. We, Legend (Beijing) Consulting Co. Ltd, and Legend (Beijing) Information
and Technology Co., Ltd have entered into a series of contractual arrangements
with our PRC operating affiliates and their respective shareholders under
which:
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We
are able to exert effective control over the PRC operating affiliates;
|
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A
substantial portion of the economic benefits of our PRC operating
affiliates will be transferred to us; and
|
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We
can consolidate the results in our financial
statements.
|
Our
PRC
counsel, Hawkhigh Law Firm, reviews all agreements entered into in China.
Hawkhigh structured the PRC based business and advised the Company regarding
a)
the ownership structure established to operate in China and comply with existing
PRC laws and regulations, and b) whether the contractual arrangements between
Legend (Beijing) Consulting Co., Ltd and Legend (Beijing) Information and
Technology Co., Ltd, and their respective PRC affiliates and PRC shareholders,
are valid, binding and enforceable.
Our
counsel has advised us that there are uncertainties regarding the interpretation
and application of current and future PRC laws and regulations. For that reason,
there can be no assurance that the PRC regulatory authorities will not in the
future take a view that is contrary to that of our PRC legal counsel. Further,
PRC counsel has also advised that we could be subject to severe penalties if
the
PRC government determines that the agreements establishing the structure for
operating our PRC advertising business do not comply with PRC government
restrictions on foreign investment in the advertising industry.
Regulations
on the advertising industry
The
principal regulations governing the PRC advertising industry include:
|
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•
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The
Advertising Law promulgated by the National People’s Congress on
October 27, 1994;
|
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||
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•
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The
Administration Regulations of Advertising Industry, promulgated by
the
State Council on October 26, 1987; and
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•
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The
Implementation Rule of Advertising Industry Administration, or the
Implementation Rule, promulgated by the State Administration for
Industry
and Commence on January 9, 1988, amended in 1998, 2000 and 2004, and
effective as of January 1, 2005.
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The
regulations stipulate that companies engaging in advertising activities must
obtain from the State Administration for Industry and Commerce ("SAIC"), or
its
local branches, a business license which specifically includes operating an
advertising business within its business scope. A company conducting advertising
activities without such a license may be subject to penalties, including fines,
confiscation of advertising income and orders to cease advertising operation.
The business license of an advertising company is valid for the duration of
its
existence, unless the license is suspended or revoked due to a violation of
any
relevant law or regulation.
We
do not
expect to encounter any difficulties in maintaining our business licenses.
Each
of our affiliated PRC companies has obtained such a business license as required
by PRC regulations. We work with various advertising agencies and to the best
of
our knowledge these advertising agents also have the required business licenses
as required by PRC law, although it is possible that one or more them my not
be
in compliance at any given time. We will terminate any relationship that is
deemed to be with an entity that is not properly licensed per the regulations
set by the PRC.
13
Advertising
content
PRC
advertising laws and regulations set forth certain content requirements for
advertisements in China, which include prohibitions on, among other things,
false or misleading content, superlative wording, socially destabilizing content
or content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are prohibited. It is prohibited to
disseminate tobacco advertisements via radio, film, television, newspapers
or
magazines. It is also prohibited to display tobacco advertisements in any
waiting lounge, theater, cinema, conference hall, stadium or other public area.
There are also specific restrictions and requirements regarding advertisements
that relate to matters such as patented products or processes, pharmaceuticals,
medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In
addition, all advertisements relating to pharmaceuticals, medical instruments,
agrochemicals and veterinary pharmaceuticals advertised through radio, film,
television, newspapers, magazines, out-of-home and other forms of media,
together with any other advertisements which are subject to censorship by
administrative authorities according to relevant laws and administrative
regulations, must be submitted to relevant administrative authorities for
content approval prior to dissemination.
Advertisers,
advertising operators and advertising distributors are required by PRC
advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and in full compliance with
applicable law. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents
provided by advertisers for advertisements and verify that the content of the
advertisements comply with applicable PRC laws and regulations. In addition,
prior to distributing advertisements for certain commodities which are subject
to government censorship and approval, advertising distributors are obligated
to
ensure that such censorship has been performed and approval has been obtained.
Violation of these regulations may result in penalties, including fines,
confiscation of advertising income, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the SAIC or its
local branches may revoke violators’ licenses or permits for advertising
business operations. Furthermore, advertisers, advertising operators or
advertising distributors may be subject to civil liability if they infringe
on
the legal rights and interests of third parties in the course of their
advertising business.
The
radio
industry is plagued by the airing of what are termed “medical advertisements” or
advertisements that promote products with claims of specific medical benefits.
The Chinese regulatory body has taken notice of these advertisements and such
added review has lead to the absolute prohibition of such advertisements. Though
prohibited, these advertisements still are estimated to account for more than
45% of the revenues generated by the radio advertising industry. Further, these
advertisements, in most cases outside of the tier 1 cities, represent the
majority of revenues for radio channels. As such, the local authorities have
taken a passive approach to enforcement and allowed channels to continue to
air
the advertisements. Not allowing such would result in a mass crisis in the
radio
industry and the inability of many stations to cover expenses. Though passively
enforced, it is believed that over the coming years the regulatory body will
become more strict and look to completely eliminate such
advertisements.
Legend
Media and our affiliates are committed to the direction set forth by the
regulatory body and today do not sell or air any such “medial advertisements.”
However, with expansion the Company expects it may encounter situations where
new relationships with radio stations and other advertising companies result
in
the airing of such restricted content. The Company’s management has a strict
policy of not selling such advertisements but accepts the terms of future
relationships may require such advertisements to be aired as the Company works
to eliminate and replace the advertisements with unrestricted contents.
Item
1A. Risk
Factors
The
risk
factors listed in this section and other factors noted herein or incorporated
by
reference could cause our actual results to differ materially from those
contained in any forward-looking statements. The following risk factors, in
addition to the information discussed elsewhere herein, should be carefully
considered in evaluating us and our business:
14
We
have a limited operating history, which may make it difficult for you to
evaluate our business and prospects.
We
began
operations in China in February 8, 2008 and had our first month of revenue
operations in China starting June 1, 2008. We entered into two Memoranda of
Understanding in February 2008 and closed our first acquisition in May 2008
for
radio advertising inventory for a radio channel in Tianjin, China. We secured
our radio advertising minutes in Beijing in July 2008. As such, we have a very
limited operating history upon which you can evaluate the viability and
sustainability of our business and its acceptance by advertisers and consumers.
It is also difficult to evaluate the viability of radio advertising in China
because the industry is still underdeveloped and we do not have the experience
to know how the radio advertising industry will develop in China. In addition,
due to our short operating history in China and recent additions to our
management team, some of our senior management and employees have only worked
together at the Company for a relatively short period of time. As a result,
it
may be difficult for you to evaluate the effectiveness of our senior management
and other key employees and their ability to address future challenges to our
business.
Our
failure to maintain relationships with radio stations and specific radio
channels would harm our business and prospects.
Our
ability to generate revenues from advertising sales depends on our ability
to
air advertisements on radio channels. Our ability to place advertisements on
specific radio channels in large part is related to our ability to secure and
maintain exclusive sales agreements with radio channels in China. This, in
turn,
requires that we develop and maintain business relationships with national,
regional and local radio stations as well as with national and local government
agencies. As of June 30, 2008, we were in control of 54 minutes of radio
advertising per day in Tianjin, China. In July 2008, we added 126 minutes of
advertising per day in Beijing. In August 2008, the Company added an additional
126 minutes of advertising in Shenzhen, China. In total, the Company controls
306 minutes of inventory per day, or 111,690 minutes per year. We have entered
into three exclusive advertising agency arrangements with different entities.
We
cannot assure you that we can maintain these relationships on satisfactory
terms, or at all. If we fail to maintain relationships with radio stations
we
would be at risk of losing our rights to be the exclusive advertising agent
for
the respective channel. In turn, we would lose inventory and be unable to
satisfy our customers’ advertising needs.
We
derive nearly all of our revenues from the sale of radio advertising, and
advertising is sensitive to overall economic trends, domestic consumption trends
and advertising trends.
Demand
for advertising on the radio channels under contract by the Company, and the
resulting advertising spending by our customers, is sensitive to changes in
general economic conditions and specifically to changes in overall advertising
spending. It is likely that a decline in overall advertising spending in China
will have a greater impact on radio advertising as it will be deemed as a
support medium and as such customers will shift a larger portion of spending
to
primary media such as television. Advertisers may reduce their investment in
radio for any number of reasons, including:
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a
general decline in economic conditions in China that impact the growth
of
domestic consumption in China;
|
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a
decline in economic conditions in the cities where we maintain radio
advertising operations;
|
|
o
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a
decline in retail sale growth in China is likely to reduce the number
of
new brands trying to enter the
market;
|
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o
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a
decision by customers to shift advertising investment from radio
to other
available advertising media;
|
|
o
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a
decline in advertising spending in general;
or
|
|
o
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an
overall decrease in advertising investment in China and for radio
advertising in particular would materially and adversely affect our
current operations and our ability to execute on our business
plan.
|
Our
quarterly operating results are difficult to predict and may fluctuate
significantly from period to period in the future.
Our
quarterly operating results are difficult to predict and may fluctuate
significantly from period to period based on the seasonality of consumer
spending and corresponding advertising trends in China. Revenues of our business
are largely dependent on overall advertising expenditures. Overall advertising
in China tends to decrease during January and February each year due to the
Chinese Lunar New Year holiday. We also expect to expect to experience
fluctuations around overall commercial slowdowns which can be influenced by
external influences. As radio is a support medium to other advertising media,
our operating results are likely to fluctuate as overall advertising spending
decreases. The reduction in overall advertising spending in the market is likely
to cause advertisers to shift their marketing mix and, in turn, reduce the
percentage of advertising spending on radio advertising. As a result, you may
not be able to rely on period to period comparisons of our operating results
as
an indication of our future performance. A large portion of costs are fixed
thus, if
our
revenues for a particular quarter are lower than expected, we may be unable
to
reduce our operating expenses for that quarter by a corresponding amount, which
would harm our operating results for that quarter relative to our operating
results from other quarters.
15
If
advertisers or the listening public do not accept, or lose interest in, our
radio advertising, our revenues may be negatively affected and our business
may
not expand or be successful.
The
radio
advertising industry in China is small and underdeveloped in comparison to
alternative advertising media including television, outdoor, Internet,
newspapers and magazines. We compete with each of these media and others for
a
share of the advertising spending of our current and prospective customers.
Our
success depends upon the emergence of radio as a viable messaging medium, the
continued increase in listenership and ultimately the broader acceptance of
radio by the advertisers themselves. Advertisers may elect not to invest in
radio advertising as a whole or not use our specific services. If a substantial
number of advertisers lose interest in advertising on the radio or on our
channels specifically, we will be unable to generate sufficient revenues and
cash flows to operate our business, and our financial condition and results
of
operations would be materially and adversely affected.
The
process of building a relationship with a radio channel and then gaining
exclusive rights to their advertising inventory can be time consuming and
requires resources, mostly management’s time and attention, from which we may be
unable to recognize the anticipated benefits.
Our
business plan depends largely on our ability to gain the exclusive rights to
many radio channels across China. The process depends on our ability to
establish relationships with local, regional and national radio stations which
control up to 10 radio channels. Establishing these relationships and securing
the exclusive rights to radio advertising inventory can be lengthy and often
not
result in the actual securing of the exclusive rights. We often need to convince
radio stations about the benefit of partnering with us to ensure they maximize
the value of their individual channels and station as a whole. We invest
considerable time and effort into the process but the radio station may decide
not to partner with us. If a majority of targets decide not to partner with
us,
we will not be able to grow our business or revenues as planned.
The
acquisition of additional exclusive radio advertising inventory requires
significant up front costs that may not be immediately
recoverable.
Once
we
sign a contract with a radio channel to acquire the exclusive sales and
marketing rights for its advertising inventory, we must immediately deposit
up
to 25% of the first year's contract price. Such deposits are usually held for
the term of the contract and often roll-over as contracts are renewed. Further,
we often have to establish a new sales office to handle the new contract. Such
deposits and investments usually come months before any revenue is generated
by
the new contact. We may also experience further delays in revenue generation,
if
any, due to deployment delays or difficulties in selling advertising time to
new
or current advertisers to be aired on the new radio channels
acquired.
The
acquisition of additional exclusive radio advertising inventory may result
in
the Company placing advertisements that are
restricted.
The
acquisition of new advertising inventory either through new contracts with
channels or the acquisition of competing business may result in the Company
placing advertisements that are restricted by the regulatory body. An estimated
40% to 50% of the current radio advertising in China is being sold to companies
placing “medical advertisements.” These advertisements are restricted and per
the regulatory body may not be aired without the prior approval by relevant
government authorities. However, the local regulatory bodies have overlooked
strict enforcement so far due to concerns that strict enforcement may lead
to a
financial crisis in the radio industry. As we expand our inventory we are likely
to be in a situation where an acquisition and / or radio channel has an existing
level of sales being derived from such advertisements. The Company plans to
eliminate such advertisements but may not be able to immediately as many of
these advertisements are content substitutes which will require the channels
to
replace the content prior to eliminating the advertisements. Further, the
Company, as part of the negotiations with radio channels, may offer a timed
removal of the advertisements as they often provide an existing source of
revenue that can not be immediately replaced and that offsets the immediate
costs associated with a new contract. The Company, as a core principle, will
follow all applicable advertising laws; however, the Company also accepts the
need at times to phase the restricted advertisements out versus an immediate
removal.
16
There
are
no guarantees the regulatory body will not take immediate action to eliminate
all such restricted advertisements. If the Company through acquisitions and
new
contacts implements a phase out approach to such advertisements, a change in
regulatory action would adversely impact the result of the Company. The Company
does not currently sell any such restricted advertisements.
We
face significant competition from alternative advertising media, and if we
do
not compete successfully against new and existing competitors, we may not be
able to execute on our plan, and our profitability may be adversely affected.
The
radio
industry in China is underdeveloped and for the most underutilized by
advertisers in the market. We are competing first and foremost with alternative
advertising media to increase the overall level of investment in radio
advertising in China. We compete with other mobile digital television
advertising companies and other new media advertising companies in China.
Further, if the radio advertising industry expands as expected in the coming
years, the Company is likely to face an influx of new competitors focused on
selling radio advertising. We compete for advertising customers primarily on
the
basis of cost of impressions and reach of the radio channels we have under
contract. Specifically in the radio advertising industry we compete with Yuan
Chuan Radio, Beijing Universal Chief Advertising, Simulcast, Beijing Radio
Station, Xinhua Finance Media Unlimited and numerous other smaller radio
advertising companies. We also face competition from radio stations that
establish their own sales networks. The Company views the primary competition
as
coming from other advertising media, such as television, outdoor, newspapers,
magazines and the Internet. The alternative media have already established
a
stronger presence in China and have a far more comprehensive and organized
sales
effort.
Further,
we may also face competition from new entrants into the radio advertising
market. Though we are working to acquire a significant amount of exclusive
radio
advertising minutes, the total amount of radio advertising inventory in China
is
approximately 80 million minutes. The vast amount of minutes across China means
that as radio become a more viable advertising medium, there will be plenty
of
inventory available for competitors looking to enter the market. Therefore,
we
cannot assure you that we will succeed in executing on our plan of gaining
a
market leading amount of advertising under contract at very attractive rates.
Increased
competition could reduce our ability to secure new contracts for radio
advertising, attract new customers and maintain our planned growth trajectory.
We cannot assure you that we will be able to successfully compete against new
or
existing competitors.
If
we or someone else in the radio advertising industry does not “champion” the
industry, we may not be able to execute on our sales plan, and our profitability
may be adversely affected.
We
believe that the radio industry in China is underdeveloped and for the most
underutilized by advertisers in the market. As such, the industry will require
a
“champion” to promote the inherent benefits of adding radio advertising to
existing marketing activities. Companies in China, to date, have not adopted
radio as part of the advertising plan as companies have done in other parts
of
the world. For the industry to meet the more aggressive growth forecasts, we
believe that the medium as a whole will have to become a larger part of the
marketing spending by larger advertisers in China. We expect to take an active
role in championing the industry but accept that this will require an investment
of time and resources. There are no guarantees that an effort to promote the
radio advertising industry will be successful in attracting an increased market
share of radio advertising. We cannot assure you that we will be able to
efficiently or effectively promote the radio advertising industry to become
a
larger portion of the total advertising spending. Any failure to effectively
develop the radio advertising industry may materially and adversely affect
our
business and future growth.
Acquisitions
of existing radio advertising businesses and new exclusive contracts with radio
channels may expose us to potential risks and have an adverse effect on our
ability to manage our business.
Selective
acquisitions and new deals directly with radio channels form a major part of
our
strategy to further expand our business. As we are presented with appropriate
opportunities, we may acquire additional businesses or exclusive contracts
for
radio advertising that are part of our core business. Our integration of the
acquired entities and contacts into our business may not be successful and
may
not enable us to expand into new markets. This would significantly affect the
expected benefits of these acquisitions. Moreover, the integration of new
acquisitions have required, and will continue to require, significant attention
from our management. Future acquisitions will also likely present similar
challenges.
17
The
diversion of our management’s attention and difficulties encountered in any
integration process could have an adverse effect on our ability to manage our
business. In addition, we may face challenges trying to integrate new
operations, services and personnel with our existing operations. Our recent
acquisitions and possible future acquisitions may also expose us to other
potential risks, including risks associated with unforeseen or hidden
liabilities, the diversion of resources from our existing businesses and
technologies, our inability to generate sufficient revenues to offset the costs,
expenses of acquisitions and potential loss of, or harm to, relationships with
employees and advertising customers as a result of our integration of new
businesses and new regulations governing cross-border investment by PRC
residents.
There
may be unknown risks inherent in our acquisitions and signing of new contracts
with radio channels for the exclusive sales and marketing rights of their
advertising inventory.
Although
we have conducted due diligence with respect to the major acquisitions we have
undertaken and expect to do so with respect to future acquisitions, we may
not
be aware of all of the risks associated with the targets of such acquisitions.
Any discovery of adverse information concerning any company we have acquired
could have a material adverse effect on our business, financial condition and
results of operations. While we are entitled to seek indemnification in certain
circumstances, successfully asserting indemnification or enforcing such
indemnification could be costly and time consuming or may not be successful
at
all.
Failure
to manage our growth could strain our management, operational and other
resources and we may not be able to achieve anticipated levels of growth in
the
new networks and media platforms we are beginning to operate, either of which
could materially and adversely affect our business and growth potential.
We
have
been expanding our operations and plan to continue to expand rapidly in China.
We must continue to expand our operations to meet our plan and the expected
needs of the emerging radio advertising industry. We must continue to sign
new
contracts for the exclusive rights to radio advertising inventory across China.
We also need to take advantage of the current environment that provides the
opportunities to enter into such agreements. This expansion has resulted, and
will continue to result, in substantial demands on our management's resources.
It has also increased our need for a reliable supply of management to handle
the
sales and marketing activities needed in the expanding markets. To manage our
growth, we must develop and improve our existing administrative and operational
systems and, our financial and management controls and further expand, train
and
manage our work force. We may not be able to manage our current or future
expansion as it extends beyond our base of operations in Beijing, China. We
cannot assure you that we will be able to efficiently or effectively manage
the
growth of our operations, recruit top talent and train our personnel. Any
failure to efficiently manage our expansion may materially and adversely affect
our business and future growth.
Our
business depends substantially on the continuing efforts of our key executives.
Our business may be severely disrupted if we lose their services.
Our
future success heavily depends upon the continued services of our key
executives, particularly Jeffrey Dash, who is the Chief Executive Officer and
Chief Financial Officer of the Company. Our Chief Executive Officer also serves
as the Chief Financial Officer and will be required to devote some amount of
time in that capacity. None of our key executives, other than Mr. Dash, has
an
employment agreement with Legend Media. Further, Mr. Dash's employment agreement
does not contain a specific term. We rely on the expertise of our key executives
in business operations and the advertising industries and on their relationships
with our stockholders, business partners and regulators. If one or more of
our
key executives are unable or unwilling to continue in their present positions,
we may not be able to replace them easily or at all. Therefore, our business
may
be severely disrupted, our financial condition and results of operations may
be
materially and adversely affected and we may incur additional expenses to
recruit and train personnel.
18
Our
senior management and employees have worked together for a short period of
time,
which may make it difficult for you to evaluate their effectiveness and ability
to address challenges.
Due
to
our limited operating history, certain of our senior management and employees
have worked together at the Company for a relatively short period of time.
As a
result of these circumstances, it may be difficult for you to evaluate the
effectiveness of our senior management and other key employees and their ability
to work with the employees of our operating groups and address future challenges
to our business.
If
we are unable to attract, train and retain key individuals, highly skilled
employees and important talent, our business may be adversely affected.
We
need
to hire additional employees, including personnel to sell our radio advertising
inventory and administrative staff to support our operations. If we are unable
to identify, attract, hire, train and retain individuals in these areas or
retain our existing employees, due to our failure to provide them with adequate
incentives or otherwise, the effectiveness of our sales efforts and overall
business management may be negatively impacted, which could adversely affect
our
business, expansion and results of operations.
We
may be subject to intellectual property infringement claims, which may force
us
to incur legal expenses and could potentially result in judgments against us,
which may materially disrupt our business.
We
cannot
be certain that our radio advertising content or other aspects of our business
do not or will not infringe upon patents, copyrights or other intellectual
property rights held by third parties. Although we are not aware of any such
claims, we may become subject to legal proceedings and claims from time to
time
relating to the intellectual property of others in the ordinary course of our
business. If we are found to have violated the intellectual property rights
of
others, we may be enjoined from using such intellectual property, and we may
incur licensing fees or be forced to develop alternatives. In addition, we
may
incur substantial expenses in defending against these third party infringement
claims, regardless of their merit. Successful infringement or licensing claims
against us may impact our ability to place advertisement for our customers
or in
substantial monetary liabilities, which may materially and adversely disrupt
our
business.
If
we fail to implement effective internal controls required by the Sarbanes-Oxley
Act of 2002, to remedy any material weaknesses in our internal controls that
we
may identify, or to obtain the attestation required by Section 404 of the
Sarbanes-Oxley Act of 2002, such failure could result in material misstatements
in our financial statements, cause investors to lose confidence in our reported
financial information and have a negative effect on the trading price of our
common stock.
Section
404 of the Sarbanes-Oxley Act of 2002 requires management of public companies
to
develop and implement internal controls over financial reporting and evaluate
the effectiveness thereof, and the independent auditors to attest to the
effectiveness of such internal controls and the evaluation performed by
management. We have not yet been required to obtain the independent auditor
attestation required by the Sarbanes-Oxley Act of 2002.
Any
failure to complete our assessment of our internal controls over financial
reporting, to remediate any material weaknesses that we may identify, or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet
our
reporting obligations or result in material misstatements in our financial
statements. Any such failure also could adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of
a
failure to remediate any material weaknesses that we may identify, would
adversely affect our ability to obtain the annual auditor attestation reports
regarding the effectiveness of our internal controls over financial reporting
that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our common stock.
Further,
because some members of our management team have limited or no experience
operating a publicly-traded company, we may need to recruit, hire, train and
retain additional financial reporting, internal controls and other personnel
in
order to develop and implement appropriate internal controls and reporting
procedures. This may be time consuming, difficult and costly for
us.
19
We
need additional capital and we may not be able to obtain it, which could
adversely affect our liquidity and financial position.
We
will
require additional cash resources in order to make acquisitions, secure new
radio advertising inventory and achieve our business plan. We plan to expand
through new contracts and acquisitions. We have identified many targets but
still many have not been identified. The Company will need additional capital
to
execute on its current business plan. The exact cost of acquisitions and the
cost of signing new contracts for radio advertising is not known until the
opportunities are analyzed, due diligence has commenced and negotiations are
underway. The Company will need to raise additional capital to expand at the
planned rate. The sale of additional equity securities could result in
additional dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations. We may not be able to obtain financing in amounts or on terms
acceptable to us, if at all. As a result, our operating results and financial
condition could be adversely affected.
Our
ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including:
|
o
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Investors’
perception of, and demand for, securities of radio advertising companies;
|
|
o
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A
decline in economic conditions in China leading to reduced demand
for
securities of Chinese advertising companies
overall;
|
|
o
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Conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
|
|
o
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Our
future results of operations, financial condition and cash flows;
and
|
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PRC
governmental regulation of foreign investment in advertising services
companies in China.
|
We
cannot
assure you that financing will be available in amounts or on terms acceptable
to
us, if at all. Any failure by us to raise additional funds on terms favorable
to
us could have a material adverse effect on our liquidity and financial
condition.
We
have limited insurance coverage for our operations in China.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited insurance products. We have determined that
the
risks of disruption or liability from our business, the loss or damage to our
property, including our facilities, equipment and office furniture, the cost
of
insuring for these risks, and the difficulties associated with acquiring such
insurance on commercially reasonable terms make it impractical for us to have
such insurance. As a result, we do not have any business liability, disruption,
litigation or property insurance coverage for our operations in China. Any
uninsured occurrence of loss or damage to property, or litigation or business
disruption may result in the incurrence of substantial costs and the diversion
of resources, which could have an adverse effect on our operating results.
Risks
related to the regulation of our business and to our structure
If
the PRC government finds that the agreements that establish the structure for
operating our China business do not comply with PRC governmental restrictions
on
foreign investment in the advertising industry, we could be subject to severe
penalties.
The
PRC
government requires foreign entities that invest in PRC companies providing
advertising services to have at least two years of direct operations in the
advertising industry outside of China. We have recently entered the radio
advertising industry and have not operated any advertising business outside
of
China and therefore, we currently do not qualify to directly invest in or
provide advertising services in China. We are a Nevada based company with
subsidiaries in the British Virgin Islands and Hong Kong and therefore treated
as foreign entity under Chinese law. Accordingly, our China based subsidiaries
Legend (Beijing) Consulting Co., Ltd and Legend (Beijing) Information and
Technology Co., Ltd are currently ineligible to apply for the required licenses
to provide advertising services in China. Our business is currently operated
through our contractual arrangements with our consolidated affiliated entities,
Tianjin Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi International
Advertising Co., Ltd. Both Tianjin Yinse Lingdong Advertising Co., Ltd. and
Beijing Maihesi International Advertising Co., Ltd. are currently owned by
Ju
Baochun and Xue Wei and hold the requisite licenses to provide advertising
services in China.
Tianjing
Yinse Lingdong Advertising Co., Ltd. and Beijing Mahesi International
Advertising Co. Ltd. directly operate our advertising business, sell advertising
time to our customers and enter into sales and marketing agreements with radio
stations. We have been and will continue to be dependent on the two PRC
companies to operate and build our business. We do not have any equity interest
in Tianjing Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi
International Advertising Co., Ltd., but receive the economic benefits of
ownership through various contractual arrangements. We have entered into
contractual arrangements with PRC operating affiliates and their respective
subsidiaries, pursuant to which we, through our PRC operating subsidiaries,
provide technical support and consulting services to our PRC operating
affiliates and their subsidiaries. In addition, we have entered into agreements
with our PRC operating affiliates and each of their shareholders which provide
us with the substantial ability to control these affiliates and their existing
and future subsidiaries.
20
If
we, or
our existing or future PRC operating subsidiaries and affiliates, are found
to
be in violation of any existing or future PRC laws or regulations or fail to
obtain or maintain any of the required permits or approvals, the relevant PRC
regulatory authorities, including the SAIC, which regulates the registration
and
operation of advertising companies, would have broad discretion in dealing
with
such violations, including:
|
o
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Revoking
the business and operating licenses of our PRC subsidiaries and
affiliates;
|
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Discontinuing
or restricting our PRC subsidiaries’ and affiliates’ operations;
|
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Imposing
fines, confiscating the income of our PRC subsidiaries and affiliates
or
our income, or imposing conditions or requirements with which we
or our
PRC subsidiaries and affiliates may not be able to
comply;
|
|
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Requiring
us or our PRC subsidiaries and affiliates to restructure the relevant
ownership structure or operations;
or
|
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Restricting
or prohibiting our use of the proceeds from our initial public offering
or
private placement to finance our business and operations in
China.
|
The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.
We
rely on contractual arrangements with our PRC operating affiliates and their
subsidiaries and shareholders for our China operations, which may not be as
effective in providing operational control as direct ownership.
We
rely
on contractual arrangements with several affiliated PRC entities and their
respective shareholders to operate our advertising business in China. These
contractual arrangements may not be as effective in providing us with control
over our PRC operating affiliates and their subsidiaries as direct ownership.
If
we had direct ownership of our PRC operating affiliates and their respective
subsidiaries, we would be able to exercise our rights as a shareholder to effect
changes in the board of directors of those companies, which in turn could effect
changes, subject to any applicable fiduciary obligations, at the management
level. However, under the current contractual arrangements, as a legal matter,
if our PRC operating affiliates or any of their subsidiaries and shareholders
fails to perform its or his respective obligations under these contractual
arrangements, we may have to incur substantial costs and resources to enforce
such arrangements, and rely on legal remedies under PRC law, including seeking
specific performance or injunctive relief, and claiming damages, which we cannot
assure you to be effective. For example, if shareholders of Tianjing Yinse
Lingdong Advertising Co., Ltd. were to refuse to transfer equity interests
in
Tianjing Yinse Lingdong Advertising Co., Ltd. to us or our designated persons
when we exercise the purchase option pursuant to these contractual arrangements,
or if the shareholders were otherwise to act in bad faith toward us, then we
may
have to take legal action to compel them to fulfill their contractual
obligations. Accordingly, it may be difficult for us to change our corporate
structure or to bring claims against our PRC operating affiliates if they do
not
perform their obligations under their contracts with us or if any of the PRC
citizens who hold the equity interest in our PRC operating affiliates do not
cooperate with any such actions.
Many
of
these contractual arrangements are governed by PRC laws and provide for the
resolution of disputes through arbitration in Hong Kong. Accordingly, these
contracts would be interpreted in accordance with PRC law and any disputes
would
be resolved in accordance with PRC laws. The legal environment in the PRC is
not
as developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. In the event we are unable to enforce these
contractual arrangements, we may not be able to exert effective control over
our
operating entities, and our ability to conduct our business may be negatively
affected.
21
Our
contractual arrangements with our subsidiaries and affiliated entities may
be
subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes, could substantially increase our taxes owed, and reduce our
net income.
Under
applicable PRC laws, rules and regulations, arrangements and transactions among
related parties may be subject to audits or challenges by the PRC tax
authorities. We are not able to determine whether any of these transactions
will
be regarded by the PRC tax authorities as arm’s length transactions. Based on
our knowledge, the PRC tax authorities have not issued a ruling or
interpretation in respect of the type of transaction structure similar to ours.
The relevant tax authorities may determine that our contractual relationships
were not entered into on an arm’s length basis. If any of the transactions are
determined not to have been entered into on an arm’s length basis, or are found
to result in an impermissible reduction in taxes under PRC law, the PRC tax
authorities may adjust our profits and losses and assess more taxes on it.
Further, the PRC tax authorities may impose late payment surcharges and other
penalties for underpaid taxes. Our business may be materially and adversely
affected if tax liabilities increase or if it is found to be subject to late
payment surcharges or other penalties.
The
shareholders of our PRC affiliated entities may breach our agreements with
them
or may have potential conflicts of interest with us, and we may not be able
to
enter further agreements to extract economic benefits from these entities,
which
may materially and adversely affect our business and financial condition.
The
beneficial owners of Tianjing Yinse Lingdong Advertising Co., Ltd. and Beijing
Maihesi International Advertising Co., Ltd. own a substantial portion of our
common shares. Conflicts of interests between their dual roles as beneficial
owners of both Tianjing Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi
International Advertising Co., Ltd. and the Company may arise. We cannot assure
you that when conflicts of interest arise, any or all of these individuals
will
act in the best interests of the Company or that any conflict of interest will
be resolved in our favor. In addition, these individuals may breach or cause
Tianjing Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi International
Advertising Co., Ltd. to breach or refuse to renew the existing contractual
arrangements that allow us to effectively control Tianjing Yinse Lingdong
Advertising Co., Ltd. and Beijing Maihesi International Advertising Co., Ltd.
and receive economic benefits from it. If we cannot resolve any conflicts of
interest or disputes between us and the beneficial owners of Tianjing Yinse
Lingdong Advertising Co., Ltd. and Beijing Maihesi International Advertising
Co., Ltd., we would have to rely on legal proceedings, the outcome of which
is
uncertain and which could be disruptive to our business.
Our
business operations may be affected by legislative or regulatory changes.
Changes
in laws and regulations or interpretations therein, or the enactment of new
laws
and regulations governing placement or content radio advertising, our business
licenses or otherwise affecting our business in China may materially and
adversely affect our business prospects, expansion plans and results of
operations.
Risks
Relating to Doing Business in the PRC
Adverse
changes in political and economic policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
ability to execute on our plan and grow the business.
Substantially
all of our business operations are conducted in China and substantially all
of
our sales are made in China. Further, our entire growth plan is currently based
on expanding our radio advertising business in China. Accordingly, our business,
financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The
Chinese economy differs from the economies of most developed countries in many
respects, including:
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The
degree of government involvement;
|
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The
uncertainty and lack of visibility into the future plans of the
government;
|
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The
forecasted growth rate of the
economy;
|
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The
forecasted growth rate of domestic consumption;
|
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The
control of foreign exchange; and
|
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Access
to financing.
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22
While
the
Chinese economy has grown significantly in the past 30 years, the growth has
been uneven, both geographically and among various sectors of the economy.
The
PRC government has implemented various measures to encourage economic growth
and
guide the allocation of resources. Some of these measures benefit the overall
Chinese economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be materially and adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. At the same time, the very same policies
can generate opportunity as the government works to spread the wealth more
evenly across China.
The
PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the PRC government. The continued control
of
these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The Company depends on
the
ability to work with the government controlled radio stations to generate
substantially all of their revenue.
A
substantial portion of our assets are located in China and substantially all
of
our revenues are derived from our operations in China. Accordingly, our
business, financial condition, results of operations and prospects are subject,
to a significant extent, to economic, political and legal developments in China.
There
are uncertainties with respect to the PRC legal system that could limit the
protections available to you and us.
The
PRC
legal system is a civil law system based on written statutes. Unlike common
law
systems, it is a system in which decided legal cases have little precedential
value. Each
of
our PRC operating subsidiaries and affiliates is subject to PRC laws and
regulations. However,
since the PRC legal system continues to rapidly evolve, the interpretations
of
many
laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit legal
protections available to us. For example, we may have to resort to
administrative and court proceedings to enforce the legal protection that we
enjoy either by law or contract. However, since PRC administrative and court
authorities have significant discretion in interpreting and implementing
statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal
protection we enjoy than in more developed legal systems. These uncertainties,
including the inability to enforce our contracts, could materially and adversely
affect our business and operation. Further, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the
advertising industry, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption
of
local regulations by national laws. These uncertainties could limit the legal
protections available to us and other foreign investors, including you. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of our resources and management attention.
You
may experience difficulties effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws, against us, our management or the experts named in this
annual report.
We
conduct substantially all of our operations in China and a substantial portion
of our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon
our
senior executive officers, including with respect to matters arising under
U.S.
federal securities laws or applicable state securities laws. Moreover, PRC
does
not have treaties with the United States or many other countries providing
for
the reciprocal recognition and enforcement of civil judgments of
courts.
SAFE
has
promulgated several regulations, including SAFE Circular No. 75 issued in
November 2005 and its implementation rule issued in May 2007, that require
PRC
residents and PRC corporate entities to register with local branches of SAFE
in
connection with their direct or indirect offshore investment in an overseas
special purpose vehicles, or SPV, for the purposes of overseas equity financing
activities. These regulations apply to our stockholders who are PRC residents
and may apply to any offshore acquisitions that we make in the future.
23
Under
the
SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in a SPV will be required to register those investments.
In
addition, any PRC resident who is a direct or indirect shareholder of a SPV
is
required to file with the local branch of SAFE, with respect to that offshore
company, any material change involving capital variation, such as an increase
or
decrease in capital, transfer or swap of shares, merger, division, long term
equity or debt investment or creation of any security interest over the assets
located in China. If any PRC shareholder fails to make the required SAFE
registration, the PRC subsidiaries of that offshore parent company may be
prohibited from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation, to their offshore parent company,
and
the offshore parent company may also be prohibited from injecting additional
capital into their PRC subsidiaries. Moreover, failure to comply with the
various SAFE registration requirements described above could result in liability
under PRC laws for evasion of applicable foreign exchange restrictions.
We
cannot
assure you that all of our stockholders who are PRC residents will comply with
or obtain any registrations or approvals required under these regulations or
other related legislation. It is unclear how these regulations, and any future
legislation concerning offshore or cross-border transactions, will be
interpreted, amended and implemented by the relevant government authorities.
The
failure or inability of our PRC resident stockholders to comply with these
regulations may subject us to fines and legal sanctions, restrict our overseas
or cross-border investment activities, limit our ability to inject additional
capital into our PRC subsidiaries, to make distributions or pay dividends,
or
materially and adversely affect our ownership structure. If any of the foregoing
events occur, our acquisition strategy and business operations and our ability
to distribute profits to you could be materially and adversely
affected.
If
any of our PRC affiliates becomes the subject of a bankruptcy or liquidation
proceeding, we may lose the ability to use and enjoy those assets, which could
reduce the size of our advertising network and materially and adversely affect
our business, ability to generate revenues and the market price of our common
stock.
To
comply
with PRC laws, rules and regulations relating to foreign ownership restrictions
in the advertising business, we currently conduct our operations in China
through contractual arrangements with Tianjing Yinse Lingdong Advertising Co.,
Ltd. and Beijing Maihesi International Advertising Co., Ltd., its shareholders
and subsidiaries. As part of these arrangements, Tianjing Yinse Lingdong
Advertising Co., Ltd. and Beijing Maihesi International Advertising Co., Ltd.
hold some of the assets that are important to the operation of our business.
If
any of these entities become bankrupt and all or part of their assets become
subject to liens or rights of third party creditors, we may be unable to
continue some or all of our business activities, which could materially and
adversely affect our business, financial condition and results of operations.
If
Tianjing Yinse Lingdong Advertising Co., Ltd. or Beijing Maihesi International
Advertising Co., Ltd. or any of their subsidiaries undergoes a voluntary or
involuntary liquidation proceeding, its shareholders or unrelated third party
creditors may claim rights to some or all of their assets, thereby hindering
our
ability to operate our business, which could materially and adversely affect
our
business, our ability to generate revenues and the market price of our common
stock.
The
PRC tax authorities may require us to pay additional taxes in connection with
our acquisitions of offshore entities that conducted their PRC operations
through their affiliates in China.
Our
operations and transactions are subject to review by the PRC tax authorities
pursuant to relevant PRC laws and regulations. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For example, in the case of some of our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China, we cannot assure you that the PRC tax authorities
will not require us to pay additional taxes in relation to such acquisitions,
in
particular where the PRC tax authorities take the view that the previous taxable
income of the PRC affiliates of the acquired offshore entities needs to be
adjusted and additional taxes be paid. In the event that the sellers failed
to
pay any taxes required under PRC law in connection with these transactions,
the
PRC tax authorities might require us to pay the tax, together with late-payment
interest and penalties.
24
Restrictions
on currency exchange may limit our ability to utilize our revenues effectively.
The
PRC
government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China.
We
receive all our revenues in Renminbi. Under our current corporate structure,
our
income is primarily derived from dividend payments from our PRC subsidiaries
Tianjin Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi International
Advertising Co., Ltd.. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiary to remit sufficient foreign currency
to pay dividends or other payments to us, or otherwise satisfy their foreign
currency-denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade related transactions, can be
made
in foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. However, approval from SAFE or its local branch is
required where Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated
in foreign currencies. The PRC government may also, at its discretion, restrict
access in the future to foreign currencies for current account transactions.
If
the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay
dividends in foreign currencies to our stockholders.
Fluctuations
in exchange rates could result in foreign currency exchange losses.
The
exchange rate between the Renminbi and the U.S. dollar, Euro and other foreign
currencies is affected by, among other things, changes in China’s political and
economic conditions. Since
July 2005 the Renminbi is no longer pegged solely to the U.S. dollar.
Instead, it is reported to be pegged against a basket of currencies, determined
by the People’s Bank of China. Under
the
new policy, the Renminbi is permitted to fluctuate within a narrow and managed
band. This change in policy has resulted in significant appreciation of the
Renminbi against the U.S. dollar. The
Renminbi may appreciate or depreciate significantly in value against the U.S.
dollar in the long term, depending on the fluctuation of the basket of
currencies against which it is currently valued or it may be permitted to enter
into a full float, which may also result in a significant appreciation or
depreciation of the Renminbi against the U.S. dollar. Fluctuations in the
exchange rate will also affect the relative value of any dividend we issue
in
the future which will be exchanged into U.S. dollars and earnings from and
the
value of any U.S. dollar-denominated investments we make in the future.
Very
limited hedging options are available in China to reduce exposure to exchange
rate fluctuations. To date, we have not entered into any hedging transactions
to
reduce our exposure to foreign currency exchange risk. While we may decide
to
enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited and we may not be able to
successfully hedge our exposure at all. In addition, our currency exchange
losses may be aggravated by PRC exchange control regulations that restrict
our
ability to convert Renminbi into foreign currency.
We
may be treated as a resident enterprise for PRC tax purposes under the new
Enterprise Income Tax Law (“EIT Law”), which may subject us to PRC income tax
for any dividends we receive from our subsidiary and withholding for any
dividends we pay to our non-PRC stockholders.
Under
the
EIT Law, enterprises established outside of China whose “de facto management
bodies” are located in China are considered “resident enterprises,” and are
generally subject to the uniform 25% enterprise income tax rate for their global
income. Under the implementation regulations to the EIT Law issued by the PRC
State Council, “de facto management body” is defined as a body that has material
and overall management and control over the manufacturing and business
operations, personnel and human resources, finances, treasury or properties
and
other assets of an enterprise. If we are required to pay income tax for any
dividends we receive from our subsidiary, the amount of dividends we can pay
to
our stockholders could be materially reduced.
Furthermore,
the EIT Law and implementation regulations provide that an income tax rate
of
10% is normally applicable to dividends payable to non-PRC enterprise investors
which are derived from sources within China, although such income tax may be
exempted or reduced pursuant to a tax treaty between China and the jurisdictions
in which our non-PRC enterprise stockholders reside. If we were considered
a PRC
resident enterprise under the EIT Law, our non-PRC enterprise investors who
are
deemed non-resident enterprises may be subject to the EIT at the rate of 10%
upon the dividends payable by us or upon any gains realized from the transfer
of
our common shares, if such income is deemed derived from China, provided that
(i) such non-PRC enterprise investors has no establishment or premises in China,
or (ii) it has establishment or premises in China but its income derived from
China has no real connection with such establishment or
premises.
25
If
we are
required under the EIT Law to withhold income tax on dividends payable to our
non-PRC enterprise stockholders or any gains realized from the transfer of
our
common shares, the value of your investment may be materially and adversely
affected.
Our
subsidiaries and affiliated entities are subject to restrictions on paying
dividends and making other payments to us.
We
are a
holding company incorporated in Nevada and do not have any assets or conduct
any
business operations other than our investments in our subsidiaries and
affiliated entities. As a result of our holding company structure, we currently
rely entirely on dividends payments from our subsidiaries in China after they
receive payments from our consolidated affiliated entities, Tianjin Yinse
Lingdong Advertising Co., Ltd. and Beijing Maihesi International Advertising
Co., Ltd., under various service and other contractual arrangements. However,
PRC regulations currently permit payment of dividends only out of accumulated
profits, as determined in accordance with PRC accounting standards and
regulations. Our subsidiaries and consolidated affiliated entities in China
are
also required to set aside a portion of their after-tax profits according to
PRC
accounting standards and regulations to fund certain reserve funds. Furthermore,
if our subsidiaries or consolidated affiliated entities in China incur debt
on
their own in the future, the instruments governing the debt may restrict their
ability to pay dividends or make other payments. If we or any of our
subsidiaries in China are unable to receive all of the revenues from our
operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our common stocks.
Any
future outbreak of severe acute respiratory syndrome or avian flu in China,
or
similar adverse public health developments, may severely disrupt our business
and operations.
From
December 2002 to June 2003, China and other countries experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known
as
severe acute respiratory syndrome, or SARS. On July 5, 2003, the World
Health Organization declared that the SARS outbreak had been contained. Since
September 2003, however, a number of isolated new cases of SARS have been
reported, most recently in central China in April 2004. During May and June
of 2003, many businesses in China were closed by the PRC government to prevent
transmission of SARS. In addition, many countries, including China, have
encountered incidents of the H5N1 strain of bird flu, or avian flu. This
disease, which is spread through poultry populations, is capable in some
circumstances of being transmitted to humans and is often fatal. A new outbreak
of SARS or an outbreak of avian flu may result in health or other government
authorities requiring the closure of our offices or other businesses, including
office buildings, retail stores and other commercial venues, which could reduce
the number of people commuting and reduce the appeal of radio advertising.
Any
recurrence of the SARS outbreak, an outbreak of avian flu or a development
of a
similar health hazard in China, may impact the economy, the advertising industry
as a whole and the radio advertising industry specifically. Such occurrences
could severely impact the value of radio advertising, reduce the advertising
time purchased by advertisers and severely disrupt our business and operations.
The
new PRC Property Rights Law may affect the perfection of the pledge in our
equity pledge agreements with our consolidated affiliated entities and their
individual shareholders.
Under
the
Exclusive Technical, Operational, Business Consulting and Service Agreements
among Legend (Beijing) Consulting Co., Ltd., Legend (Beijing) Information and
Technology Co., Ltd. and our consolidated affiliated entities, Tianjin Yinse
Lingdong Advertising Co., Ltd. and Beijing Maihesi International Advertising
Co., Ltd., their respective individual shareholders have pledged all of their
equity interests therein to Legend (Beijing) Consulting Co., Ltd., and Legend
(Beijing) Information and Technology Co., Ltd., respectively, by recording
the
pledge on the shareholder registrars of the respective entities. However,
according to the PRC Property Rights Law, which became effective as of October
1, 2007, a pledge is not effective without being registered with the relevant
local administration for industry and commerce. To our knowledge, no application
for registration of share pledge has been processed by the local administration
for industry and commerce in Beijing and Tianjin, due to a lack of registration
procedures. Tianjin Yinse Lingdong Advertising Co., Ltd. and Beijing Maihesi
International Advertising Co., Ltd. will make efforts to register the equity
pledge when the local administration for industry and commerce implements
registration procedures. We cannot assure you that they will be able to register
the pledges. If we are unable to do so, the pledges may be deemed ineffective
under the PRC Property Rights Law. If any individual shareholder of Tianjin
Yinse Lingdong Advertising Co., Ltd. or Beijing Maihesi International
Advertising Co., Ltd. breaches his or her obligations under the agreement with
Legend (Beijing) Consulting Co., Ltd. and Legend (Beijing) Information and
Technology Co., Ltd., respectively, there is a risk that Legend (Beijing)
Consulting Co., Ltd. or Legend (Beijing) Information and Technology Co., Ltd.
may not be able to successfully enforce the pledge and would need to resort
to
legal proceedings to enforce its contractual rights.
26
We
may incur substantial administrative and staffing cost due to the promulgation
of the new China Labor Contract Law.
On
June
29, 2007, the Standing Committee of the National People’s Congress of China
enacted the Labor Contract Law, which became effective on January 1, 2008.
The
Labor Contract Law contains substantial provisions with a view to improve job
security and to protect the rights and interests of employees. In order to
fully
comply with the legal requirements under the Labor Contract Law, we may incur
substantial administrative and staffing cost.
A
regulation adopted in August 2006 establishes more complex procedures for
acquisitions conducted by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions.
On
August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of
Commerce, or the MOC, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the SAIC, the China
Securities Regulatory Commission and SAFE, jointly adopted the Regulations
on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which
became effective on September 8, 2006. Among other things, the regulations
established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time-consuming and complex,
including requirements in some instances that the MOC be notified in advance
of
any change-of-control transaction in which a foreign investor takes control
of a
PRC domestic enterprise. If we grow our business in part by directly acquiring
complementary businesses in the PRC, complying with the requirements of these
regulations to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval from the MOC, may
delay or inhibit our ability to complete such transactions, which could affect
our ability to expand our business or maintain our market share.
Risks
Related to our Common Stock
There
is not an active trading market for our common stock, and if a market for our
common stock does not develop, our investors may be unable to sell their shares.
Our
common stock is currently quoted on the OTC BB trading system. The OTC BB is
not
a listing service or exchange, but is instead a dealer quotation service for
subscribing members. The OTC BB tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can track
the
market price of shares except through information received or generated by
a
limited number of broker-dealers that make markets in particular stocks. There
is a greater chance of market volatility for securities that trade on the OTC
BB
as opposed to a national exchange or quotation system. This volatility may
be
caused by a variety of factors including:
|
·
|
The
lack of readily available price quotations;
|
|
·
|
The
absence of consistent administrative supervision of “bid” and “ask”
quotations;
|
|
·
|
Lower
trading volume;
|
|
·
|
Market
conditions;
|
|
·
|
Innovations
or new products and services by us or our competitors;
|
|
·
|
Regulatory,
legislative or other developments affecting us or our industry generally;
|
|
·
|
Limited
availability of freely-tradable “unrestricted” shares of our common stock
to satisfy purchase orders and demand;
|
|
·
|
Our
ability to execute our business plan;
|
|
·
|
Operating
results that fall below expectations;
|
|
·
|
Industry
developments;
|
|
·
|
Economic
and other external factors; and
|
|
·
|
Period-to-period
fluctuations in our financial results.
|
27
In
addition, the value of our common stock could be affected by:
|
·
|
Actual
or anticipated variations in our operating results;
|
|
·
|
Changes
in the market valuations of other companies operating in our industry;
|
|
·
|
Announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
|
|
·
|
Adoption
of new accounting standards affecting our industry;
|
|
·
|
Additions
or departures of key personnel;
|
|
·
|
Introduction
of new services or technology by our competitors or us;
|
|
·
|
Sales
of our common stock or other securities in the open market;
|
|
·
|
Changes
in financial estimates by securities analysts;
|
|
·
|
Conditions
or trends in the market in which we operate;
|
|
·
|
Changes
in earnings estimates and recommendations by financial analysts;
|
|
·
|
Our
failure to meet financial analysts’ performance expectations; and
|
|
·
|
Other
events or factors, many of which are beyond our control.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also significantly affect
the market price of our common stock.
In
a
volatile market, you may experience wide fluctuations in the market price of
our
securities. These fluctuations may have an extremely negative effect on the
market price of our securities and may prevent you from obtaining a market
price
equal to your purchase price when you attempt to sell our securities in the
open
market. In these situations, you may be required either to sell our securities
at a market price which is lower than your purchase price, or to hold our
securities for a longer period of time than you planned. An inactive market
may
also impair our ability to raise capital by selling shares of capital stock
and
may impair our ability to acquire other companies or technologies by using
common stock as consideration.
Because
we do not intend to pay any dividends on our common stock, purchases of our
common stock may not be suited for investors seeking dividend income.
We
do not
currently anticipate declaring and paying dividends to our stockholders in
the
near future. It is our current intention to apply any net earnings in the
foreseeable future to the internal needs of our business. Prospective investors
seeking or needing dividend income or liquidity from our common stock should,
therefore, not purchase our common stock. There can be no assurance that we
will
ever have sufficient earnings to declare and pay dividends to the holders of
our
shares, and in any event, a decision to declare and pay dividends is at the
sole
discretion of our board of directors, who currently do not intend to pay any
dividends on our common shares for the foreseeable future.
We
cannot assure you that we will list our common stock on NASDAQ or any other
national securities system or exchange.
Although
we intend to apply to list our common stock on NASDAQ or the American Stock
Exchange in the future, we do not currently meet the initial listing standards
of either of those markets and we cannot assure you that we will be able to
qualify for and maintain a listing of our common stock on either of those
markets or any other stock system or exchange in the future. Furthermore, in
the
case that our application is approved, there can be no assurance that trading
of
our common stock on such market will reach or maintain desired liquidity. If
we
are unable to list our common stock on NASDAQ, the American Stock Exchange
or
another stock system or exchange, or to maintain the listing, we expect that
our
common stock will be eligible to trade on the OTC BB, maintained by NASDAQ,
another over-the-counter quotation system, or on the “pink sheets,” where an
investor may find it more difficult, or impossible, to dispose of shares or
obtain accurate quotations as to the market value of our common stock. Under
such circumstances, the probability of reduced liquidity would hinder investors’
ability to obtain accurate quotations for our common stock, and our common
stock
could become substantially less attractive to investors.
28
Securities
analysts may not initiate coverage or continue to cover our common stock, and
this may have a negative impact on our common stock’s market price.
The
trading market for our common stock will depend, in part, on the research and
reports that securities analysts publish about us and our business. We do not
have any control over these analysts. Currently there is no coverage of our
common stock and there is no guarantee that securities analysts will cover
our
common stock in the future. If securities analysts do not cover our common
stock, the lack of research coverage may adversely affect its market price.
If
we are covered by securities analysts, and our stock is downgraded, our stock
price would likely decline. If one or more of these analysts ceases to cover
us
or fails to publish regular reports on us, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to
decline.
We
have raised substantial amounts of capital in private placements, and if we
fail
to comply with the applicable securities laws, ensuing rescission rights or
lawsuits would severely damage our financial position.
Our
private placements consist of securities that were not registered under the
Securities Act or any state “blue sky” law as a result of exemptions from such
registration requirements. Such exemptions are highly technical in nature and
if
we inadvertently failed to comply with any of such exemptive provisions,
investors could have the right to rescind their purchase of our securities
and
also sue for damages. If any investors were to successfully seek such rescission
or prevail in any such suit, we could face severe financial demands that could
have significant, adverse affects on our financial position. Future financings
may involve sales of our common stock at prices below prevailing market prices
on the OTC BB or exchange on which our common stock is quoted or listed at
that
time, as well as the issuance of warrants or convertible securities at a
discount to market price.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those shares.
The
SEC
has adopted regulations which generally define a “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. While the
last reported trade of our company stock on the OTC BB was at a price above
$5.00 per share, our common stock has in the past been considered a penny stock
and there can be no assurance that our common stock will continue to trade
at a
price above $5.00 per share in the future. The SEC’s penny stock rules require a
broker-dealer, before a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and the
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer’s account. In addition,
the penny stock rules generally require that before a transaction in a penny
stock, the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s
agreement to the transaction. If applicable in the future, these rules may
restrict the ability of brokers-dealers to sell our common stock and may affect
the ability of investors to sell their shares, until our common stock no longer
is considered a penny stock.
29
Item 2.
Description
of Property
We
lease
office space in the locations and on the terms described in the table below:
|
Location
|
Purpose
|
Approximate
Size
in Square
Feet
|
Monthly
Rent
(USD)
|
Lease
Expires
|
|||||||||
|
|
|
|
|
||||||||||
|
Beijing,
PRC
|
Area
Office
|
750
|
5,500
|
7/22/2008
|
|||||||||
|
|
|||||||||||||
|
Beijing,
PRC
|
Area
Office
|
1,750
|
4,600
|
6/30/2009
|
|||||||||
|
Tianjin,
PRC
|
Area
Office
|
1,950
|
4,400
|
11/1/2009
|
|||||||||
Item 3.
Legal
Proceedings
The
Company is, from time to time, involved in legal proceedings arising in the
normal course of business. As of the date of this Annual Report on Form 10-KSB,
the Company is not involved in any material legal proceeding.
Item 4.
Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended June 30, 2008.
30
PART
II
Item
5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
Market
Information
Our
common stock is quoted on the Over-The-Counter
Bulletin Board ("OTCBB"), as of September 26, 2007, and
trades under the symbol “LEGE.” No active public or private market developed for
our common shares until February 12, 2008, after the merger with Well Chance.
The following table represents the high and low closing prices for our common
stock on the OTCBB during the fiscal year ended June 30, 2008.
|
2008*
|
|||||||
|
High
|
Low
|
||||||
|
First
quarter
|
N/a
|
N/a
|
|||||
|
Second
quarter
|
N/a
|
N/a
|
|||||
|
Third
quarter
|
$
|
4.97
|
$
|
2.90
|
|||
|
Fourth
quarter
|
$
|
4.79
|
$
|
2.40
|
|||
*
The
quarterly highs and lows are based on daily market closing prices during each
respective period. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission , and may not represent actual transactions.
As
of
September 30, 2008, the closing sales price for shares of our common stock
was
$1.70 per share on the OTCBB.
Stockholders
As
of
September 15, 2008, we had approximately 10,339,755 shares of common stock
issued and outstanding, which were held by approximately 88 stockholders of
record based upon
the
stockholder list provided by our transfer agent.
Dividend
Policy
We
do not
currently intend to pay any cash dividends in the foreseeable future on our
common stock and, instead, intend to retain earnings, if any, for future
operation and expansion. Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on,
among other things, our results of operations, cash requirements, financial
condition, contractual restrictions and other factors that our board of
directors may deem relevant.
Securities
Authorized for Issuance under Equity Compensation Plans or Individual
Compensation Arrangements
We
do not
currently have in place any equity compensation plans.
Our
board
of directors has granted options exercisable into 1,040,000 shares of our common
stock. Of these, our board of directors granted options exercisable into 400,000
shares of our common stock to each of Jeffrey Dash, our chief executive officer
and chief financial officer, and William Lee, our chief operating officer,
and
also granted options exercisable into 80,000 shares of our common stock to
each
of our non-employee directors Richard Vogel, Michael Bonner and Andre
Nair.
Recent
Sales of Unregistered Securities
This
information has been previously disclosed in our current reports on Form 8-K,
and, therefore, need not be furnished pursuant to SEC rules regarding Form
10-KSB. Reference is made to our current reports on Form 8-K filed on February
11, April 3, April 24, May 12, and June 5, 2008 which are hereby incorporated
by
reference herein, for a description of our recent sales of unregistered
securities during the period covered by this annual report on Form 10-KSB.
In
addition, reference is made to our current reports on Form 8-K filed on July
7,
July 25 and September 2, 2008, which are explicitly not incorporated by
reference herein, for a description of recent sales of unregistered securities
during the period between July 1, 2008 and the date of this annual report on
Form 10-KSB.
31
Item 6.
Management’s
Discussion and Analysis or Plan of Operations
The
following discussion and analysis of the results of operations and financial
condition of Legend Media for the year ended June 30, 2008 should be read in
conjunction with Legend Media’s financial statements and the notes to those
financial statements that are included elsewhere in this annual report on Form
10-KSB. Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the "Risk Factors", "Special Note Regarding Forward Looking Statements" and
"Description of Business" sections in this report. We use words such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.
Executive
Overview
Legend
Media, formerly known as Noble Quests, Inc., was organized as a Nevada
corporation on March 16, 1998, for the purpose of selling multi-media marketing
services and other related services to network marketing groups. Specifically,
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, we entered into a Share Exchange Agreement with Ms. Shannon
McCallum-Law, the majority stockholder, sole director and Chief Executive
Officer of the Company, Well Chance and the Well Chance Shareholder. Pursuant
to
the terms of the Share Exchange Agreement, we agreed to acquire all of the
issued and outstanding shares of Well Chance's common stock in exchange for
the
issuance of 1,200,000 shares of our common stock to the Well Chance Shareholder
on the basis of 1,200 shares of our common stock for every one share of Well
Chance common stock held.
Concurrently
with the closing of the transactions under the Share Exchange Agreement and
as a
condition thereof, we entered into an agreement with Ms. McCallum-Law, pursuant
to which she returned to us for cancellation 2,419,885 of the 5,119,885 shares
of our common stock owned by her. Ms. McCallum-Law was not compensated in any
way for the cancellation of the shares. In addition, we issued 4,100,000 shares
of our common stock to certain affiliates of Well Chance for $87,740 and 200,000
shares in exchange for consulting services performed in connection with this
transaction. Upon completion of the foregoing transactions, we had an aggregate
of 8,200,000 shares of common stock issued and outstanding.
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.
We
expanded our business in February 2008 to focus on building a consumer
advertising network in the PRC focused on the Chinese radio advertising
industry. 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
September 30, 2008, we have secured the exclusive rights to 111,690 minutes
of
radio advertising annually across three cities in the PRC: Beijing, Tianjin
and
Shenzhen. Management has identified several other opportunities to acquire
additional advertising rights and expects continued expansion of radio
advertising assets.
32
Critical
Accounting Policies and Estimates
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Areas
that require estimates and assumptions include valuation of accounts receivable
and determination of useful lives of property and equipment.
Reclassification
Certain
prior period amounts have been reclassified to conform to the year ended June
30, 2008 presentation.
Principles
of Consolidation
The
consolidated financial statements of Legend Media include the accounts of Well
Chance, its wholly owned subsidiary, and the accounts of its 80% owned
subsidiary, Legend Media Investment Company Limited. In addition, the
consolidation financial statements include Tianjin Yinse Lingdong Advertising
Company, Limited, an 80% controlled variable interest entity ("VIE") of Legend
Media Investment Company Limited, and the following wholly owned subsidiaries
of
Legend Media Investment Company Limited: Legend Media Tianjin HK Limited and
Legend Media (Beijing) Consulting Company Limited.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash in 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
We
maintain reserves for potential credit losses on 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.
Unbilled
Accounts Receivable
At
times
we will record receivables, which have not yet been invoiced, from revenues
on
advertising contracts. These receivables are recorded in the accompanying
consolidated balance sheet as unbilled accounts receivable until invoiced.
The
unbilled accounts receivable balance at June 30, 2008 was $195,680.
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
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
|
Computer
equipment
|
3
years
|
|||
|
Office
equipment and furniture
|
3
years
|
|||
|
Leasehold
improvements
|
1
year
|
33
The
following are the details of the property and equipment at June 30,
2008:
|
Computer equipment
|
$
|
5,278
|
||
|
Office
equipment and furniture
|
4,339
|
|||
|
Leasehold
improvements
|
8,573
|
|||
|
$
|
18,190
|
|||
|
Less:
Accumulated depreciation
|
(1,430
|
)
|
||
|
$
|
16,760
|
Depreciation
expense was $758 for the year ended June 30, 2008.
Long-Lived
Assets
We
apply
the provisions of the Financial Accounting Standards Board (the "FASB")
Statement of Financial Accounting Standards ("SFAS") No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and
reporting provisions of the Accounting Principles Board Opinion No. 30,
“Reporting the Results of Operations for a Disposal of a Segment of a Business.”
We periodically evaluate the carrying value of long-lived assets to be held
and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, we believe that there were no
significant impairments of our long-lived assets as of June 30,
2008.
Intangible
Assets
Intangible
assets consist of contract rights purchased in the acquisition of Music Radio
Limited on May 30, 2008. See Note 12 to the financial statements. Net intangible
assets at June 30, 2008 are as follows:
|
FM
92.5 Contract rights
|
$
|
2,174,428
|
||
|
Exclusivity
agreement
|
6,999,353
|
|||
|
|
||||
|
Less
Accumulated amortization
|
(128,471
|
)
|
||
|
|
||||
|
Intangibles,
net
|
$
|
9,045,310
|
The
FM
92.5 contract rights primarily relate to an exclusive contract acquired in
connection with the acquisition of Music Radio Limited, and the contract is
being amortized over 31 months, which is the contract effective period,
beginning on June 1, 2008, based
on
the duration of the existing advertising agreement that expires December 31,
2008 plus the expected two-year renewal of the advertising agreement. The
contract provides 54 minutes per day or 19,710 minutes per year. The channel
is
actually Beijing based and through a relay facility airs in Tianjin. Our
contract is with the channel’s exclusive agent which has a national exclusive
contract with the channel. The exclusive agent has sub contracted the rights
for
the Tianjin market to Legend Media. The value was derived as the net present
value of the contract’s EBITDA over the contract’s expected term from May 30,
2008 through December 31, 2010, using a discount rate of 10%. Amortization
expense on this contract for the year ended June 30, 2008 of
$69,742 has been included in general and administrative expenses in the
accompanying consolidated statements of operations and other comprehensive
loss.
The
remainder of the purchase price of $6,999,353 has been allocated to an Operating
Agreement among Legend
Media (Beijing) Consulting Co., Ltd.,
Tianjin
Yinse Lingdong Advertising Co., Ltd. and
Ju
Baochun entered into in connection with the Music Radio Limited acquisition.
Mr.
Baochun, through a company he owns and operates, is the 80% owner of Music
Radio
Limited, which is the 20% owner of the post-acquisition VIE, Tianjin
Yinse Lingdong Advertising Company, Ltd.
Mr.
Baochun is a valuable partner with significant experience in the radio industry
who has the ability to locate and acquire additional radio advertising contracts
direct with the radio stations, provide access to deep customer relationships,
and provide the leadership that would be a foundation for our future expansion
in China. Pursuant to the terms of the Operating Agreement, Tianjin
Yinse Lingdong Advertising Company, Ltd.
is
prohibited from:
34
|
·
|
The
borrowing of money from any third party or the assumption of any
debt;
|
|
·
|
The
sale to any third party or the acquisition from any third party of
any
assets, including, without limitation, any intellectual
rights;
|
|
·
|
The
imposition of any security interests for the benefit of any third
party
through collateralization of its
assets;
|
|
·
|
The
assignment to any third party of the agreement entered into by it;
and
|
|
·
|
The
sale, transfer and disposition of any license held by
it.
|
The
term
of the Operating Agreement is 10 years, beginning May 30, 2008. As such, we
are
amortizing the contract value over its 10-year life. Amortization
expense on this contract at June 30, 2008 of $57,994 has been included in
general and administrative expenses in the accompanying consolidated statements
of operations and other comprehensive loss.
Amortization
expense for our intangible assets for the year ended June 30, 2008 was
$127,736.
Revenue
Recognition
Our
revenue recognition policies are in compliance with SEC Staff Accounting
Bulletin (“SAB”) 104. We purchase advertising inventory in the form of airtime,
the unit being minutes, from radio stations. We then distribute these minutes
under various sales agreements. We recognize
advertising revenue
over the term of each sales agreement, provided that evidence of an arrangement
exists, the fees are fixed or determinable and collection of the resulting
receivable is reasonably assured. We recognize deferred revenue when cash has
been received on a sales agreement, but the revenue has not yet been earned.
Under these policies, no revenue is recognized unless persuasive evidence of
an
arrangement exists, delivery has occurred, the fee is fixed or determinable,
and
collection is reasonably assured.
Advertising
Costs
We
expense the cost of advertising as incurred or, as appropriate, the first time
advertising takes place. Advertising costs for the years ended June 30, 2008
and
2007 were not significant.
Stock-Based
Compensation
We
account for our stock-based compensation in accordance with SFAS No. 123R,
“Share-Based Payment, an Amendment of FASB Statement No. 123.” We recognize in
the statement of operations the grant-date fair value of stock options and
other
equity-based compensation issued to employees and non-employees. There were
1,040,000 options outstanding as of June 30, 2008.
Income
Taxes
We
utilize SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
35
We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, (“FIN
48”),
on January 1, 2007. As a result of the implementation of FIN 48, the company
made a comprehensive review of its portfolio of tax positions in accordance
with
recognition standards established by FIN 48. As a result of the implementation
of FIN 48, the Company recognized no material adjustments to liabilities or
stockholders’ equity. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit
of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken
are
not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount
of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in
the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits are classified as interest expense
and
penalties are classified in selling, general and administrative expenses in
the
consolidated statements of operations and other comprehensive loss. The adoption
of FIN 48 did not have a material impact on our financial
statements.
Foreign
Currency Transactions and Comprehensive Income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
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 the equity section
of
the balance sheet. Such items, along with net income, are components of
comprehensive income. Our functional currency is RMB. Translation gains of
$75,236 at June 30, 2008 are classified as an item of other comprehensive income
in the stockholders’ equity section of the consolidated balance sheet. During
the years ended June 30, 2008 and 2007, other comprehensive income in the
consolidated statements of operations and other comprehensive loss
included translation gains of $0.
Basic
and Diluted Earnings Per Share
Earnings
per share is calculated in accordance with the SFAS No. 128, “Earnings Per
Share” (“SFAS 128”). Net earnings per share for all periods presented has been
restated to reflect the adoption of SFAS 128. Basic earnings per share is based
upon the weighted average number of common shares outstanding. Diluted earnings
per share is based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying
the
treasury stock method. Under this method, options and warrants are assumed
to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period. There were options to purchase 1,040,000
shares of common stock and warrants to purchase 880,294 shares of common stock
outstanding as of June 30, 2008. For the year ended June 30, 2008, we
incurred a net loss in the accompanying statements of operations and other
comprehensive loss of $2,013,826. Therefore the effect of options and
warrants outstanding is anti-dilutive during the year ended June 30,
2008.
The
following is a reconciliation of the number of shares (denominator) used in
the
basic and diluted earnings per share computations for the years ended June
30,
2008 and 2007:
|
2008
|
2007
|
||||||||||||
|
Weighted
Average
Shares
Outstanding
|
|
Per Share
Amount
|
Weighted
Average
Shares
Outstanding
|
Per Share
Amount
|
|||||||||
|
Basic earnings per share
|
4,376,911
|
$
|
(0.
46
|
)
|
1,200,000
|
$
|
-
|
||||||
|
Effect
of dilutive stock options and warrants
|
-
|
-
|
-
|
-
|
|||||||||
|
Diluted
earnings per share
|
4,376,911
|
$
|
(0.46
|
)
|
1,200,000
|
$
|
-
|
||||||
36
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from our
operations are calculated based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
Minority
Interest in Subsidiaries
On
May
30, 2008, we purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited, a British Virgin Islands company and a wholly-owned
subsidiary of Music Radio Limited, a British Virgin Islands company. See Note
12
to our financial statements. As a result of this purchase, we recognized initial
minority interest on our consolidated balance sheet in the amount of $0. The
income (loss) attributed to minority interest has been separately designated
in
the accompanying statement of operations. We recognized $0 in income attributed
to minority interest in the accompanying statements of operations and other
comprehensive loss for the year ended June 30, 2008.
Minority
Interest in VIEs
In
January 2003, the FASB issued Accounting Standards Board Interpretation No.
46,
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 41”
(“FIN 46”). In December 2003, the FASB modified FIN 46 (“FIN 46R”) to make
certain technical corrections and address certain implementation issues that
had
arisen. FIN 46 provides a new framework for identifying VIEs and determining
when a company should include the assets, liabilities, non-controlling interests
and results of activities of a VIE in its consolidated financial
statements.
FIN
46R
states that in general, a VIE is a corporation, partnership, limited liability
corporation, trust or any other legal structure used to conduct activities
or
hold assets that either (a) has an insufficient amount of equity to carry out
its principal activities without additional subordinated financial support,
(b)
has a group of equity owners that are unable to make significant decisions
about
its activities, or (c) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its
operations.
On
May
30, 2008, we acquired control over Tianjin Yinse Lingdong Advertising Company,
Ltd. by purchasing 80% of the common stock of Legend Media Tianjin Investment
Company Limited, a British Virgin Islands company and a wholly-owned subsidiary
of Music Radio Limited, a British Virgin Islands company, and entering into
certain control agreements in connection therewith. Direct investment and
ownership of media and advertising companies in the PRC is prohibited due to
certain restrictions imposed upon Chinese advertising companies. We structured
the Music Radio Limited transaction to comply with such
restrictions.
The
principal regulations governing foreign ownership in the advertising industry
in
China include:
|
·
|
The
Catalogue for Guiding Foreign Investment in Industry (2004); and
|
|
·
|
The
Administrative Regulations on Foreign-invested Advertising Enterprises
(2004).
|
These
regulations set the guidelines by which foreign entities may 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 3 years of direct operations
in the advertising industry outside of China.
Because
we have not been involved in advertising outside of the PRC for the required
number of years, our domestic PRC operating subsidiaries, which are considered
foreign invested, are currently ineligible to apply for the required advertising
services licenses in the PRC. Our PRC operating affiliates hold the
requisite licenses to provide advertising services in the PRC and they are
owned
or controlled by PRC citizens designated by us. Our radio advertising
business operates in the PRC though contractual arrangements with consolidated
entities in the PRC. We and our newly acquired PRC subsidiaries have
entered into a series of contractual arrangements with Tianjin Yinse Lingdong
Advertising Company, Ltd. and their respective shareholders under
which:
|
·
|
We
are able to exert significant control over significant decisions
about the
activities of Tianjin Yinse Lingdong Advertising Company,
Ltd.;
|
|
·
|
A
substantial portion of the economic benefits and risks of the operations
of Tianjin Yinse Lingdong Advertising Company, Ltd. have been transferred
to us through a revenue assignment agreement; and
|
37
|
·
|
The
equity owner of Tianjin Yinse Lingdong Advertising Company, Ltd.
does not
have the obligation to absorb the losses of Tianjin Yinse Lingdong
Advertising Company, Ltd.
|
As
we are
able to exert significant control over the PRC operating affiliates and a
substantial portion of the economic benefits and risks have been transferred
to
us, we have determined that the advertising entity, Tianjin Yinse Lingdong
Advertising Company, Ltd., meets the definition of a VIE. Further, we are
considered to be the primary beneficiary of the risks and benefit of equity
ownership of Tianjin Yinse Lingdong Advertising Company, Ltd. and thus have
consolidated Tianjin Yinse Lingdong Advertising Company, Ltd.
in
our
accompanying financial statements as of June 30, 2008. As a result of this
purchase, we recognized initial minority interest on our consolidated balance
sheet in the amount of $15,524. The income (loss) attributed to minority
interest has been separately designated in the accompanying statements of
operations. For the year ended June 30, 2008, we have recognized loss attributed
to VIE of $9,437 in our consolidated statements of operations and other
comprehensive loss.
Fair
Value of Financial Instruments
On
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. The carrying amounts reported in the
balance sheets for receivables and current liabilities each qualify as financial
instruments and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and their current market rate of interest. The three levels are
defined as follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for
identical assets or liabilities in active
markets;
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument;
and
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant
to
the fair value measurement.
|
As
of
June 30, 2008, we did not identify any assets and liabilities that are required
to be presented on the balance sheet at fair value.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (“SFAS
158”).
This
statement requires employers to recognize the overfunded or underfunded status
of a defined benefit postretirement plan (other than a multiemployer plan)
as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This statement also requires an employer
to
measure the funded status of a plan as of the date of its year-end statement
of
financial position, with limited exceptions. The provisions of SFAS 158 are
effective for employers with publicly traded equity securities as of the end
of
the fiscal year ending after December 15, 2006. The adoption of this statement
had no effect on our reported financial position or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS
159”).
This
statement permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
159
is effective for fiscal years beginning after November 15, 2007. We are
currently assessing the impact of SFAS 159 on our financial position and results
of operations.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities,” which addresses whether nonrefundable
advance payments for goods or services that used or rendered for research and
development activities should be expensed when the advance payment is made
or
when the research and development activity has been
performed. Management is currently evaluating the effect of this
pronouncement on financial statements.
38
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS
141”).
SFAS 141 changes how a reporting enterprise accounts for the acquisition of
a business. SFAS 141 requires an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value, with limited exceptions, and applies to a wider range of
transactions or events. SFAS 141 is effective for fiscal years beginning on
or after December 15, 2008 and early adoption and retrospective application
is prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS
160”),
which
is an amendment of Accounting Research Bulletin No. 51. This
statement clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This statement changes the
way the consolidated income statement is presented, thus requiring consolidated
net income to be reported at amounts that include the amounts attributable
to
both parent and the noncontrolling interest. This statement is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on
current
conditions, we do not expect the adoption of SFAS 160 to have a significant
impact on our results of operations or financial position.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS
161”).
This
statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133
and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, we do not expect the adoption of SFAS
161 to have a significant impact on our results of operations or financial
position.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This statement will not have an impact on our financial
statements.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
this statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope
of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This statement
will not have an impact on our financial statements.
Results
of Operations
The
following table sets forth statement of operations data expressed as a
percentage of revenue for the year ended June 30, 2008:
39
|
|
%
of Revenue
|
||||||
|
Total
revenue
|
$
|
155,970
|
|||||
|
Cost
of revenue
|
30,144
|
19.3
|
%
|
||||
|
Gross
profit
|
125,826
|
80.7
|
%
|
||||
|
Selling
expenses
|
51,404
|
33.0
|
%
|
||||
|
General
and administrative expenses
|
1,614,302
|
1035.0
|
%
|
||||
|
Interest
expense
|
457,427
|
293.3
|
%
|
||||
|
Income
tax
|
-
|
0.0
|
%
|
||||
|
Net
income (loss)
|
$
|
(2,013,826
|
)
|
-1291.2
|
%
|
||
Revenue Revenue
during the year ended June 30, 2008 of $155,970 were earned on a number of
exclusive advertising contracts for radio advertising that were acquired
together with the Legend Media Tianjin Investment Company Limited (Music Radio
Limited) acquisition in May 2008. We plan to focus on executing additional
exclusivity agreements for radio advertising space throughout highly populated
areas. We are prepared to support the anticipated increased sales volume by
recruiting an experienced and driven sales team and relationship management
team, further developing our technology platform as described below, and
utilizing direct and indirect relationships with advertising agencies. We will
also consider licensing our technological capabilities to generate an additional
revenue stream. Any company newly acquired by us is and will be expected to
continue to operate largely autonomously. We hope to add substantial value
through our relationships with international advertisers and advertising
agencies, as well as with large domestic advertisers, our planned elite
management and sales teams, and the technology platform we are building. The
technology platform will focus on inventory management and pricing management
across the region. Subsidiaries may utilize our proprietary technology to
allocate advertising space between our larger customers and our local customers.
In addition to better serving our customer base with a larger distribution
network, we intend to develop the ability to provide more comprehensive
statistics to better assist our customers in maximizing the efficiency of their
advertising campaigns. Our technology platform is expected to provide web access
for customers to view available inventory, pricing and advertising
trends.
Cost
of revenue Cost
of
revenue of $30,144, or 19.3% of total revenue, was incurred during the year
ended June 30, 2008 on a number of exclusive advertising contracts that were
acquired together with the Legend Media Tianjin Investment Company Limited
(Music Radio Limited) acquisition in May 2008. Costs include fixed and variable
sales costs and advertising minutes incurred associated with each advertising
contract.
Selling
expenses
Selling
expenses incurred during the year ended June 30, 2008 amounted to $51,404,
or
33.0% of total revenue. Selling expenses primarily consist of commissions and
expenses related to distribution of advertising minutes.
General
and administrative expenses
General
and administrative expenses of $1,614,302, or 1,035% of total revenue, primarily
relate to amortization of intangible assets of $127,736, option expense, legal
fees, and other various professional fees.
Interest
expense
Interest
expense of $457,427, or 293.3% of total revenue, was incurred in the year ended
June 30, 2008. The expense resulted from interest expense on our convertible
notes as well as amortization of debt discounts on the same notes.
Liquidity
and Capital Resources
Cash
as
of June 30, 2008 was $2,583,346.
On
January 31, 2008 , in connection with the Share Exchange Agreement, as amended,
from the same date, Well Chance entered into a Loan Agreement with RMK Emerging
Growth Opportunity Fund LP pursuant to which Well Chance had the right to borrow
$375,733 from RMK as a short term bridge loan. The advances on the loan occurred
in February 2008. Of the $375,733 original loan amount, the full $375,733 of
principal and $94,986 of accrued interest is outstanding as of June 30,
2008.
40
On
March
30, 2008, we entered into a Loan Agreement with Jonathan Kantor in the principal
amount of $100,000. Of the $100,000 original loan amount, $33,000 of principal
and $23,600 of accrued interest is outstanding as of June 30, 2008. Also on
March 30, 2008, we entered into a loan agreement with Blueday Limited in the
principal amount of $250,000. Of the $250,000 original loan amount, $183,000
of
principal and $128,600 of accrued interest is outstanding as of June 30,
2008.
On
April
21, 2008, Well Chance
entered
into a Loan Agreement with Newport Capital Asset Management Group ("Newport"),
pursuant to which Newport loaned Well Chance $200,000. Of the $200,000 original
loan amount, the full $200,000 of principal and $35,500 of accrued interest
is
outstanding as of June 30, 2008.
On
March
31, 2008, pursuant
to the terms of a Securities Purchase Agreement between us and Maoming China
Fund, we agreed to issue and sell to Maoming 2,083,333 shares of our Series
A
Convertible Preferred Stock and warrants to purchase 1,000,000 shares of our
common stock in the following manner: (a) 1,250,000 shares of Series A
Convertible Preferred Stock and 600,000 warrants for $3,000,000 upon the later
of April 12, 2008 or 15 days after our first acquisition of a media advertising
business operating in the PRC (the “First Sale”), and (b) 833,333 shares of
Series A Convertible Preferred Stock and 400,000 warrants for $2,000,000 upon
the later of May 12, 2008 or 15 days after our second acquisition of a media
advertising business operating in the PRC (the “Second Sale”). The First Sale
(Music Radio Limited) closed on May 30, 2008 and we issued 1,250,000 shares
of
Series A Series A Convertible Preferred Stock and warrants to purchase 600,000
shares of our common stock to Maoming for gross proceeds to us of $3,000,000
in
cash. The Second Sale (News Radio Limited) closed on July 21, 2008. On August
29, 2008, we completed
the sale of 625,000 shares of our Series A Convertible Preferred Stock and
warrants to purchase 300,000 shares of our common stock to Maoming for gross
proceeds to us of $1,500,000 in cash. We
expect
$1,000,000 of the proceeds received in the Second Sale to be available for
working capital with the remaining going towards the purchase price for the
News
Radio Limited acquisition. In
accordance with the terms of the Maoming Securities Purchase Agreement, Maoming
is obligated to purchase an additional 208,333 shares of Series A Convertible
Preferred Stock and additional warrants to purchase 100,000 shares of Common
Stock for $500,000. These securities will be issued on an as-needed
basis.
Cash
used
in operating activities in the year ended June 30, 2008 amounted to $830,681,
primarily from our net loss in the current year of $2,013,826. The
net
loss was driven by the expanding operations in the PRC and the associated
increased overhead. We
believe we have sufficient capital resources to fund our current operations
for
the next 12 months. However, additional funds will be required to fully
implement our business plan. There are no assurances that we will be able to
obtain further funds required for further expansion and full execution of our
business plan.
Cash
used
in investing activities in the year ended June 30, 2008 amounted to $466,185,
and resulted from the payment of $500,000 for deposit on our acquisition of
News
Radio Limited, primarily offset by cash acquired in the Music Radio Limited
acquisition.
Cash
flows generated by financing activities in the year ended June 30, 2008 amounted
to $3,879,473, and primarily resulted form the sale of Series A Convertible
Preferred Stock of $3,000,000, as well as net proceeds from notes payable of
$791,733. Common stock was also sold in connection with the reverse acquisition
for $87,740. We intend to pursue various financing alternatives to meet our
long-term financial requirements. There can be no assurance that additional
financing will be available to us when needed or, if available, that it can
be
obtained on commercially reasonable terms. If we are not able to obtain
additional financing on a timely basis, we will be unable to expand our business
as planned, and we will not be able to meet our other obligations as they become
due. In such event, we will be forced to scale down or perhaps even cease our
operations.
We
intend
to meet our liquidity requirements, including capital expenditures related
to
the purchase of equipment and the expansion of our business, through cash flow
provided by operations and funds raised through offerings of our securities.
Employees
We
believe that the radio advertising industry in China is highly fragmented and
inefficient and, therefore, that there is an opportunity to take a leading
position by deploying a highly motivated and experienced sales team in the
market. With our planned expansion of inventory and anticipated increased sales
volume, we are expecting a significant increase in the number of our employees.
We have begun recruiting all levels of sales staff and expect to add new staff
members in early 2009.
41
Technology
The
advertising industry in China is quickly evolving from its pioneering stage.
Its
fast development is largely a result of the rapid emergence of new technologies,
such as inexpensive television displays, compact storage technology, and
centralized radio platforms. We intend to develop proprietary technology
offering fully-customized distribution capabilities to our advertising customers
that rapidly deploy advertisements. This technology would be designed to also
quickly turn around performance metrics to better assist our customers in making
adjustments that may be necessary to realize their goals. As a peripheral source
of revenue, we may explore licensing our then developed technology platform
to
companies that are not appropriate acquisition targets but do not pose a threat
to our market share.
Marketing
After
we
acquire advertising rights, we plan to develop and oversee sales teams in each
region with which we would then have advertising rights. We would then train
and
educate such sales personnel in house to best position them to provide
prospective customers with appropriate information about our services, the
advantages of our advertising networks, and any other relevant information.
Sales teams would be organized by region, advertising medium, and industry.
Suppliers
We
hope
to deploy our advertisements in a variety of media and locations, including
radio stations, office buildings, post offices and airports. Maintaining
relationships with radio station owners, land owners and property managers
would
be essential to our sustained competitiveness. Relationship management teams
will be expected to actively ensure that we maintain the respect of our
suppliers. In so doing, we believe that in addition to avoiding distractions,
we
anticipate earning a good reputation that can bring opportunities with other
such owners and managers.
Customers
We
plan
to attract international and domestic advertising customers from a variety
of
industries which is expected to include leading brand names. Relationships
with
local advertisers would be maintained at the local level to further increase
utilization rates.
Network
Monitoring and Analysis
We
intend
to provide services relating to our customers’ marketing campaigns. Our future
in-house operations team would be designed to monitor the displays in its
network and provide analytic reports that can be supplied to customers for
future planning purposes. Advertising customers could leverage our advertising
services that target specific segments of consumer markets. Market analysis
is
vital to evaluating the effectiveness and value of advertising campaigns.
Included in these planned services are consumer surveys, demographic analysis,
and other internally distributed analytics.
Inflation
We
believe that inflation has not had a material adverse impact on our business
or
operating results during the periods presented.
Off-Balance
Sheet Arrangements
There
were no off-balance sheet arrangements during the year ended June 30, 2008
that
have, or are reasonably likely to have, a current or future affect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that
is material to our interests.
42
Item
7. Financial Statements
See
"Index to Financial Statements" beginning on page F-1 below for our financial
statements included in this Form 10-KSB.
Effective
July 16, 2008, we dismissed our independent accountant engaged as the principal
accountant to audit our financial statements, Mantyla McReynolds LLC, and retain
in its place Goldman Parks Kurland Mohidin - GPKM LLP as the Company's new
independent accountant engaged as the principal accountant to audit our
financial statements. The Company's relationship with Mantyla McReynolds LLC
ended on July 16, 2008. There have been no disagreements with Mantyla McReynolds
LLC or Goldman Parks Kurland Mohidin - GPKM LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure and there were no reportable events, as described in Item
304(a)(1)(iv) of Regulation S-B.
(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 annual report on
Form
10-KSB, 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 Securities and Exchange Commission'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) Management’s
Annual Report on Internal Control over Financial Reporting
The
Certifying Officers are responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule
13a-15(f) and 15d-15(f) promulgated under the Exchange Act. The Certifying
Officers' evaluation of our internal control over financial reporting concluded
that they were effective and that there have been no occurrences during the
period covered by this annual report on Form 10-KSB that has materially affected
or is reasonably likely to materially affect, our internal control over
financial reporting.
(c)
Attestation Report by Registered Public Accounting Firm
This
annual report on Form 10-KSB does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
(d)
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
43
(e)
Inherent Limitations of Controls and Procedures
Our
management, including each of the Certifying Officers, does not expect that
our
disclosure controls or our internal controls will prevent all error and fraud.
A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact
that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based
in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
not be detected.
(f)
Certifications
We
have
attached as exhibits to this annual report on Form 10-KSB the certifications
of
our Chief Executive Officer and Chief Financial Officer, which are required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. We recommend that
this Item 8A(T) be read in conjunction with the certifications for a more
complete understanding of the subject matter presented.
None.
44
PART
III
Item
9. Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act.
Identity
and Background of our Executive Officers and Directors
The
following individuals serve as our directors and/or executive officers, as
indicated:
|
Name
|
Age
|
Position
|
||
|
Jeffrey
Dash
|
39
|
Chief
Executive Officer, Chief Financial Officer and Director
|
||
|
William
Lee
|
52
|
Chief
Operating Officer
|
||
|
Michael
Bonner
|
40
|
Director
|
||
|
Andre
Nair
|
52
|
Director
|
||
|
Richard
Vogel
|
43
|
Director
|
Jeffrey
Dash has been our Chief Executive Officer and a director since February 2008.
He
has spent his career building businesses and has held positions in Germany,
Switzerland, Czech Republic and Russia. Mr. Dash has over 16 years of finance
and operation experience. Since August 2007 and until February 2008, Mr. Dash
has been working as a self employed consultant developing the business plan
for
Legend Media. He was employed by Xyience Incorporated, a consumer packaged
good
company from May 2006 to May 2007. From May 2001 to April 2006, Mr. Dash worked
for Viking River Cruises where he held numerous positions including President
of
U.S. Division, Managing Director of the European division in Germany and Senior
Vice President of Worldwide sales and marketing.
William
Lee, Ph.D, joined the Company in April 2008 and assumed the role of Chief
Operating Officer. He received his Ph.D from MIT and spent over 10 years in
the
United States. From 2007 to 2008, Dr. Lee held the position of Managing Director
of Transworld Consulting Group, an investment advisory service. From 2004 to
2006, he worked for TNT, an express delivery company, where he held various
positions focused on strategy, mergers and acquisitions and alliances in the
PRC. From 2002 to 2004, Dr. Lee worked for McKinsey & Co., a worldwide
management consulting firm, as a senior associate.
Michael
Bonner has been a director since February 2008. He is
a
business strategy consultant who has held numerous senior positions in the
cruise industry, including positions running the strategic planning, business
development, corporate finance, and capital planning functions at Royal
Caribbean Cruises, a major cruise line with a portfolio of cruise brands in
the
United States, Europe, and Asia. From 2006 to 2008, Mr. Bonner worked for
TheScholarShip, a subsidiary of Royal Caribbean Cruise Line, where he held
the
position of Chief Operating Officer. From 2005 to 2006, he was the Senior Vice
President of Corporate Planning at Viking River Cruises. From 1997 to 2005,
he
worked for Royal Caribbean Cruise Line where he held numerous senior positions
in strategy and finance.
Richard
Vogel has been a director since February 2008. Since 2005, he has been Chief
Operating Officer of Loeb Enterprises, LLC, a private equity firm, and has
extensive background in the advertising, marketing and media industries. From
1994 to 2004, he worked for Synapse Group, Inc., a marketing services company,
where he held various senior management positions in sales, marketing and
general management.
Andre
Nair has been a director since April 2008. He has 27 years of experience in
Asia's media industry where he has held numerous senior positions. Since 2007,
Mr. Nair has been the Chief Strategy Officer of JWT Asia Pacific, a leading
advertising agency where he is responsible for business strategy. From 2006
to
2007, he was the Chief Executive Officer of GroupM Asia Pacific, a media
planning and buying company. From 2004 to 2006, Mr. Nair was the Chairman of
MEC
Asia Pacific, a media planning and buying company. From 2001 to 2004, Mr. Nair
worked for GroupM Asia Pacific where he was the Chief Executive Officer of
the
South Asia division.
Board
Committees
We
are
not a "listed issuer" as defined in Rule 10A-3 promulgated under the Exchange
Act and are not currently required to have an audit, compensation, or nominating
committee. However, our board of directors has future plans to form these
committees and approve their charters. When the audit committee is formed,
our
board of directors expects to determine if it has a member that qualifies as
an
"audit committee financial expert" as defined in Item 407(d)(5)(ii) of
Regulation S-B promulgated under the Exchange Act.
45
Code
of Ethics
Our
code
of ethics is currently out of date and we are in the process of updating it.
Once updated, we undertake to provide to any person without charge, a copy
of
our code of ethics upon written request directed to Chief Financial Officer,
Legend Media, Inc., 9663 Santa Monica Boulevard #952, Beverly Hills, CA
90210.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
At
this
time, the Company is not subject to the provisions of Section 16(a) of the
Exchange Act.
Item
10. Executive
Compensation
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended June 30, 2008 and June 30,
2007 by our Chief Executive Officer, Chief Operating Officer, and each of our
other highest paid executives, if any, whose total compensation exceeded
$100,000 during such fiscal year ends.
|
Name and principal position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($) (6)
|
Non-
Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
Total
($)
|
|||||||||||||||||
|
Jeffrey
Dash
|
2008
|
$
|
83,333
|
—
|
$
|
12,840
|
(2)
|
$
|
36
|
(3)
|
—
|
—
|
$
|
96,209
|
|||||||||||
|
Chief
Executive Officer and
|
2007
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Chief
Financial Officer (1)
|
|||||||||||||||||||||||||
|
Shannon
McCallum Law
|
2008
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Former
President, Secretary and
|
2007
|
$
|
25,938
|
—
|
—
|
—
|
—
|
—
|
$
|
25,938
|
|||||||||||||||
|
Director
(4)
|
|||||||||||||||||||||||||
|
Dr.
William Lee
|
2008
|
$
|
37,500
|
—
|
—
|
$
|
65,277
|
(5)
|
—
|
—
|
$
|
102,777
|
|||||||||||||
|
Chief
Operating Officer (1)
|
2007
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
(1)
|
Mr.
Jeffrey Dash and Dr. William Lee have deferred payment of all cash
salary
during 2008. The amount shown for each reflects the accrued amount
of
compensation due each, respectively.
|
|
(2)
|
Mr.
Jeffrey Dash received 600,000 shares of common stock at the time
he became
our Chief Executive Officer and Chief Financial Officer in February
2008.
The value of each share of our common stock at such time was $0.0214.
|
|
(3)
|
On
January 31, 2008, the Company granted Mr. Dash options to purchase
400,000
shares of our common stock at an exercise price of $2.50 per share,
with
25% vesting at the end of the first three months and options to purchase
30,000 shares of common stock vesting at the end of each three months
thereafter. The Company used the Black Scholes model to value the
options
at the time they were issued, based on volatility of 100%, dividend
yield
of 0%, the stated exercise prices and expiration dates of the instruments
and using an average risk-free rate of 4.5%. Because the Company
does not
have a history of issuing employee stock options, the estimated life
is
based on the vesting period. This is the same as assuming that the
options
are exercised at the end of the vesting period.
|
|
(4)
|
Shannon
McCallum-Law was the principal executive officer during 2007 and
until
January 31, 2008. Her compensation was paid to her or to a company
controlled by her, MCL
Marketing.
|
46
|
(5)
|
On
April 8, 2008, the Company granted Dr. Lee options to purchase 400,000
shares of our common stock at an exercise price of $3.25 per share,
with
12.5% vesting at the end of the first three months and options to
purchase
30,000 shares of common stock vesting at the end of each three months
thereafter. The Company used the Black Scholes model to value the
options
at the time they were issued, based on volatility of 92%, dividend
yield
of 0%, the stated exercise prices and expiration dates of the instruments
and using an average risk-free rate of 4.5%. Because the Company
does not
have a history of issuing employee stock options, the estimated life
is
based on the vesting period. This is the same as assuming that the
options
are exercised at the end of the vesting period.
|
|
Reflects
the dollar amount expensed by the Company during the applicable fiscal
year for financial statement reporting purposes pursuant to FAS 123R.
FAS
123R requires the Company to determine the overall value of the options
as
of the date of grant based upon the Black-Scholes method of valuation,
and
to expense that value over the service period over which the options
become exercisable (vested). As a general rule, for time in service
based
options, the Company will immediately expense any option or portion
thereof which is vested upon grant, while expensing the balance on
a pro
rata basis over the remaining vesting term of the option.
|
Employment
Agreements
On
January 31, 2008, we entered into an Employment Agreement with our Chief
Executive Officer and Chief Financial Officer, Jeffrey Dash, effective February
1, 2008. Mr. Dash’s annual base salary is $200,000 and he is eligible to receive
a discretionary bonus of up to 75% of his base salary at the discretion of
our
board of directors. The Employment Agreement has no term and Mr. Dash serves
at
the discretion of our board of directors.
We
have
not entered into employment agreements with any of our other executive officers.
Outstanding
Equity Awards
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option
Awards
|
|||||||||||||||
|
Name
|
Number of
Securities
Under lying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Un exercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Under lying
Un exercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
|||||||||||
|
Jeffrey Dash
|
120,000
|
280,000
|
(1)
|
0
|
$
|
2.50
|
02/01/2013
|
|||||||||
|
William
Lee
|
33,335
|
366,665
|
(2)
|
0
|
$
|
3.25
|
04/08/2013
|
|||||||||
|
(1)
|
Pursuant
to the agreement with Jeffrey Dash, 25% of his options vest at the
end of
the first three months of employment with the remaining vesting at
30,000
options at the end of each three months thereafter.
|
|
|
(2)
|
|
Pursuant
to the agreement with William Lee, 12.5% of his options vest at the
end of
the first three months of employment with the remaining vesting at
30,000
options at the end of each three months
thereafter.
|
47
Director
Compensation
The
following table provides compensation information for our directors during
the
fiscal year ended June 30, 2008:
|
Name
|
Fees
Earned or
Paid in
Cash ($)
|
Stock
Awards
($)
|
Option
Awards ($)
(2)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Non-Qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||
|
Jeffrey
Dash (1)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Michael
Bonner
|
-
|
-
|
$
|
33,783
|
(3)
|
-
|
-
|
-
|
$
|
33,783
|
||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Andre
Nair
|
-
|
-
|
$
|
17,690
|
(4)
|
-
|
-
|
-
|
$
|
17,690
|
||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Richard
Vogel
|
-
|
-
|
$
|
36,742
|
(5)
|
-
|
-
|
-
|
$
|
36,742
|
||||||||||||
| (1) |
Mr.
Dash’s is not compensated as a director. We compensate him solely in his
role as our Chief Executive Officer and Chief Financial
Officer.
|
| (2) |
Reflects
the dollar amount expensed by the Company during the fiscal year
for
financial statement reporting purposes pursuant to FAS 123R. FAS
123R
requires the Company to determine the overall value of the options
as of
the date of grant based upon the Black-Scholes method of valuation,
and to
expense that value over the service period over which the options
become
exercisable (vested). As a general rule, for time in service based
options, the Company will immediately expense any option or portion
thereof which is vested upon grant, while expensing the balance on
a pro
rata basis over the remaining vesting term of the
option.
|
| (3) |
On
February 13, 2008, the Company granted Mr. Bonner options to purchase
80,000 shares of our common stock at an exercise price of $2.50 per
share,
that vest at a rate of 10,000 options at the end of each three month
period following the date of grant. The Company used a Black Scholes
model
to value the options at the time they were issued, based on volatility
of
90%, dividend yield of 0%, the stated exercise prices and expiration
dates
of the instruments and using an average risk-free rate of 4.5%. Because
the Company does not have a history of employee stock options, the
estimated life is based on the vesting period. This is the same as
assuming that the options are exercised at the end of the vesting
period.
As
of June 30, 2008, 80,000 of Mr. Bonner's options were outstanding,
of
which 15,222 were
exercisable.
|
| (4) |
On
April 10, 2008, the Company granted Mr. Nair options to purchase
80,000
shares of our common stock at an exercise price of $3.70 per share,
that
vest at a rate of 10,000 options at the end of each three month period
following the date of grant. The Company used a Black Scholes model
to
value the options at the time they were issued, based on volatility
of
96%, dividend yield of 0%, the stated exercise prices and expiration
dates
of the instruments and using an average risk-free rate of 4.5%. Because
the Company does not have a history of employee stock options, the
estimated life is based on the vesting period. This is the same as
assuming that the options are exercised at the end of the vesting
period.
As
of June 30, 2008, 80,000 of Mr. Nair's options were outstanding,
of which
9,111 were exercisable.
|
| (5) |
On
February 1, 2008, the Company granted Mr. Vogel options to purchase
80,000
shares of our common stock at an exercise price of $2.50 per share,
that
vest at a rate of 10,000 options at the end of each three month period
following the date of grant. The Company used a Black Scholes model
to
value the options at the time they were issued, based on volatility
of
90%, dividend yield of 0%, the stated exercise prices and expiration
dates
of the instruments and using an average risk-free rate of 4.5%. Because
the Company does not have a history of employee stock options, the
estimated life is based on the vesting period. This is the same as
assuming that the options are exercised at the end of the vesting
period.
As
of June 30, 2008, 80,000 of Mr. Vogel's options were outstanding,
of which
16,556 were exercisable.
|
48
Item
11. Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of September 15, 2008 for each of the following
persons:
•
each of our directors and officers;
•
all directors and officers as a group; and
•
each person who is known by us to own beneficially five percent or
more of our common stock.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the stockholder’s name. The percentage
of shares of common stock beneficially owned set forth below is based on
12,934,273 shares of common stock which includes 10,339,775 shares of common
stock outstanding as of September 15 and 1,254,518 shares of common stock
issuable upon exercise of warrants and options currently exercisable and
exercisable over the next 60 days as of September 15, 2008.
|
Number of
Shares of
Common Stock
Beneficially
Owned (1)
|
Percent of Shares
of Common Stock
Beneficially Owned
(1)
|
||||||
|
Executive
Officers and/or Directors:
|
|||||||
|
Jeffrey
Dash, Chief Executive Officer, Chief Financial Officer and
Director
(2)
|
730,000
|
5.7
|
%
|
||||
|
Michael
Bonner, Director (3)
|
35,222
|
*
|
|||||
|
Andre
Nair, Director (4)
|
29,111
|
*
|
|||||
|
Richard
Vogel, Director (5)
|
36,556
|
*
|
|||||
|
William
Lee, Chief Operating Officer (6)
|
93,335
|
*
|
|||||
|
All
Executive Officers and Directors
as
a Group (5 persons)
|
924,224
|
7.2
|
%
|
||||
|
5%
Beneficial Owners:
|
|||||||
|
Maoming
China Fund (7)
|
3,925,000
|
30.6
|
%
|
||||
|
Music
Radio Limited (8)
|
2,039,755
|
15.9
|
%
|
||||
|
Adam
Roseman (9)
|
921,907
|
7.2
|
%
|
||||
|
Jeffrey
Dash, Chief Executive Officer, Chief Financial Officer and
Director
(2)
|
730,000
|
5.7
|
%
|
||||
|
*
Denotes less than 1%
|
|
|
(1)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person
who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which
includes
the power to vote, or to direct the voting of shares; or (ii) investment
power, which includes the power to dispose or direct the disposition
of
shares. Certain shares may be deemed to be beneficially owned by
more than
one person (if, for example, persons share the power to vote or the
power
to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire
the
shares (for example, upon exercise of an option) within 60 days of
the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed
to
include the amount of shares beneficially owned by such person (and
only
such person) by reason of these acquisition rights. As a result,
the
percentage of outstanding shares of any person as shown in this table
does
not necessarily reflect the person's actual ownership or voting power
with
respect to the number of shares of common stock actually outstanding.
|
|
(2)
|
Includes
stock options to purchase 180,000 shares of common
stock.
|
49
|
(3)
|
Includes
stock options to purchase 35,222 shares of common
stock.
|
|
(4)
|
Includes
stock options to purchase 29,111 shares of common
stock.
|
|
(5)
|
Includes
stock options to purchase 36,556 shares of common
stock.
|
|
(6)
|
Includes
stock options to purchase 93,335 shares of common
stock.
|
|
(7)
|
Includes
1,250,000 shares of our common stock issuable upon conversion of
our
Series A Convertible Preferred Stock and 600,000 shares of our common
stock issuable upon exercise of warrants. The stockholder owns 100%
of our
issued and outstanding Series A Convertible Preferred Stock. Based
solely
on information provided by the stockholder and related transaction
documents. The address of this stockholder is Clifton House, 75 Fort
Street, PO Box 1350GT, Grand Cayman, Cayman Islands.
|
|
(8)
|
Based
solely on information provided by stockholder and related transaction
documents. Mr. Ju Baochun has voting and investment control over
these
securities. According to the transaction documents the address of
this
holder is Room 8-3-101, Guanyuan Plaza, No.1 Cuihua Street, Xicheng
District, Beijing PRC.
|
|
(9)
|
Includes
150,294 shares of our common stock issuable upon exercise of warrants
held
by RMK Emerging Growth Opportunity Fund LP over which the stockholder
has
voting and investment power as the Chief Executive Officer of RMK
Emerging
Growth Opportunity Fund LP. Based solely on information provided
by the
stockholder. The address of this stockholder is 9440 South Santa
Monica
Boulevard, Suite 401 Beverly Hills, CA
90210.
|
Securities
Authorized for Issuance under Equity Compensation Plans or Individual
Compensation Arrangements
Item
12. Certain
Relationships and Related Transactions And Director
Independence
RMK
Emerging Growth Opportunity Fund LP
On
January 31, 2008, in connection with the closing of our reverse merger, Well
Chance entered into a Loan Agreement with RMK Emerging Growth Opportunity Fund
LP pursuant to which RMK Emerging Growth Opportunity Fund LP extended a loan
to
Well Chance in the principal amount of $375,733, evidenced by a promissory
note.
The loan matures on January 30, 2009. If the loan is repaid on or before January
30, 2009, Well Chance must pay a loan fee on the loan equal to 68.64045% of
the
outstanding loan principal. If payment of the loan principal is made after
January 30, 2009, additional loan fees are due as described in the Loan
Agreement. The entire principal amount of the initial loan is currently
outstanding and also represents the largest aggregate amount of principal
outstanding on the loan during the period covered by this annual report on
Form
10-KSB. We have not made any payments of principal or interest during the fiscal
year ended June 30, 2008. Provided we repay the loan on or before January 30,
2009, we owe RMK Emerging Growth Opportunity Fund LP an aggregate of $633,638
In
connection with entering into the Loan Agreement, Well Chance and RMK Emerging
Growth Opportunity Fund LP also entered into a Security Agreement to secure
the
loan and the Company issued a warrant to RMK Emerging Growth Opportunity Fund
LP
exercisable into 200,000 shares of the Company's common stock at an exercise
price of $2.50 per share. The warrant is immediately exercisable upon issuance
and is exercisable until the third anniversary of the issuance date. On August
23, 2008, Well Chance and RMK Emerging Growth Opportunity Fund LP entered into
a
First Amendment to Loan Agreement and First Amendment to Security Agreement
pursuant to which the parties revised the documentation for the loan to reflect
that the principal amount of the loan actually advanced by RMK Emerging Growth
Opportunity Fund LP to Well Chance was $375,733. On the same date, Well Chance
issued a First Replacement Secured Promissory Note in the principal amount
of
$375,733 and the Company issued a First Replacement Common Stock Purchase
Warrant exercisable into 150,294 shares of the Company's common stock at an
exercise price of $2.50 per share. RMK Emerging Growth Opportunity Fund LP
is
owned and controlled by Adam Roseman, who is a beneficial owner of 7.2% of
our
common stock.
50
The
due
date on this loan is January 30, 2009. Interest expense of $134,808 has been
included in the accompanying statement of operations for the year ended June
30,
2008. Of the $375,733 original loan amount, the full $375,733 is outstanding
and
is classified as related party note payable in the amount of $307,294, net
of
debt discount of $68,439 in the accompanying June 30, 2008 consolidated balance
sheet.
Beijing
Hongteng Lianguang Advertising Co., Ltd.
We
have
an ongoing business relationship with Beijing Hongteng Lianguang Advertising
Co., Ltd. (“HTLG”), a PRC company beneficially owned by Mr. Ju Baochun. Mr.
Baochun owns 80% of Music Radio Limited, which in turn is the beneficial owner
of 15.9% of our common stock. We entered into a sales and marketing agreement
with HTLG pursuant to which HTLG actively sells and promotes our radio
advertising inventory. The agreement can be cancelled at any time. We pay HTLG
RMB105,000 per month plus 15% commission of sales revenue. The commission is
paid based on cash collections but is recorded as revenue is recognized. We
have
recognized $140,080 in payables to HTLG, and have classified the amount as
part
of other payables in the accompanying consolidated balance sheet at June 30,
2008. We have also recognized $155,970 related to the revenue rights agreement
in the accompanying consolidation statements of operations for the year ended
June 30, 2008.
Director
Independence
Our
board
of directors follow the standards of independence established under the Nasdaq
rules in determining if directors are independent and has determined that
Michael Bonner, Andre Nair and Richard Vogel are independent for all purposes
under such rules.
|
Exhibit
#
|
Description
|
|
|
2.1
|
Share
Exchange Agreement, dated January 31, 2008, by and among Noble Quests,
Inc., the majority shareholder of Noble Quests, Inc., Well Chance
Investments Limited and the shareholders of Well Chance Investments
Limited (1)
|
|
|
3.1
|
Articles
of Incorporation of Noble Quests, Inc., filed with the Nevada Secretary
of
State on March 13, 1998 (2)
|
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation for Noble Quests, Inc.,
filed
with the Nevada Secretary of State on October 25, 2006
(2)
|
|
|
3.3
|
Amended
and Restated Articles of Incorporation for Noble Quests, Inc., filed
with
the Nevada Secretary of State on November 1, 2006 (2)
|
|
|
3.4
|
Certificate
of Amendment to Articles of Incorporation (3)
|
|
|
3.5
|
Certificate
of Designation of the Preferences, Rights, Limitations, Qualifications
and
Restrictions of the Series A Convertible Preferred Stock of the Company
(4)
|
|
|
3.6
|
Bylaws
of Noble Quests, Inc. (2)
|
|
|
4.1
|
Form
of Common Stock Purchase Warrant of Legend Media, Inc.
(5)
|
|
|
4.2
|
Common
Stock Purchase Warrant, dated April 21, 2008, issued by Well Chance
Investments Limited to Newport Capital Asset Management Group
(6)
|
51
|
4.3
|
Common
Stock Purchase Warrant, dated March 30, 2008, issued by the Company
to
Jonathan Kantor (7)
|
|
|
4.4
|
Common
Stock Purchase Warrant, dated March 30, 2008, issued by the Company
to
Blueday Limited (7)
|
|
|
4.5
|
Common
Stock Purchase Warrant, dated January 31, 2008, issued to RMK Emerging
Growth Opportunity Fund LP (1)
|
|
|
10.1
|
Form
of Stock Purchase Agreement (1)
|
|
|
10.2
|
Share
Purchase Agreement, dated June 4, 2008, among the Company, Well Chance
Investments Limited, Ju Baochun and Xue Wei (8)
|
|
|
10.3
|
Share
Purchase Agreement, dated May 8, 2008, among the Company, Well Chance
Investments Limited, Music Radio Limited, Ju Baochun and Xue Wei
(9)
|
|
|
10.4
|
Amendment
to Share Purchase Agreement, dated June 19, 2008, among the Company,
Well
Chance Investments Limited, Music Radio Limited, Ju Baochun and Xue
Wei
(10)
|
|
|
10.5
|
Securities
Purchase Agreement, dated March 31, 2008, among the Company and Maoming
China Fund (5)
|
|
|
10.6
|
Loan
Agreement, dated April 21, 2008, between Well Chance Investments
Limited
and Newport Capital Asset Management Group (6)
|
|
|
10.7
|
Loan
Agreement, dated March 30, 2008, between the Company and Jonathan
Kantor
(7)
|
|
|
10.8
|
Loan
Agreement, dated March 30, 2008, between the Company and Blueday
Limited
(7)
|
|
|
10.9
|
Loan
Agreement, dated January 31, 2008, by and between Well Chance Investments
Limited and RMK Emerging Growth Opportunity Fund LP (1)
|
|
|
10.10
|
First
Amendment to Loan Agreement, dated August 23, 2008, between Well
Chance
Investments Limited and RMK Emerging Growth Fund, LP
(11)
|
|
|
10.11
|
Security
Agreement dated as of April 21, 2008 between Well Chance Investments
Limited and Newport Capital Asset Management Group (6)
|
|
|
10.12
|
Security
Agreement, dated January 31, 2008, by and between Well Chance Investments
Limited and RMK Emerging Growth Opportunity Fund LP (1)
|
|
|
10.13
|
First
Amendment to Security Agreement, dated August 23, 2008, between Well
Chance Investments Limited and RMK Emerging Growth Opportunity Fund,
LP
(11)
|
|
|
10.14
|
Secured
Convertible Promissory Note, dated April 21, 2008, issued by Well
Chance
Investments Limited to Newport Capital Asset Management Group
(6)
|
|
|
10.15
|
Promissory
Note, dated March 30, 2008, issued by the Company to Jonathan Kantor
(7)
|
|
|
10.16
|
Promissory
Note, dated March 30, 2008, issued by the Company to Blueday Limited
(7)
|
52
|
10.17
|
Secured
Promissory Note, dated January 31, 2008, issued by Well Chance Investments
Limited to RMK Emerging Growth Opportunity Fund LP (1)
|
|
|
10.18
|
Voting
Agreement, dated March 31, 2008, by and among the Company, ARC Investment
Partners LLC, Tapirdo Enterprises LLC, Loeb Enterprises II LLC, Jeffrey
Dash, Aries Equity Corp., Nalp Capital LLC and Maoming China Fund
(5)
|
|
|
10.19
|
Exclusive
Advertising Rights Agreement, dated August 4, 2008, by and between
Beijing
Guo Guangrong Advertising Co., Ltd. and Beijing Merci International
Advertising Co., Ltd. (12)
|
|
|
10.20
|
Exclusive
Technical, Operational, Business Consulting and Services Agreement,
dated
July 3, 2008, by and among Legend Media (Beijing) Information and
Technology Co., Ltd., Beijing Maihesi Advertising International Co.,
Ltd.,
Ju Baochun and Xue Wei (13)
|
|
|
10.21
|
Exclusive
Technical, Operational, Business Consulting and Services Agreement,
dated
May 30, 2008, among Legend Media (Beijing) Consulting Co., Ltd.,
Tianjin
Yinse Lingdong Advertising Co., Ltd., Ju Baochun and Xue Wei
(14)
|
|
|
10.22
|
Operating
Agreement, dated July 3, 2008, by and among Legend Media (Beijing)
Information and Technology Co., Ltd., Beijing Maihesi Advertising
International Co., Ltd., Ju Baochun and Xue Wei (13)
|
|
|
10.23
|
Operating
Agreement, dated May 30, 2008, among Legend Media (Beijing) consulting
Co., Ltd., Tianjin Yinse Lingdong Advertising Co., Ltd., Ju Baochun
and
Xue Wei (14)
|
|
|
10.24
|
Revenue
Assignment Agreement, dated May 30, 2008, among Well Chance Investments
Limited, Beijing Hongteng Lianguang Advertising Co., Ltd., Tianjin
Yinse
Lingdong Advertising Co., Ltd., Ju Baochun and Xue Wei
(14)
|
|
|
10.25
|
Authorization
Agreement, dated July 3, 2008, between Xue Wei and Jeffrey Dash
(13)
|
|
|
10.26
|
Authorization
Agreement, dated July 3, 2008, between Ju Baochun and Jeffrey Dash
(13)
|
|
|
10.27
|
Authorization
Agreement, dated May 30, 2008, by Ju Baochun (14)
|
|
|
10.28
|
Finder's
Agreement, dated January 31, 2008, by and between Noble Quests, Inc.
and
Fiona E LLC (1)
|
|
|
10.29
|
Investor
Relations Agreement, dated January 31, 2008, by and between Noble
Quests,
Inc. and Aries Equity Corp. (1)
|
|
|
16.1
|
Letter
from Mantyla McReynolds LLC (15)
|
|
|
21.1
|
List
of Subsidiaries (16)
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) - Certification of Chief Executive Office and
Chief
Financial Officer (16)
|
|
|
32.1
|
Section
1350 Certification Pursuant to 18 U.S.C. Section 1350
(16)
|
53
|
(1)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on February 11, 2008.
|
|
(2)
|
Incorporated
herein by reference to the Company's Registration Statement on Form
SB-2
filed with the SEC on November 7,
2006.
|
|
(3)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on February 26, 2008.
|
|
(4)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on July 7, 2008.
|
|
(5)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on April 4, 2008.
|
|
(6)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on April 24, 2008.
|
|
(7)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on March 30, 2008.
|
|
(8)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on June 6, 2008.
|
|
(9)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on May 12, 2008.
|
|
(10)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on June 26, 2008.
|
|
(11)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on August 28, 2008.
|
|
(12)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on September 11, 2008.
|
|
(13)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on July 25, 2008.
|
|
(14)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on June 5, 2008.
|
|
(15)
|
Incorporated
herein by reference to the Company's Current Report on Form 8-K filed
with
the SEC on July 17, 2008.
|
|
(16)
|
Filed
herewith.
|
Item
14. Principal
Accountant Fees and Services
Goldman
Parks Kurland Mohidin served as our independent registered public accounting
firm for the fiscal year ended June 30, 2008. For the year ended June 30, 2007,
at which time the Company was known as Noble Quests, Inc., Mantyla McReynolds
served as our independent registered public accounting firm. The following
table
shows the fees that were billed for the audit and other services provided by
these respective firms for the fiscal years ended June 30, 2008 and 2007.
|
Fiscal 2008
|
Fiscal 2007
|
||||||
|
Audit
Fees (1)
|
$
|
51,212
|
$
|
10,656
|
|||
|
Audit-Related
Fees (2)
|
-
|
-
|
|||||
|
Tax
Fees (3)
|
$
|
1,350
|
-
|
||||
|
All
Other Fees (4)
|
-
|
-
|
|||||
|
Total
|
$
|
52,562
|
$
|
10,656
|
|||
|
(a)
|
Audit
Fees
— This category consists of fees billed for professional services rendered
by our independent auditors for the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB
Quarterly Reports and services that are normally provided by the
independent auditors in connection with engagements for those fiscal
years. This category also includes advice on audit and accounting
matters
that arose during, or as a result of, the audit or the review of
interim
financial statements.
|
54
|
(b)
|
Audit-Related
Fees —
This category consists of fees billed for professional services rendered
by our independent auditors for assurance and related services that
are
reasonably related to the performance of the audit or review of our
financial statements and are not reported above under "Audit Fees."
The
services for the fees disclosed under this category include consultation
regarding our correspondence with the SEC and other accounting consulting.
|
|
(c)
|
Tax
Fees —
This category consists of fees billed for professional services rendered
by our independent auditors for tax compliance and tax advice. The
services for the fees disclosed under this category include tax return
preparation and technical tax advice.
|
|
(d)
|
All
Other Fees —
This category consists of fees billed for professional services rendered
by our independent auditors for other miscellaneous items.
|
Pre-Approval
Policies and Procedures
Prior
to
engaging its accountants to perform particular services, our board of directors
obtains an estimate for the service to be performed. All of the services
described above were approved by the board of directors in accordance with
its
procedure.
Under
applicable SEC rules, the Audit Committee is required to pre-approve the audit
and non-audit services performed by the independent auditors in order to ensure
that they do not impair the auditors’ independence. The SEC’s rules specify the
types of non-audit services that an independent auditor may not provide to
its
audit client and establish the Audit Committee’s responsibility for
administration of the engagement of the independent auditors. Until such time
as
we have an Audit Committee in place, our Board of Directors will pre-approve
the
audit and non-audit services performed by the independent
auditors.
55
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
|
|
LEGEND
MEDIA, INC.
|
|
|
Date:
October 14, 2008
|
By:
|
/s/
JEFFREY DASH
|
|
|
Jeffrey
Dash
Chief
Executive Officer and Chief Financial
Officer
|
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated
|
/s/
JEFFREY DASH
|
|
Chief
Executive Officer, Chief Financial Officer and Director
|
|
Jeffrey
Dash
|
|
Date:
October 14, 2008
|
|
/s/
MICHAEL BONNER
|
Director
|
|
|
Michael
Bonner
|
Date:
October 14, 2008
|
|
|
/s/
ANDRE NAIR
|
Director
|
|
|
Andre
Nair
|
Date:
October 14, 2008
|
|
|
/s/
RICHARD VOGEL
|
|
Director
|
|
Richard
Vogel
|
|
Date:
October 14, 2008
|
56
TABLE
OF CONTENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Goldman,
Parks, Kurland, Mohidin, LLP
|
F-1
|
|
Gruber
and Company, LLC
|
F-2
|
|
Consolidated
Financial Statements
|
|
|
Balance
Sheet as of June 30, 2008
|
F-3
|
|
Statements
of Operations and Other Comprehensive Loss For Years Ended June 30,
2008 and 2007
|
F-4
|
|
Statement
of Stockholders’ Equity For Years Ended June 30, 2008 and
2007
|
F-5
|
|
Statements
of Cash Flows For Years Ended June 30, 2008 and 2007
|
F-6
|
|
Notes
To Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders of
Legend
Media, Inc.
We
have
audited the accompanying consolidated balance sheet of Legend Media, Inc. (a
Nevada corporation) and subsidiaries as of June 30, 2008, and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity, and cash flows for the year ended June 30, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Legend Media,
Inc. and Subsidiaries as of June 30, 2008, and the consolidated results of
their
operations and their consolidated cash flows for the year ended June 30, 2008,
in conformity with U.S. generally accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred a loss of $2,013,826 and
has a working capital deficit of $550,846 that raise substantial doubt about
the
Company’s ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 3. The financial statements do
not
include any adjustments that might result from the outcome of this
uncertainty.
Goldman
Parks Kurland Mohidin LLP
Encino,
California
October
7, 2008
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The
Board Of Directors And Stockholders Of Legend Media, Inc.
We
have
audited the accompanying consolidated statement of operations and other
comprehensive loss, stockholders' equity and cash flows of Legend Media, Inc.
and subsidiaries for the year ended June 30, 2007. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Legend
Media, Inc. for the year ended June 30, 2007 in conformity with accounting
principles generally accepted in the United States of America.
/s/
Gruber & Company, LLC
Lake
Saint Louis, Missouri
January
30, 2008
F-2
LEGEND
MEDIA, INC.
CONSOLIDATED
BALANCE SHEET
AS
OF JUNE 30, 2008
|
ASSETS
|
||||
|
CURRENT
ASSETS:
|
||||
|
Cash
& cash equivalents
|
$
|
2,583,346
|
||
|
Accounts
receivable
|
64,493
|
|||
|
Unbilled
accounts receivable
|
195,680
|
|||
|
Vendor
deposits
|
17,463
|
|||
|
Prepaid
expense
|
100,951
|
|||
|
Total
current assets
|
2,961,933
|
|||
|
Transaction
deposit
|
500,000
|
|||
|
Property
and equipment, net
|
16,760
|
|||
|
Intangible
assets, net
|
9,045,310
|
|||
|
TOTAL
ASSETS
|
$
|
12,524,003
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
CURRENT
LIABILITIES:
|
||||
|
Accounts
payable
|
$
|
97,313
|
||
|
Accrued
liabilities
|
356,791
|
|||
|
Accrued
interest
|
282,686
|
|||
|
Unearned
revenue
|
12,979
|
|||
|
Short
term notes payable, net of discount of $100,364
|
315,636
|
|||
|
Related
party note payable, net of discount of $68,439
|
307,294
|
|||
|
Other
payables
|
2,140,080
|
|||
|
Total
current liabilities
|
3,512,779
|
|||
|
Commitments
and contingencies
|
-
|
|||
|
Minority
interest in variable interest entity (See Note 9)
|
6,215
|
|||
|
STOCKHOLDERS'
EQUITY
|
||||
|
Preferred
stock - 10,000,000 shares authorized, par value $0.001, 1,250,000
shares
issued and outstanding
|
1,250
|
|||
|
Common
stock - 50,000,000 shares authorized, par value $0.001, 10,235,328
shares
issued and outstanding
|
10,235
|
|||
|
Additonal
paid-in capital
|
10,932,114
|
|||
|
Other
comprehesive income
|
75,236
|
|||
|
Accumulated
deficit
|
(2,013,826
|
)
|
||
|
Total
stockholders' equity
|
9,005,009
|
|||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
12,524,003
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
LEGEND
MEDIA, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
|
2008
|
2007
|
||||||
|
Net
revenue
|
155,970
|
-
|
|||||
|
Cost
of revenue
|
30,144
|
-
|
|||||
|
Gross
profit
|
125,826
|
-
|
|||||
|
Operating
expenses:
|
|||||||
|
Selling
expenses
|
51,404
|
||||||
|
General
and administrative expenses
|
1,614,302
|
-
|
|||||
|
Loss
from operations
|
(1,539,880
|
)
|
-
|
||||
|
Non-operating
income (expense):
|
|||||||
|
Interest
income
|
36
|
||||||
|
Interest
expense
|
(322,619
|
)
|
-
|
||||
|
Related
party interest expense
|
(134,808
|
)
|
|||||
|
Loss
on disposal of fixed assets
|
(25,893
|
)
|
-
|
||||
|
Non-controlling
interest in loss from variable interest entity
|
9,437
|
||||||
|
Other
expense
|
(99
|
)
|
|||||
|
Total
non-operating income (expense)
|
(473,946
|
)
|
-
|
||||
|
Loss
before income tax
|
(2,013,826
|
)
|
-
|
||||
|
Income
tax
|
-
|
-
|
|||||
|
Net
loss
|
$
|
(2,013,826
|
)
|
$
|
-
|
||
|
Other
comprehensive income
|
|||||||
|
Foreign
currency translation gain
|
75,236
|
-
|
|||||
|
Comprehensive
loss
|
(1,938,590
|
)
|
-
|
||||
|
Weighted
average shares outstanding :
|
|||||||
|
Basic
|
4,376,911
|
1,200,000
|
|||||
|
Diluted
|
4,376,911
|
1,200,000
|
|||||
|
Loss
per share:
|
|||||||
|
Basic
|
$
|
(0.46
|
)
|
$
|
-
|
||
|
Diluted
|
$
|
(0.46
|
)
|
$
|
-
|
||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
LEGEND
MEDIA, INC.
STATEMENT
OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
|
Accumulated
|
|||||||||||||||||||||||||
|
Additonal
|
Other
|
Total
|
|||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-in
|
Comprehensive
|
Accumulated
|
Stockholders'
|
||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
|
Deficit
|
Equity
|
||||||||||||||||||
|
Balance,
July 1, 2006
|
-
|
$
|
-
|
1,200,000
|
$
|
1,200
|
$
|
(1,200
|
)
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
|
Net
loss
|
-
|
-
|
|||||||||||||||||||||||
|
Balance,
June 30, 2007
|
-
|
-
|
1,200,000
|
1,200
|
(1,200
|
)
|
-
|
-
|
-
|
||||||||||||||||
|
Shares
issued in connection with Noble Quest merger
|
2,700,000
|
2,700
|
5,634
|
8,334
|
|||||||||||||||||||||
|
Common
stock issued for cash
|
4,100,000
|
4,100
|
83,640
|
87,740
|
|||||||||||||||||||||
|
Common
stock issued for services
|
300,000
|
300
|
252,980
|
253,280
|
|||||||||||||||||||||
|
Convertible
preferred stock issued for cash
|
1,250,000
|
1,250
|
2,998,750
|
3,000,000
|
|||||||||||||||||||||
|
Common
stock issued for investment in Tianjin Investment Company
|
1,935,328
|
1,935
|
7,158,779
|
7,160,714
|
|||||||||||||||||||||
|
Fair
value of warrants issued with notes payable
|
232,918
|
232,918
|
|||||||||||||||||||||||
|
Fair
value of benefical conversion feature for convertible debt
|
44,626
|
44,626
|
|||||||||||||||||||||||
|
Fair
value of employee/director options
|
155,987
|
155,987
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
75,236
|
75,236
|
|||||||||||||||||||||||
|
Net
loss
|
(2,013,826
|
)
|
(2,013,826
|
)
|
|||||||||||||||||||||
|
Balance,
June 30, 2008
|
1,250,000
|
$
|
1,250
|
10,235,328
|
$
|
10,235
|
$
|
10,932,114
|
$
|
75,236
|
$
|
(2,013,826
|
)
|
$
|
9,005,009
|
||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
LEGEND
MEDIA, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(2,013,826
|
)
|
$
|
-
|
||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||
|
Depreciation
and amortization
|
128,494
|
-
|
|||||
|
Amortization
of debt discounts
|
108,742
|
-
|
|||||
|
Common
stock issued for services
|
253,280
|
-
|
|||||
|
Fair
value of stock options under SFAS 123R
|
155,987
|
-
|
|||||
|
Loss
from minority interest in subsidiary
|
(9,437
|
)
|
-
|
||||
|
Loss
on disposal of fixed assets
|
25,893
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(2,227
|
)
|
-
|
||||
|
Unbilled
receivables
|
(106,355
|
)
|
-
|
||||
|
Vendor
deposits
|
(4,586
|
)
|
-
|
||||
|
Prepaid
expenses
|
(100,885
|
)
|
-
|
||||
|
Accounts
payable
|
92,457
|
-
|
|||||
|
Accrued
liabilities
|
306,060
|
-
|
|||||
|
Other
payables
|
52,758
|
-
|
|||||
|
Unearned
revenue
|
278
|
-
|
|||||
|
Accrued
interest
|
282,686
|
-
|
|||||
|
Net
cash used in operating activities
|
(830,681
|
)
|
-
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchase
of property and equipment
|
(1,688
|
)
|
-
|
||||
|
Payment
for investment deposit
|
(500,000
|
)
|
|||||
|
Cash
acquired in acquisition of variable interest entity
|
35,503
|
-
|
|||||
|
Net
cash used in investing activities
|
(466,185
|
)
|
-
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds
from notes payable
|
925,733
|
-
|
|||||
|
Repayment
of notes payable
|
(134,000
|
)
|
-
|
||||
|
Proceeds
from sale of convertible preferred stock
|
3,000,000
|
-
|
|||||
|
Proceeds
from sale of common stock
|
87,740
|
-
|
|||||
|
Net
cash provided by financing activities
|
3,879,473
|
-
|
|||||
|
Effect
of exchange rate changes on cash and cash eqiuvalents
|
739
|
-
|
|||||
|
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
2,583,346
|
-
|
|||||
|
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
-
|
-
|
|||||
|
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$
|
2,583,346
|
$
|
-
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
|
Interest
paid
|
$
|
66,000
|
$
|
-
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING:
|
|||||||
|
Issuance
of common shares for purchase of Tianjin Investment
Company
|
$
|
7,160,714
|
$
|
-
|
|||
|
Increase
in other payable for purchase of Tianjin Investment
Company
|
$
|
2,000,000
|
$
|
-
|
|||
|
Beneficial
conversion feature on issuance of convertible debt
|
$
|
44,626
|
$
|
-
|
|||
|
Issuance
of warrants with note payable
|
$
|
232,918
|
$
|
-
|
|||
|
Common
shares issued in connection with Noble Quest merger
|
$
|
8,334
|
$
|
-
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Note
1 - Organization and Basis of Presentation
Organization
and Line of Business
Legend
Media, Inc., formerly known as Noble Quests, Inc. (hereinafter referred to
as
the “Company” or “Legend Media”), was organized as a Nevada corporation on March
16, 1998, for the purpose of selling multi-media marketing services and other
related services to network marketing groups. Specifically, the Company assisted
network marketers in using marketing tools such as public relations,
advertising, direct mail, collateral development, electronic communications
and
promotion tools to increase product and service awareness.
On
January 31, 2008, the Company entered into a share exchange agreement with
Ms.
Shannon McCallum-Law, the majority stockholder, sole director and Chief
Executive Officer of the Company, Well Chance Investments Limited (“Well
Chance”) and Well Chance's sole shareholder (the "Well Chance Shareholder").
Pursuant to the terms of the exchange agreement, the Company agreed to acquire
all of the issued and outstanding shares of Well Chance's common stock in
exchange for the Company’s issuance of 1,200,000 shares of its common stock to
the Well Chance Shareholder on the basis of 1,200 shares of its common stock
for
every one share of Well Chance common stock held.
Concurrently
with the closing of the transactions under the share exchange agreement and
as a
condition thereof, the Company entered into an agreement with Ms. McCallum-Law,
pursuant to which she returned to the Company for cancellation 2,419,885 of
the
5,119,885 shares of the Company’s common stock owned by her. Ms. McCallum-Law
was not compensated in any way for the cancellation of the shares. In addition,
the Company issued 4,100,000 shares of its common stock to certain affiliates
of
Well Chance for $87,740 and 200,000 shares in exchange for consulting services
performed in connection with this transaction. Upon completion of the foregoing
transactions, the Company had an aggregate of 8,200,000 shares of common stock
issued and outstanding.
The
exchange of shares with the Well Chance Shareholder was accounted for as a
reverse acquisition under the purchase method of accounting since Well Chance
obtained control of Legend Media. Concurrent with the closing of the
transaction, Noble Quests, Inc. changed its name to Legend Media, Inc.
Accordingly, the share exchange was recorded as a recapitalization of Well
Chance, Well Chance being treated as the continuing entity.
As
a
result of the reverse merger transactions described above, the historical
financial statements presented are those of Well Chance, the operating entity.
Well
Chance was incorporated under the laws of the British Virgin Islands as an
International Business Company on February 22, 2005. Well Chance was formed
to
create a business that principally engaged in the development and management
of
a technology platform that deploys advertisements across its various advertising
mediums.
Today,
the Company is building a consumer advertising network in China focused on
the
Chinese radio advertising industry. On May 8, 2008, the Company entered into
a
Share Purchase Agreement with Music Radio Limited, a British Virgin Islands
company (the "Seller"), and all of the shareholders of the Seller pursuant
to
which the Company agreed to purchase 80% of the common stock of Legend Media
Tianjin Investment Company Limited, a British Virgin Islands company and a
wholly-owned subsidiary of the Seller. On May 30, 2008, the Company finalized
the transaction with the completion of all the secondary documents required
to
give the Company effective control of the exclusive sales contract for the
Tianjin, China based radio channel. Tianjin, China is a large city with a
population of over 11.5 million. Administratively it is a municipality that
has
provincial-level status, reporting directly to the central government. There
are
a total of four such cities in China with Beijing, Shanghai and Chongqing making
up the other three. Its urban area is the third largest in China, ranked only
after Shanghai and Beijing.
Also
in
connection with the closing of the Purchase, the Purchaser entered into a
Revenue Assignment Agreement (the "Revenue Agreement") with Beijing Hongteng
Lianguang Advertising Co., Ltd. ("Hongteng"), the Advertising Entity and the
Shareholders. The Shareholders are the sole shareholders of Hongteng. Pursuant
to the Revenue Agreement, Hongteng agreed to, and the Shareholders agreed to
cause Hongteng to, assign any and all of the benefits (financial or otherwise)
generated by an identified advertising agreement (the "Old Advertising
Agreement"), and all advertising sales contracts entered into pursuant to the
Old Advertising Agreement, to the Advertising Entity until the date on which
the
Advertising Entity enters into the New Advertising Agreement.
F-7
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
On
July
21, 2008, the Company closed a transaction pursuant to which Well Chance
Investments Limited, its wholly-owned subsidiary and a British Virgin Islands
company (the "Purchaser"), purchased 100% of the common stock of News Radio
Limited, a British Virgin Islands company (the "Target"). The transaction
occurred pursuant to the terms of a Share Purchase Agreement that the Company
entered into on June 4, 2008 with the Purchaser and all of the shareholders
of
the Target (the "Sellers").
Management
has established relationships in China that will provide access to key sales
outlets and additional advertising assets. The Company has contracted with
local
experts in the Beijing and Shandong provinces who are developing a network
of
relationships that are expected to allow the Company to expand sales efforts
quickly as new inventory is acquired.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the Chinese Yuan Renminbi (RMB); however
the accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).
Foreign
Currency Translation
As
of
June 30, 2008, the accounts of the Company’s subsidiaries were maintained, and
their consolidated financial statements were expressed in the Chinese Yuan
Renminbi (RMB). Such consolidated financial statements were translated into
U.S.
Dollars (USD) in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation," with the RMB as the functional
currency. According to the Statement, all assets and liabilities were translated
at the exchange rate on the balance sheet date, stockholder's equity are
translated at the historical rates and statements of operations and other
comprehensive loss items are translated at the weighted average exchange rate
for the year. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive
Income”.
Note
2 - Summary of Significant Accounting Policies
Use
of
Estimates
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Areas that
require estimates and assumptions include valuation of accounts receivable
and
determination of useful lives of property and equipment.
Reclassification
Certain
prior period account descriptions have been reclassified to conform to the
year
ended June 30, 2008 presentation.
F-8
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Principles
of Consolidation
The
consolidated financial statements of Legend Media, Inc. include the accounts
of
Well Chance, its wholly owned subsidiary, and the accounts of its 80% owned
subsidiary, Legend Media Investment Company Limited. In addition, the
consolidation financial statements include Tianjin Yinse Lingdong Advertising
Company, Limited, an 80% controlled variable interest entity of Legend Media
Investment Company Limited, and the following wholly owned subsidiaries of
Legend Media Investment Company Limited: Legend Media Tianjin HK Limited, Legend
Media (Beijing) Consulting Company Limited.
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash in 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
Company maintains reserves for potential credit losses on 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.
Unbilled
Accounts Receivable
At
times
the Company will record receivables, which have not yet been invoiced, from
revenues on advertising contracts. These receivables are recorded in the
accompanying consolidated balance sheet as unbilled accounts receivable until
invoiced.
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; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
|
Computer
equipment
|
|
|
3
years
|
|
|
Office
equipment and furniture
|
|
|
3
years
|
|
|
Leasehold
improvements
|
|
|
1
year
|
|
The
following are the details of the property and equipment:
|
Computer
equipment
|
$
|
5,278
|
||
|
Office
equipment and furniture
|
4,339
|
|||
|
Leasehold
improvements
|
8,573
|
|||
|
$
|
18,190
|
|||
|
Less:
Accumulated depreciation
|
(1,430
|
)
|
||
|
$
|
16,760
|
Depreciation
expense was $758 for the year ended June 30, 2008.
F-9
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Long-Lived
Assets
The
Company applies the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of,” and the accounting and reporting
provisions of APB Opinion No. 30, “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with
SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined
in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of June 30, 2008
there were no significant impairments of its long-lived assets.
Intangible
Assets
Intangible
assets consist of contract rights purchased in the acquisition of Music Radio
Limited on May 30, 2008. See Note 12. Net intangible assets at June 30, 2008
are
as follows:
|
FM
92.5 Contract rights
|
$
|
2,174,428
|
||
|
Exclusivity
agreement
|
6,999,353
|
|||
|
|
||||
|
Less
Accumulated amortization
|
(128,471
|
)
|
||
|
|
||||
|
Intangibles,
net
|
$
|
9,045,310
|
The
FM
92.5 contract rights primarily relate to an exclusive contract acquired in
connection with the acquisition of Music Radio Limited, and the contract is
being amortized over 31 months, which is the contract effective period,
beginning on June 1, 2008, based on the duration of the existing advertising
agreement that expires December 31, 2008 plus the expected two-year renewal
of
the advertising agreement. The contact is with the Tianjin FM 92.5 radio
station. The contract provides 54 minutes per day or 19,710 minutes per year.
The channel is actually Beijing based and through a relay facility airs in
Tianjin. Legend Media’s contract is with the Beijing channel’s exclusive agent,
which has a national exclusive contract with the channel. The exclusive agent
has subcontracted the rights for the Tianjin market to Legend Media. The value
was derived as the net present value of the contract’s EBITDA over the
contract’s expected term from May 30, 2008 through December 31, 2010, using a
discount rate of 10%. Amortization expense on this contract at June 30,
2008 of $69,742 has been included in general and administrative expenses in
the
accompanying consolidated statements of operations and other comprehensive
loss.
|
·
|
The
borrowing of money from any third party or the assumption of any
debt;
|
|
·
|
The
sale to any third party or the acquisition from any third party of
any
assets, including, without limitation, any intellectual
rights;
|
|
·
|
The
imposition of any security interests for the benefit of any third
party
through collateralization of its
assets;
|
|
·
|
The
assignment to any third party of the agreement entered into by it;
and
|
|
·
|
The
sale, transfer and disposition of any license held by the
Company.
|
F-10
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
The
term
of the agreement is 10 years, beginning May 30, 2008. As such, the Company
is
amortizing the contract value over its 10-year life. Amortization
expense on this contract at June 30, 2008 of $57,994 has been included in
general and administrative expenses in the accompanying consolidated statements
of operations and other comprehensive loss. See Note 12.
Amortization
expense for the Company’s intangible assets for the year ended June 30, 2008 was
$127,736.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104. The Company purchases advertising inventory in
the form of airtime, the unit being minutes, from radio stations. The Company
then distributes these minutes under various sales agreements. We
recognize
advertising revenue
over the term of each sales agreement, provided that evidence of an arrangement
exists, the fees are fixed or determinable and collection of the resulting
receivable is reasonably assured. We recognize deferred revenue when cash has
been received on a sales agreement, but the revenue has not yet been earned.
Under these policies, no revenue is recognized unless persuasive evidence of
an
arrangement exists, delivery has occurred, the fee is fixed or determinable,
and
collection is reasonably assured.
Advertising
Costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the
years ended June 30, 2008 and 2007 were not significant and $0,
respectively.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The Company
recognizes in the statements of operations and other comprehensive loss the
grant-date fair value of stock options and other equity-based compensation
issued to employees and non-employees. There were 1,040,000 options outstanding
as of June 30, 2008.
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. When
tax returns are filed, it is highly certain that some positions taken would
be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position
is
recognized in the financial statements in the period during which, based on
all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount
of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in
the
accompanying balance sheet along with any associated interest and penalties
that
would be payable to the taxing authorities upon examination. Interest associated
with unrecognized tax benefits are classified as interest expense and penalties
are classified in selling, general and administrative expenses in the statements
of operations and other comprehensive loss. The adoption of FIN 48 did not
have
a material impact on the Company’s financial statements.
F-11
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Foreign
Currency Transactions and Comprehensive Income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
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 the equity section
of
the balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the RMB. Translation gains
of
$75,236 at June 30, 2008 are classified as an item of other comprehensive income
in the stockholders’ equity section of the consolidated balance sheet. During
the years ended June 30, 2008 and 2007, other comprehensive income in the
consolidated statements of operations and other comprehensive loss included
translation gains of $0.
Basic
and Diluted Earnings Per Share
Earnings
per share is calculated in accordance with the SFAS No. 128 ("SFAS No. 128"),
“Earnings Per Share.” Net earnings per share for all periods presented has been
restated to reflect the adoption of SFAS No. 128. Basic earnings per share
is
based upon the weighted average number of common shares outstanding. Diluted
earnings per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed
by
applying the treasury stock method. Under this method, options and warrants
are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. There were options
to purchase 1,040,000 shares of common stock and warrants to purchase 880,294
shares of common stock outstanding as of June 30, 2008. For the year
ended June 30, 2008, the Company incurred a net loss in the accompanying
statements of operations and other comprehensive loss of $2,013,826;
therefore the effect of options and warrants outstanding is anti-dilutive during
the year ended June 30, 2008.
The
following is a reconciliation of the number of shares (denominator) used in
the
basic and diluted earnings per share computations for the years ended June
30,
2008 and 2007:
|
2008
|
2007
|
||||||||||||
|
Weighted
Average
Shares
Outstanding
|
Per Share
Amount
|
Weighted
Average
Shares
Outstanding
|
Per Share
Amount
|
||||||||||
|
Basic
earnings per share
|
4,376,911
|
$
|
(0.
46
|
)
|
1,200,000
|
$
|
-
|
||||||
|
Effect
of dilutive stock options and warrants
|
-
|
-
|
-
|
-
|
|||||||||
|
Diluted
earnings per share
|
4,376,911
|
$
|
(0.46
|
)
|
1,200,000
|
$
|
-
|
||||||
Statement of Cash Flows
In
accordance with Statement of Financial Accounting Standards No. 95, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
Minority
Interest in Subsidiaries
On
May
30, 2008, the Company purchased 80% of the common stock of Legend Media Tianjin
Investment Company Limited (the "Target"), a British Virgin Islands company
and
a wholly-owned subsidiary of Music Radio Limited, a British Virgin Islands
company. See Note 12. As a result of this purchase, the Company recognized
initial minority interest on its consolidated balance sheet in the amount of
$0.
The income (loss) attributed to minority interest has been separately designated
in the accompanying statements of operations and other comprehensive loss.
The Company recognized $0 in income attributed to minority interest in the
accompanying statements of operations and other comprehensive loss for the
year ended June 30, 2008.
F-12
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Minority
Interest in Variable Interest Entity
In
January 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 41 ("FIN 46"). In
December 2003, the FASB modified FIN 46 (“FIN 46R”) to make certain technical
corrections and address certain implementation issues that had arisen. FIN
46
provides a new framework for identifying variable interest entities (VIEs)
and
determining when a company should include the assets, liabilities,
non-controlling interests and results of activities of a VIE in its consolidated
financial statements.
FIN
46R
states that in general, a VIE is a corporation, partnership, limited liability
corporation, trust or any other legal structure used to conduct activities
or
hold assets that either (1) has an insufficient amount of equity to carry out
its principal activities without additional subordinated financial support,
(2)
has a group of equity owners that are unable to make significant decisions
about
its activities, or (3) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its
operations.
On
May
30, 2008, the Company purchased 80% of the common stock of the Target. See
Note
12. Due to certain restrictions imposed upon Chinese advertising companies,
direct investment and ownership of media and advertising companies in the
People’s Republic of China (“PRC”) is prohibited. Therefore, the Company
acquired control of Tianjin Yinse Lingdong Advertising Company, Ltd. through
its
purchase of the above mentioned Target.
The
principal regulations governing foreign ownership in the advertising industry
in
China include:
| · |
The
Catalogue for Guiding Foreign Investment in Industry (2004);
and
|
|
·
|
The
Administrative Regulations on Foreign-invested Advertising Enterprises
(2004).
|
These
regulations set the guidelines by which foreign entities can directly invest
in
the advertising industry. The regulations require foreign entities that
directly invest in the China advertising industry to have at least two years
of
direct operations in the advertising industry outside of China. Further,
since December 10, 2005, 100% ownership in Chinese advertising companies is
allowed, but the foreign company must have at least 3 years of direct operations
in the advertising industry outside of China.
Since
the
Company has not been involved in advertising outside of China for the required
number of years, the Company’s domestic PRC operating subsidiaries, which are
considered foreign invested, are currently ineligible to apply for the required
advertising services licenses in China. The Company’s PRC operating
affiliates hold the requisite licenses to provide advertising services in China
and they are owned or controlled by PRC citizens designated by the
Company. The Company’s radio advertising business operates in China though
contractual arrangements with consolidated entities in China. The Company
and its newly acquired PRC subsidiaries have entered into a series of
contractual arrangements with Tianjin Yinse Lingdong Advertising Company, Ltd.
and their respective shareholders under which:
|
·
|
the
Company is able to exert significant control over significant decisions
about the activities of Tianjin Yinse Lingdong Advertising Company,
Ltd.,
|
|
·
|
a
substantial portion of the economic benefits and risks of the operations
of Tianjin Yinse Lingdong Advertising Company, Ltd. have been transferred
to the Company through a revenue assignment agreement, and
|
|
·
|
The
equity owner of Tianjin Yinse Lingdong Advertising Company, Ltd.
does not
have the obligation to absorb the losses of Tianjin Yinse Lingdong
Advertising Company, Ltd.
|
F-13
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
As
the
Company is able to exert significant control over the PRC operating affiliates
and a substantial portion of the economic benefits and risks have been
transferred to the Company, it has determined that the advertising entity,
Tianjin Yinse Lingdong Advertising Company, Ltd., meets the definition of a
VIE.
Further, the Company is considered to be the primary beneficiary of the risks
and benefit of equity ownership of Tianjin Yinse Lingdong Advertising Company,
Ltd. and thus have consolidated it Tianjin Yinse Lingdong Advertising Company,
Ltd.
in
the
Company’s accompanying financial statements as of June 30, 2008. As a result of
this purchase, the Company has recognized initial minority interest on its
consolidated balance sheet in the amount of $15,524. The income (loss)
attributed to minority interest has been separately designated in the
accompanying statements of operations and other comprehensive loss. For the
year ended June 30, 2008, the Company has recognized loss attributed to VIE
of
$9,437 in its consolidated statements of operations and other comprehensive
loss. See Note 9.
Fair
Value of Financial Instruments
On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.
SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements
for
fair value measures. The carrying amounts reported in the balance sheet for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization
and
their current market rate of interest. The three levels are defined as
follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted)
for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant
to
the fair value measurement.
|
As
of
June 30, 2008, the Company did not identify any assets and liabilities that
are
required to be presented on the balance sheet at fair value.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after December 15, 2006. The adoption of this statement had no
effect on the Company‘s reported financial position or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities“. This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of
operations.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. Management is currently evaluating the effect of this
pronouncement on financial statements.
F-14
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with Ltd. exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and
the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on
current
conditions, the Company does not expect the adoption of SFAS 160 to have a
significant impact on its results of operations or financial
position.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an
amendment of FASB
Statement No. 133.”
This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133
and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In
April
2008, the FASB issued 142-3 “Determination of the useful life of Intangible
Assets”, which amends the factors a company should consider when developing
renewal assumptions used to determine the useful life of an intangible asset
under SFAS142. This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those
fiscal years. SFAS 142 requires companies to consider whether renewal can be
completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3 replaces the previous
useful life criteria with a new requirement—that an entity consider its own
historical experience in renewing similar arrangements. If historical experience
does not exist then the Company would consider market participant assumptions
regarding renewal including 1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific factors included
in
SFAS 142. The Company is currently evaluating the impact that adopting SFAS
No.142-3 will have on its financial statements.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). This Statement will not have an impact
on the Company’s financial statements.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB
Statement No. 60.”
The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does
not
apply to financial guarantee contracts issued by enterprises excluded from
the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB
Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.
F-15
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
In
June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
Management is currently evaluating the effect of this pronouncement on the
Company’s financial statements.
Note
3 - Going Concern
The
accompanying combined financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
combined financial statements for the year ended June 30, 2008, the Company
has
incurred a loss of $2,013,826 and has a working capital deficit of $550,846.
These factors among others may indicate that the Company will 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 Company's
ability to meet its financial requirements, raise additional capital, and the
success of its future operations. Management's plans include further marketing
of its multi-media marketing services and the expansion of its sale consumer
advertising on Chinese radio stations. 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.
Note
4 – Prepaid Expenses
The
Company had a balance of $100,951 in prepaid expenses in the accompanying
balance sheet at June 30, 2008, which primarily relate to prepayments for legal
and consulting services.
Note
5 – Transaction Deposit
In
connection with the acquisition of News Radio Limited on July 21, 2008 (see
Note
16), the Company deposited $500,000 on June 19, 2008, and the amount has been
classified as a transaction deposit in the accompanying consolidated balance
sheet at June 30, 2008.
Note
6 – Accrued Liabilities
Accrued
liabilities in the accompanying consolidated balance sheet at June 30, 2008
consist of the following:
|
Salaries
|
$
|
120,833
|
||
|
Revenue
tax and levies
|
11,894
|
|||
|
Legal
fees
|
161,303
|
|||
|
Commission
payable
|
41,669
|
|||
|
Other
|
21,092
|
|||
|
$
|
356,791
|
RMK
Emerging Growth Opportunity Fund LP Note Agreement
On
January 31, 2008, in connection with the share exchange agreement discussed
under Note 1, Well Chance entered into a loan agreement by and between Well
Chance and RMK Emerging Growth Opportunity Fund LP (“RMK”) pursuant to which
Well Chance had the right to borrow $375,733 from RMK as a short term bridge
loan. The advances on the loan occurred in February 2008, and are due one year
from the date of the initial advance along with all applicable loan fees.
Notwithstanding the foregoing, in the event of the issuance and sale of equity
or equity-linked securities by Well Chance or the Company to investors (other
than investors who are stockholders of Well Chance at the time of the loan),
which issuance and sale results in gross proceeds to Well Chance of at least
$3,000,000 prior to the maturity date, then full repayment of the loan amount,
the loan fee and any additional loan fee owed to RMK as of the closing date
of
such financing (as calculated above) shall be payable by the Company to RMK
no
later than five business days after the closing date of the equity financing.
On
June 27, 2008, the Company raised $3,000,000 through an unregistered sale of
its
Class A Preferred Stock (See Note 11). As of September 30, 2008, the note had
not been repaid
and the
full $375,733 principle balance and $161,899 of accrued interest is outstanding
on the RMK note. The
Company has classified the loan as short-term in the accompanying balance sheet.
F-16
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
In
addition, pursuant to the loan agreement, Well Chance executed and delivered
to
RMK a security agreement to secure the repayment of the loan by granting RMK
a
continuing security interest in all presently existing and subsequently acquired
assets and property of Well Chance of whatever nature and wherever located
(except for any such assets for which, by the terms of any agreement in
existence on the date of the loan agreement, does not permit the granting of
a
security interest, in which case Well Chance shall grant to RMK a security
interest in all proceeds received by Well Chance generated by such assets).
In
connection with this loan the Company issued warrants to purchase 150,294 shares
of common stock with an exercise price of $2.50 per share. See Note
10.
The
due
date on this loan is January 30, 2009. Interest expense of $134,808 has been
included in the accompanying statements of operations and other
comprehensive loss for the year ended June 30, 2008. Of the $375,733 original
loan amount, the full $375,733 is outstanding and is classified as related
party
note payable in the amount of $307,294, net of debt discount of $68,439 in
the
accompanying June 30, 2008 consolidated balance sheet. RMK is a fund controlled
by a shareholder who is also the CEO of ARC Investment Partners, a 12.8% owner
of the Company. See Note 13.
Kantor
and Blueday Loan Agreements
On
March
30, 2008, the Company entered into a loan agreement (the "Kantor Loan") with
Jonathan Kantor in the principal amount of $100,000. In connection with the
Kantor Loan, the Company issued warrants to purchase 40,000 shares of common
stock with an exercise price of $2.50 per share. See Note 10.
Also
on
March 30, 2008, the Company entered into a loan agreement (the "Blueday Loan”)
with Blueday Limited ("Blueday"), in the principal amount of $250,000. In
connection with the Blueday Loan, the Company issued warrants to purchase 50,000
shares of common stock with an exercise price of $2.50 per share. See Note
10.
Pursuant
to the terms of the Kantor Loan and Blueday Loan, the Company must repay the
loans plus applicable loan fees (described below) by June 30, 2008. If the
Company repays the outstanding principal amount of each of the loans by April
1,
2008, then the loan fees will be $50,000 for the Kantor Loan and $125,000
for the Blueday Loan. Any partial repayments delivered to Mr. Kantor or Blueday
after April 1, 2008 will be applied in accordance with a formula set forth
in
the applicable loan agreement by dividing such partial repayments between the
outstanding principal amount, the outstanding loan fee, and the applicable
additional loan fee due on the date of repayment. In the event that the Company
does not pay a loan in full, including the outstanding loan fee, on or before
April 1, 2008, then, in addition to the outstanding principal amount and loan
fee due, the Company must also pay to Mr. Kantor and Blueday, as applicable,
an
additional loan fee based on a percentage of the outstanding principal amount
of
the loan at the time repayment is made. If the Company does not repay a
loan by April 1, 2008 but repays such loan in full, including the outstanding
loan fee, on April 2, 2008 or the 44-day period thereafter, the applicable
additional loan fee will be 10% of the outstanding principal amount of the
loan at the time repayment is made. The additional loan fee percentage
amount is an additional 10% for each 45-day period subsequent to the initial
45-day period and will continue to accrue until the Company pays such loan
in
full. In the event that the Company does not repay a loan in full,
including the outstanding loan fee and the applicable additional loan fee,
on or
before June 30, 2008, then the additional loan fee will continue to increase,
and Mr. Kantor or Blueday will have the right to terminate the applicable loan
agreement and declare any amounts owed on such loan due and payable. The Company
has classified the Kantor Loan and the Blueday Loan as short-term in the
accompanying balance sheet.
F-17
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
On
June
30, 2008, waivers of default were executed on the Kantor and Blueday loans,
extending the term of the loans to August 31, 2008. As of September 30, 2008,
the Company owed Kantor $63,347, representing $33,000 of principal and $30,347
of interest and additional fees. On July 23, 2008 and September 3, 2008 the
Company repaid $150,000 and $80,000, respectively, to Blueday Limited which
represents a repayment of $160,000 principle balance, plus $70,000 of interest
expense. As of September 30, 2008, the Company owed Blueday Limited $99,858,
representing $23,000 of principal and $76,858 of interest and additional
expenses.
Newport
Loan Agreement
On
April
21, 2008, the Company entered into a loan agreement with Newport Capital Asset
Management Group, a California corporation ("Newport"), pursuant to which
Newport loaned the Company $200,000. Pursuant to the terms of the loan
agreement, the Company must repay the loan amount plus the loan fee and any
additional loan fee (each as described below) on or before 180 days following
the loan date. If the Company repays the loan amount on or before 120 days
following the loan date, then the loan will be subject to a loan fee equal
to
$60,000. In the event the loan amount and the loan fee are not repaid in full
on
or before the 120th day after the loan date, then, in addition to the loan
amount and the loan fee, the total amount due and payable to Newport under
the
loan agreement shall also include an additional loan fee that shall be a
percentage of the remaining outstanding loan amount at the time repayment is
made. If any repayment is made on the 121st calendar day after the loan date
and
for the 29-day period thereafter, the additional loan fee shall be 10% of the
remaining outstanding loan amount at the time repayment is made. In addition,
the additional loan fee shall increase to 20% for the 30-day period
subsequent to the initial 30-day period and shall continue to increase by 2%
increments for each 30-day period thereafter until the Company makes full
repayment of the remaining outstanding loan amount, the loan fee and any
additional loan fee due to Newport. Any partial repayment made by the Company
prior to the maturity date will be applied in accordance with a formula set
forth in the loan agreement by dividing such partial repayments between the
outstanding loan amount, the loan fee and any additional loan fee due on the
date of repayment. In the event the Company does not repay the loan in full,
including the loan amount, the loan fee and any additional loan fee, on or
before the maturity date, then (a) the Company will be in default of its
obligations under the loan agreement, (b) the additional loan fee will continue
to increase by 2% increments for each 30-day period until the loan is
repaid in full and (c) Newport will have the right to terminate the loan
agreement and declare all amounts owed on the loan immediately due and payable.
Notwithstanding the foregoing, in the event of the issuance and sale of equity
or equity-linked securities by Well Chance or the Company to investors (other
than investors who are stockholders of Well Chance at the time of the loan),
which issuance and sale results in gross proceeds to Well Chance of at least
$3,000,000 prior to the maturity date, then full repayment of the loan amount,
the loan fee and any additional loan fee owed to Newport as of the closing
date
of such financing (as calculated above) shall be payable by the Company to
Newport no later than five business days after the closing date of such
financing. On September 26, 2008,
the
Company repaid the $200,000 principal
of the
note and $60,000 of loan
premium.
In
addition, pursuant to the terms of the loan agreement, all (but not less than
all) of the outstanding loan amount, the loan fee and any additional loan fee
may be converted at any time by Newport into shares of the Company's common
stock based upon the following: (a) in the event the conversion takes place
within 120 days of the loan date, the conversion price per share of common
stock
shall be $4.50; (b) in the event the conversion takes place between 121 and
150
days after the loan date, the conversion price per share of common stock shall
be $5.50; and (c) in the event the conversion takes place 150 or more days
after
the loan date, the conversion price per share of common stock shall be $6.50.
On
the
loan date, and pursuant to the terms of the loan agreement, the Company issued
to Newport a warrant to purchase 40,000 shares of the Company's common stock
at
an exercise price equal to $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. See Note 10.
On
September 26, 2008, the Company repaid $260,000 to Newport Capital which
represents a repayment of $200,000 principle balance, plus $60,000 of interest
expense. As of September 30, 2008, the Company owed Newport Capital $40,000,
representing $0 of principal and $40,000 of interest and additional expenses.
Following
is a summary of notes payable at June 30, 2008:
F-18
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
|
Original
Note
Amount
|
Balance at June 30,
2008
|
Due Date
|
||||||||
|
Kantor
|
$
|
100,000
|
$
|
33,000
|
August 31, 2008
|
|||||
|
Blueday
|
250,000
|
183,000
|
August 31, 2008
|
|||||||
|
Newport
Capital
|
200,000
|
200,000
|
August 19, 2008
|
|||||||
|
Gross
notes payable
|
$
|
550,000
|
$
|
416,000
|
||||||
|
Debt
discounts
|
(100,364
|
)
|
||||||||
|
Notes
payable, net
|
$
|
315,636
|
||||||||
Interest
expense, including amortization of debt discounts, was $322,619 for the year
ended June 30, 2008 in the accompanying statements of operations and other
comprehensive loss.
Note
8 – Other Payables
Following
is a summary of other payables at June 30, 2008:
|
Advertising
minutes contract cost
|
$
|
82,300
|
||
|
Sales
and marketing contract cost, fixed portion
|
41,288
|
|||
|
Sales
and marketing contract cost, variable portion
|
16,492
|
|||
|
Payable
for acquisition of subsidiary (See Note 12)
|
2,000,000
|
|||
|
$
|
2,140,080
|
Other
payables include advertising minutes contract costs of 208,833 RMB per month,
as
well as a fixed portion of 105,000 RMB per month and variable portion of 15%
of
revenues earned and collected per month. These costs have been incurred in
connection with the acquisition of Legend Media Investment Company Limited.
See
Note 12. The costs have arisen from a number of contracts whose revenues have
been assigned to the Company after the acquisition. The Company is responsible
for paying the costs of the advertising minutes on these contracts, as well
as
their sales and marketing costs. Other payables at June 30, 2008 also include
$2,000,000 payable to escrow as partial consideration for the May 30, 2008
acquisition of Legend Media Tianjin Investment Company Limited. See Note
12.
Note
9 – Variable Interest Entity
The
following is the condensed balance sheet of Tianjin Yinse Lingdong Advertising
Company, Ltd., the variable interest entity consolidated on the Company’s
balance sheet as of the May 30, 2008 date of acquisition:
|
|
Book value
|
Fair value
|
|||||
|
Assets:
|
|||||||
|
Cash
|
$
|
35,503
|
$
|
35,503
|
|||
|
Accounts
receivable
|
61,743
|
61,743
|
|||||
|
Unbilled
receivables
|
90,072
|
90,072
|
|||||
|
Vendor
deposits
|
12,746
|
12,746
|
|||||
|
Property
and Equipment, net
|
15,700
|
15,700
|
|||||
|
Non-compete
agreement
|
-
|
6,942,006
|
|||||
|
Contract
rights
|
-
|
2,156,613
|
|||||
|
Total
Assets
|
$
|
215,764
|
$
|
9,314,383
|
|||
|
Liabilities:
|
|||||||
|
Accounts
payable
|
$
|
4,828
|
$
|
4,828
|
|||
|
Other
payables
|
87,937
|
87,937
|
|||||
|
Unearned
revenue
|
12,596
|
12,596
|
|||||
|
Accrued
expenses
|
32,784
|
32,784
|
|||||
|
Total
Liabilities
|
138,145
|
138,145
|
|||||
|
Minority
interest
|
15,524
|
15,524
|
|||||
|
Equity
|
62,095
|
9,160,714
|
|||||
|
Total
Liabilities and Equity
|
$
|
215,764
|
$
|
9,314,383
|
|||
F-19
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
The
intangible assets acquired have been marked up to fair value, as required under
FIN 46R. The Company has consolidated all balances in the accompanying June
30,
2008 consolidated balance sheet. The operations of the VIE for the period from
May 30, 2008 (date of acquisition) through June 30, 2008 have been included
in
the Company’s consolidated statements of operations and other comprehensive
loss. See Note 12 for details of the acquisition.
Note
10 – Stock Options and Warrants
Stock
Options
The
Company entered into an Employment Agreement with Mr. Jeffrey Dash on January
31, 2008. Effective January 31, 2008, Mr. Dash was appointed the President
and
Chief Executive Officer of the Company. Per the Agreement, Mr. Dash was granted
options to purchase 400,000 shares of the Company’s common stock at an exercise
price of $2.50 per share. The options vest over 33 months accruing every three
months from the first day of employment, with 25% of the options vesting after
the first three months and the remaining 75% of the options vesting equally
every three months at a rate of 30,000 shares per month. The fair value of
the
400,000 options was $120. The fair value was computed using the Black-Scholes
model under the following assumptions: (1) expected life of 3 years; (2)
volatility of 100%, (3) risk free interest of 4.5% and (4) dividend rate of
0%.
On
May
19, 2008, the Company entered into an employment agreement with Mr. William
Lee.
Effective June 2, 2008, Mr. Lee was appointed the Chief Operating Officer of
the
Company. Per the agreement, Mr. Lee was granted options to purchase 400,000
shares of the Company’s common stock at an exercise price of $3.25 per share.
The options vest over 33 months accruing every three months from the first
day
of employment, with 12.5% of the options vesting after the first first three
months and the remaining 75% of the options vesting equally every three months
at a rate of 30,000 shares per three
months. The
fair
value of the 400,000 options was $783,280. The fair value was computed using
the
Black-Scholes model under the following assumptions: (1) expected life of 3
years; (2) volatility of 92%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%.
On
March
28, 2008, the Company granted to two of its directors options to purchase 80,000
shares of the Company’s common stock with an exercise price of $2.50 per share.
The options vest on a quarterly basis (in arrears) over a 24 month period
commencing on the date of each director's appointment to the board. The fair
value of the 160,000 options was $355,088. The fair value was computed using
the
Black-Scholes model under the following assumptions: (1) expected life of 2
years; (2) volatility of 90%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%.
On
May
19, 2008, the Company granted options to another director to purchase 80,000
shares of the Company’s common stock with an exercise price of $3.70 per share.
The options vest on a quarterly basis (in arrears) over a 24 month period
commencing on the date of each director's appointment to the board. The fair
value of the 80,000 options was $155,328. The fair value was computed using
the
Black-Scholes model under the following assumptions: (1) expected life of 2
years; (2) volatility of 96%, (3) risk free interest of 4.5% and (4) dividend
rate of 0%.
Following
is a summary of the stock option activity:
|
Number
of
options
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
||||||||
|
Outstanding
as of July 1, 2007
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Granted
|
1,040,000
|
2.88
|
-
|
|||||||
|
Forfeited
|
-
|
-
|
-
|
|||||||
|
Exercised
|
-
|
-
|
-
|
|||||||
|
Outstanding
as of June 30, 2008
|
1,040,000
|
$
|
2.88
|
$
|
-
|
|||||
|
Exercisable
options:
|
||||||||||
|
June
30, 2007
|
-
|
-
|
-
|
|||||||
|
June
30, 2008
|
194,224
|
$
|
2.69
|
-
|
||||||
F-20
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Warrants
Under
the
loan agreement with RMK mentioned in Note 7, at the closing of the share
exchange agreement, the Company issued to RMK a warrant to purchase 150,294
shares of the Company’s common stock. The warrant is immediately exercisable
upon issuance and is exercisable until the third anniversary of the issuance
date of the warrant. The warrant exercise price is $2.50 per share. The fair
value of the warrants was $108,261 and was determined using the Black-Scholes
option pricing model and the following assumptions: term
of three years, a risk free interest rate of 4.5%, a dividend yield of
0% and volatility of 90%. Of the $375,733 proceeds from the loan, the fair
value of the warrants is recorded as debt discounts and will be amortized over
the term of the loan.
On
March
30, 2008, and pursuant to the terms of the Kantor Loan and Blueday Loan
described in Note 7, the Company issued to each of Mr. Kantor and Blueday a
warrant to purchase 40,000 and 50,000 shares of the Company's common stock,
respectively, at an exercise price equal to $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 fair value of the
warrants issued in connection with the Kantor Loan was $28,082 and was
determined using the Black-Scholes option pricing model and the following
assumptions: term of three years, a risk free interest rate
of 4.5%, a dividend yield of 0% and volatility of 97%. Of the $100,000
proceeds from the loan, the fair value of the warrants is recorded as debt
discounts and will be amortized over the term of the loan. The fair value of
the
warrants issued in connection with the Blueday Loan was $40,837 and was
determined using the Black-Scholes option pricing model and the following
assumptions: term of three years, a risk free interest rate
of 4.5%, a dividend yield of 0% and volatility of 97%. Of the $250,000
proceeds from the note, the fair value of the warrants is recorded as debt
discounts and will be amortized over the term of the loan.
On
April
21, 2008, and pursuant to the terms of the loan agreement described in Note
7,
the Company issued to Newport a warrant to purchase 40,000 shares of the
Company's common stock at an exercise price equal to $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 fair value of the warrant was $55,737 and
was determined using the Black-Scholes option pricing model and the following
assumptions: term of four months, a risk free interest rate
of 0.9%, a dividend yield of 0% and volatility of 96%. Of the $200,000
proceeds from the loan, the fair value of the warrants is recorded as debt
discounts and will be amortized over the term of the loan. 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 was recorded as
a
discount to additional paid in capital in accordance with Emerging Issues Task
Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments.” The intrinsic value of the beneficial conversion feature has been
recorded as a preferred stock dividend at the date of issuance. The Company
recognized $554,932 of preferred dividends related to the beneficial conversion
feature. The fair value of the beneficial conversion feature at June 30, 2008
was $44,626 and has been classified in additional paid-in capital in the June
30, 2008 consolidated balance sheet.
On
June
30, 2008, the Company issued warrants to purchase 600,000 shares of the
Company's common stock, par value $0.001 per share, to Maoming China Fund
("Maoming") as described in Note 11. The Warrants are immediately exercisable
at
an exercise price of $2.50 per share until June 30, 2011 and are exercisable
on
a cashless basis at any time after July 1, 2009 and until the expiration date
if
the Common Stock underlying the Warrants has not been registered with the SEC
by
such date. The fair value of the 600,000 warrants issued with the Series A
Convertible Preferred Stock was $554,932. The fair value was computed using
the
Black-Scholes model under the following assumptions: (1) expected life of 3
years; (2) volatility of 69%, (3) risk free interest of 2.9% and (4) dividend
rate of $0%. In addition, since this convertible preferred stock is convertible
into shares of common stock at a one to one ratio an embedded beneficial
conversion feature was recorded as a discount to additional paid in capital
in
accordance with Emerging Issues Task Force No. 00-27, “Application of Issue No.
98-5 to Certain Convertible Instruments.” The intrinsic value of the beneficial
conversion feature was $554,932. The beneficial conversion feature is considered
a deemed dividend, but the Company has an accumulated deficit; therefore, the
entry is not recorded as the accounting entry would be both a debit and a credit
to additional paid in capital.
F-21
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Following
is a summary of the warrant activity:
|
Outstanding
as of July 1, 2007
|
-
|
|||
|
Granted
|
880,294
|
|||
|
Forfeited
|
-
|
|||
|
Exercised
|
-
|
|||
|
Outstanding
as of June 30, 2008
|
880,294
|
Common
Shares Issued in Connection with Acquisition of Music Radio
Limited
On
May
30, 2008, the Company closed a transaction pursuant to which Well Chance
Investments Limited, its wholly-owned subsidiary and a British Virgin Islands
company (the "Purchaser"), purchased (the "Purchase") 80% of the common stock
of
Legend Media Tianjin Investment Company Limited (the "Target"), a British Virgin
Islands company and a wholly-owned subsidiary of Music Radio Limited, a British
Virgin Islands company (the "Seller"). The transaction occurred pursuant to
the
terms of a Share Purchase Agreement (the "Purchase Agreement") that the Company
entered into on May 8, 2008 with the Purchaser, the Seller and all of the
shareholders of the Seller. At the closing of the Purchase, the Purchaser
delivered shares of the Company's common stock, par value $0.001 per share
(the
"Common Stock"), with an aggregate value of $7,160,714 based on the weighted
average trading price of the Common Stock for the 90 trading days immediately
before May 8, 2008 (1,935,328 shares) (the "Escrowed Shares") to an escrow
agent
(the "Escrow Agent") mutually designated by the Purchaser and the Seller and
subject to an escrow agreement entered into by the Purchaser, the Seller and
the
Escrow Agent. See Note 12.
Common
Stock Issued for Services
In
June
2008, the Company issued 75,000 shares of common stock to RedChip Companies
for
providing investor relation services to the Company during the year ended June
30, 2008.
In
June
2008, the Company issued 25,000 shares of common stock to Jack Chen for
professional services provided to the Company during the year ended June 30,
2008.
The
Company valued the shares at $2.49 per share, based on the June 30, 2008 Company
per share price. The amount of $249,000 has been included in the accompanying
statement of stockholders’ equity in addition to the 200,000 shares issued in
connection with the closing of the reverse merger (See Note 1) as shares issued
for services.
Maoming
China Fund Securities Purchase Agreement
On
June
27, 2008, the Company sold and issued 1,250,000 shares of the Company's Series
A
Convertible Preferred Stock, par value $0.001 per share, and warrants to
purchase 600,000 shares of the Company's common stock, par value $0.001 per
share, to Maoming China Fund (“Maoming”) for gross proceeds to the Company of
$3,000,000 in cash. The sale of the Preferred Stock and Warrants occurred
pursuant to the terms of a Securities Purchase Agreement dated March 31, 2008,
between the Company and Maoming. The Offering closed concurrently with the
Company’s previously announced acquisition of its first media advertising
business operating in the People's Republic of China , Music Radio Limited.
In
addition, pursuant to the terms of the Purchase Agreement, 15 days following
the
Company's second acquisition of a media advertising business operating in the
People's Republic of China, the Company will issue and sell to Maoming and
Maoming will purchase from the Company an additional 833,333 shares of Preferred
Stock and 400,000 Warrants for gross proceeds to the Company of $2,000,000.
Pursuant to the terms of the securities purchase agreement, each share
of preferred stock will initially be convertible into one share of common
stock at the option of the holder at $2.40 per share.
F-22
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
The
Warrants are immediately exercisable at an exercise price of $2.50 per share
until June 30, 2011 and are exercisable on a cashless basis at any time after
July 1, 2009 and until the expiration date if the Common Stock underlying the
Warrants has not been registered with the SEC by such date. See Note
10.
Note
12 – Acquisition
Music
Radio Limited
On
May
30, 2008, the Company closed a transaction pursuant to which Well Chance
Investments Limited, its wholly-owned subsidiary and a British Virgin Islands
company (the "Purchaser"), purchased (the "Purchase") 80% of the common stock
of
Legend Media Tianjin Investment Company Limited (the "Target"), a British Virgin
Islands company and a wholly-owned subsidiary of Music Radio Limited, a British
Virgin Islands company (the "Seller"). The transaction occurred pursuant to
the
terms of a Share Purchase Agreement (the "Purchase Agreement") that the Company
entered into on May 8, 2008 with the Purchaser, the Seller and all of the
shareholders of the Seller (the "Shareholders"). As a result of this
acquisition, the Company obtained control of the following subsidiaries of
Legend Media Tianjin Investment Company Limited:
|
·
|
Legend
Media Tianjin HK Limited
(100%-owned)
|
|
·
|
Legend
Media (Beijing) Consulting Company, Ltd.
(100%-owned)
|
|
·
|
Tianjin
Yinse Lingdong Advertising Company, Ltd. (80%-controlled as
VIE)
|
As
consideration for the Purchase, the Purchaser delivered shares of the Company's
common stock and shall deliver cash to an escrow agent (the "Escrow Agent")
mutually designated by the Purchaser and the Seller, as follows: upon closing
of
the Purchase, shares of the Company's common stock with an aggregate value
of
U.S.$7,160,714 based on the weighted average trading price of the Company's
common stock for the 90 trading days immediately before May 8, 2008 (1,935,328
shares) (the “Escrowed Shares"). Further, in accordance with the agreement,
within 28 days after closing of the Purchase, the Purchaser was to deliver
cash
in the amount of U.S.$2,000,000 (the "Escrowed Cash"). As of August 20, 2008,
the US $2,000,000 was not delivered in accordance with the terms of the original
purchase agreement. On August 20, 2008, the Purchaser and Seller amended the
payment terms for the US $2,000,000 Escrowed Cash. The amendment states that
the
Purchaser shall (a) pay the Seller US $500,000 by wire transfer to an account
designated by the Seller within 3 business days after August 20, 2008, (b)
deposit US $500,000 into the Escrow Account maintained by the Escrow Agent
within 3 business days after August 20, 2008, and (c) deposit US $1,000,000
into
the Escrow Account maintained by the Escrow Agent on or prior to November 30,
2008. On August 20, 2008, the Company delivered the US $500,000 to the Seller.
As of September 30, 2008, the Company had not delivered the $500,000 to escrow.
The
Escrowed Shares and the Escrowed Cash will be held in escrow pursuant to the
terms of an escrow agreement to be entered into among the Purchaser, the Seller
and the Escrow Agent prior to the closing of the Purchase. The Escrowed Shares
and the Escrowed Cash will be released to the Seller or returned to the
Purchaser depending on the occurrence of certain events following the closing
as
described below.
All
of
the Escrowed Cash and Escrowed Shares with an aggregate value of U.S.$2,160,714
will be released to the Seller if, on or before December 31, 2008: (a) an entity
wholly-owned by the Shareholders (the "Advertising Entity") enters into an
agreement, in form and content acceptable to the Purchaser (the "Advertising
Agreement"), pursuant to which (1) the Advertising Entity is granted the
exclusive right to market and sell all broadcast advertising for a radio station
located in Tianjin, China, (2) the term of such exclusivity is at least two
years and (3) any fees payable for any subsequent 12-month period by the
Advertising Entity under the Advertising Agreement shall not be increased by
more than 20% of the fees payable in the first 12-month period; and (b) the
Advertising Entity and/or the Shareholders have entered into certain contracts
(the "Control Agreements") designated by the Purchaser, in form and content
acceptable to the Purchaser, that contain one or more of the following
provisions: (i) an entity indirectly owned by the Target (the "Target
Subsidiary") is granted the exclusive right to provide technical consulting
and
other services to the Advertising Entity; (ii) the Target Subsidiary is granted
the right to vote the shares of the Advertising Entity held by the Shareholders;
(iii) the Shareholders agree to transfer their shares of the Advertising Entity
to the Target Subsidiary or its designee upon the occurrence of certain events
of breach or default; (iv) the Target Subsidiary is granted an option to
purchase the shares of the Advertising Entity held by the Shareholders; (v)
the
Target Subsidiary is granted powers-of-attorney to act on behalf of the
Shareholders with respect to the Advertising Entity in connection with any
of
the matters described in clauses (i) through (iv) above; and (vi) the
Shareholders agree to certain non-disclosure and non-competition obligations.
If
the Advertising Agreement and the Control Agreements are not executed on or
before December 31, 2008, all of the Escrowed Cash and all of the Escrowed
Shares will be returned to the Purchaser.
F-23
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
If
all of
the Escrowed Cash and a portion of the Escrowed Shares have been released to
the
Seller as described above, then the balance of the Escrowed Shares (U.S.
$5,000,000) will be released within 90 days following December 31, 2008 as
follows based upon the audited gross revenues of the Advertising Entity for
the
period from June 1, 2008 through December 31, 2008 (the "2008 Revenues"): (a)
if
the 2008 Revenues equal 90% or more of RMB 8.75 million, then all of the
remaining Escrowed Shares will be released to the Seller; (b) if the 2008
Revenues equal less than 90% but more than 60% of RMB 8.75 million, then the
Seller is entitled to receive a portion of the Escrowed Shares based upon the
amount of the 2008 Revenues determined by a formula set forth in the Purchase
Agreement, and the Purchaser is entitled to receive the balance; and (c) if
the
2008 Revenues are less than or equal to 60% of RMB 8.75 million, then the
remaining Escrowed Shares will be returned to the Purchaser.
After
the
closing of the Purchase, the Company became the indirect beneficiary of several
agreements entered into by the Company's affiliates.
In
connection with the closing of the Purchase, Legend Media (Beijing) Consulting
Co., Ltd., a wholly-owned foreign enterprise registered in China which is
wholly-owned by the Target through its Hong Kong subsidiary, Legend Media
Tianjin Investment Company HK Limited (the "Consulting Entity"), entered into
an
Exclusive Technical, Operational, Business Consulting and Services Agreement
(the "Service Agreement") with the Advertising Entity and the Shareholders
pursuant to which the Consulting Entity became the exclusive provider of
technical, operational, business consulting and other services to the
Advertising Entity in exchange for a service fee and bonus as described in
more
detail in the Service Agreement. The term of the 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 Service Agreement. The
Advertising Entity agreed to several important covenants in the Service
Agreement, including (but not limited to), agreeing not to appoint any member
of
the Advertising Entity's senior management without the Consulting Entity's
consent and to grant the Consulting Entity certain informational rights. In
addition, in the Service Agreement, one of the Shareholders: (a) pledged his
80%
equity interest in the Advertising Entity to the Target as a guarantee of the
Advertising Entity's fulfillment of its obligations under the Service Agreement;
(b) granted to the Target or its designee an option to purchase any or all
of
his 80% equity interest in the Advertising Entity at nominal value; and (c)
agreed not to dispose of or encumber his 80% equity interest in the Advertising
Entity without the Target's prior written consent.
The
Target also entered into an Operating Agreement (the "Operating Agreement")
with
the Advertising Entity and the Shareholders to secure the performance of the
parties' obligations under the Service Agreement. Pursuant to the terms of
the
Operating Agreement: (a) the Advertising Entity agreed not to, and the
Shareholders agreed not to cause the Advertising Entity to, conduct any
transactions which may have a material adverse effect on the Advertising
Entity's assets, obligations, rights or operations without the Target's prior
written consent; (b) the Advertising Entity and the Shareholders granted the
Target certain informational rights; (c) the Advertising Entity and the
Shareholders agreed to submit the Advertising Entity's annual budget and monthly
cash requirement plans to the Target for approval, obtain the Target's approval
for withdrawals from the Advertising Entity's bank accounts, and accept
corporate policies and guidance from the Target with respect to the appointment
and dismissal of senior management, daily operations and management and
financial administrative systems; (d) the Advertising Entity and the
Shareholders agreed to appoint or cause to be appointed the individuals
nominated by the Target to become directors, general manager, chief financial
officer or other senior management of the Advertising Entity; and (e) one of
the
Shareholders unilaterally entered into an Authorization Agreement (the
"Authorization Agreement") pursuant to which he authorized Jeffrey Dash, the
Company's Chief Executive Officer, to exercise such Shareholder's voting rights
with respect to shares of the Advertising Entity at the Adverting Entity's
shareholders' meeting. The term of the Operating 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 Service Agreement. The term of the
Authorization Agreement is 10 years but it terminates automatically upon the
earlier termination of the Service Agreement.
F-24
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Also
in
connection with the closing of the Purchase, the Purchaser entered into a
Revenue Assignment Agreement (the "Revenue Agreement") with Beijing Hongteng
Lianguang Advertising Co., Ltd. ("Hongteng"), the Advertising Entity and the
Shareholders. The Shareholders are the sole shareholders of Hongteng. Pursuant
to the Revenue Agreement, Hongteng agreed to, and the Shareholders agreed to
cause Hongteng to, assign any and all of the benefits (financial or otherwise)
generated by an identified advertising agreement (the "Old Advertising
Agreement"), and all advertising sales contracts entered into pursuant to the
Old Advertising Agreement, to the Advertising Entity until the date on which
the
Advertising Entity enters into the New Advertising Agreement.
The
following pro forma financial information presents the consolidated operations
of the Company as if the above mentioned acquisition had occurred on July 1,
2007. The operations of the acquired business commenced on April 1,
2008.
For
the
year ended June 30, 2008:
|
Net
Revenue
|
$
|
397,570
|
||
|
Gross
profit
|
$
|
184,710
|
||
|
Loss
from operations
|
$
|
(2,849,896
|
)
|
|
|
Minority
Interest in Subsidiaries
|
$
|
271,711
|
||
|
Net
loss
|
$
|
(3,062,925
|
)
|
|
|
Basic
loss per share
|
$
|
(0.67
|
)
|
The
purchase price was valued based on the estimated value of $2,174,428 for a
contract that grants exclusive use of the minutes. The contact is with the
Tianjin FM 92.5 radio station. The contract provides 54 minutes per day, 19,710
minutes per year. The channel is actually Beijing based and through a relay
facility aired in Tianjin. Legend Media’s contract is with the Beijing channel’s
exclusive agent. The value was derived as the net present value of the
contract’s EBITDA over the contract’s term from May 30, 2008 through December
31, 2010, using a discount rate of 10%. The amortization period on this contract
is 31 months, based on the duration of the Old Advertising Agreement plus the
two-year term of the New Advertising Agreement. Amortization on this contract
at
June 30, 2008 of $69,742 has been included in general and administrative
expenses in the accompanying consolidated statements of operations and
other comprehensive loss.
The
remainder of the purchase price of $6,999,353 has been allocated to an
exclusivity agreement signed with Ju Baochun. Mr. Baochun, through a company
he
owns and operates, is the 80% owner of Music Radio Limited, which is the 20%
owner of the post-acquisition VIE, Tianjin Yinse Lingdong Advertising Company,
Ltd. See Note 9. Mr. Baochun is a valuable partner with significant experience
in the radio industry that has the ability to locate and acquire additional
radio advertising contracts direct with the radio stations, provide access
to
deep customer relationships, and provide the leadership that would be a
foundation for the Company’s
future
expansion in China. Mr. Baochun signed an exclusivity agreement, whereby he
is
prohibited from:
|
·
|
The
borrowing of money from any third party or the assumption of any
debt;
|
|
·
|
The
sale to any third party or the acquisition from any third party of
any
assets, including, without limitation, any intellectual
rights;
|
|
·
|
The
imposition of any security interests for the benefit of any third
party
through collateralization of its
assets;
|
|
·
|
The
assignment to any third party of the agreement entered into by it;
and
|
|
·
|
The
sale, transfer and disposition of any license held by the
Company.
|
F-25
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
The
term
of the agreement is 10 years, beginning May 30, 2008. As such, the Company
is
amortizing the contract value over its 10-year life. Amortization on this
contract at June 30, 2008 of $57,994 has been included in general and
administrative expenses in the accompanying consolidated statements
of operations and other comprehensive loss. See Note 12.
Note
13 – Related Party Transactions
Beijing
Hongteng Lianguang Advertising Co., Ltd.
In
connection with the closing of the Purchase of Legend Media Tianjin Investment
Company (See Note 12), the Purchaser entered into a Revenue Assignment Agreement
(the "Revenue Agreement") with Beijing Hongteng Lianguang Advertising Co.,
Ltd.
("HTLG"), the Advertising Entity and the Shareholders, effective June 1, 2008.
The Shareholders, Ju Baochun and Xue Wei, are the sole shareholders of HTLG
and
also control a 20% interest in Tianjin Yinse Lingdong Adertising Company, Ltd.
See Note 9.
The
revenue assignment entitles the Company to the rights on contracts acquired
from
Tianjin Lingdong Yinse Advertising Company, Ltd. See Note 12. The Company is
responsible for paying these costs of the advertising minutes on these
contracts, as well as their sales and marketing costs. In connection with this,
the Company pays advertising minutes contract costs of 208,833 RMB per month
to
HTLG as pass-through to the counterparties in the contracts, as well as a fixed
portion of 105,000 RMB per month and variable portion of 15% of revenues earned
and collected per month. The Company has incurred the following expenses payable
to HTLG in the current year with respect to this agreement (from the May 30,
2008 date of acquisition):
|
Advertising
minutes contract cost
|
$
|
30,144
|
||
|
Sales
and marketing contract cost, fixed
|
15,192
|
|||
|
Sales
and marketing contract cost, variable
|
24,594
|
|||
|
Total
expenses to HTLG
|
$
|
69,930
|
The
Company has recognized $140,080 in payables to HTLG, and has classified the
amount as part of other payables in the accompanying consolidated balance sheet
at June 30, 2008. Additionally, the Company has recognized $41,669 as part
of
accrued liabilities in the accompanying balance sheet at June 30, 2008 relating
to accrued commissions payable to HTLG from the revenue agreement. The Company
has also recognized $155,970 related to the revenue rights agreement in the
accompanying consolidation statements of operations and other comprehensive
loss for the year ended June 30, 2008.
ARC
Investment Partners
ARC
Investment Partners (“ARC”) is an investment firm whose members own 1,300,000,
or 12.8% of the Company’s outstanding common stock. ARC has performed various
consulting services for the Company during the year ended June 30, 2008. The
Company has recorded $8,073 for these services in its consolidated statements
of operations and other comprehensive loss within general and
administrative expenses for the year ended June 30, 2008.
RMK
Emerging Growth
RMK
Emerging Growth (“RMK”) is a fund controlled by a shareholder who is also the
CEO of ARC. RMK issued a note to the Company in February and March 2008 for
a total note issued of $375,733. The outstanding balance at June 30, 2008 of
$307,294 has been classified as related party note payable, net of discount
of
$68,439 in the accompanying balance sheet. See Note 7.
Note
14 – Income Taxes
Net
operating losses for tax purposes of approximately $2,000,000 at June
30, 2008 are available for carryover in the PRC. We have provided a 100%
valuation allowance for the deferred tax benefit resulting from the net
operating loss carryover. In addressing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences are
deductible. When we demonstrate a history of profitable operation we will reduce
our valuation allowance at that time.
F-26
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
A
reconciliation of the statutory Federal income tax rate and the effective income
tax rate for the years ended June 30, 2008 and 2007follows:
|
2008
|
2007
|
||||||
|
U.S.
statutory tax rate
|
(34
|
)%
|
0
|
%
|
|||
|
Tax
rate difference
|
9
|
%
|
0
|
%
|
|||
|
Utilization
of net operating loss
|
0
|
%
|
0
|
%
|
|||
|
Valuation
allowance
|
25
|
%
|
0
|
%
|
|||
|
Effective
income tax rate
|
0
|
%
|
0
|
%
|
|||
Significant
components of deferred tax assets and liabilities are as follows:
|
Deferred
tax assets:
|
||||
|
Net
operating loss carryforwards
|
$
|
500,000
|
||
|
Valuation
allowance
|
(500,000
|
)
|
||
|
Net
deferred tax assets
|
$
|
-
|
The
Company adopted FIN No. 48 on January 1, 2007. There were no unrecognized tax
benefits as of the date of adoption and there are no unrecognized tax benefits
included in the balance sheet at June 30, 2008, that would, if recognized,
affect the effective tax rate.
Note
15 – Commitments and Contingencies
None.
Note
16 -
Subsequent Events
(unaudited)
Acquisition
of News Radio Limited
On
July
21, 2008, the Company closed a transaction pursuant to which Well Chance
Investments Limited, its wholly-owned subsidiary and a British Virgin Islands
company (the "Purchaser"), purchased (the "Purchase") 100% of the common
stock
of News Radio Limited, a British Virgin Islands company (the "Target"). The
transaction occurred pursuant to the terms of a Share Purchase Agreement
(the
"Purchase Agreement") that the Company entered into on June 4, 2008 with
the
Purchaser and all of the shareholders of the Target (the "Sellers"). As a
result
of the acquisition, the Company obtained control of the following subsidiaries
of Legend Media News Radio Limited:
|
•
|
CRI
News Radio Limited (100%-owned)
|
|
•
|
Legend
Media (Beijing) Information and Technology Co., Ltd.
(100%-owned)
|
|
•
|
Beijing
Maihesi Advertising International Co., Ltd. (90%-controlled as
VIE)
|
At
the
closing of the Purchase, the Purchaser delivered to the Sellers shares of
the
Company's common stock, par value $0.001 per share (the "Common Stock"),
with an
aggregate value of 2,000,000 Chinese Renminbi ("RMB") (On June 5, 2008, this
was
approximately $287,728 based on the currency exchange rate on that date.
Subsequently on July 21, 2008, the acquisition was closed and the amount
was
settled at approximately $293,760 based on the currency exchange rate on
that
date. The change from June 5, 2008 to July 21, 2008 in USD is due to the
change
in the currency exchange rate) based on the weighted average trading price
of
the Common Stock for the 30 trading days immediately before June 4, 2008
(68,388
shares were actually delivered). In addition, (i) within 28 days after closing
of the Purchase, the Purchaser is obligated to deliver RMB 5,250,000 (On
June 5,
2008, this was approximately $755,287 based on the currency exchange rate
on
that date. Subsequently on July 21, 2008, the acquisition was closed and
the
amount was settled at approximately $771,120 based on the currency exchange
rate
on that date. The change from June 5, 2008 to July 21, 2008 in USD is due
to the
change in the currency exchange rate) to an account of the Sellers' designation
and (ii) within 90 days after closing of the Purchase, the Purchaser is
obligated to deliver RMB 1,600,000 (On June 5, 2008, this was approximately
$230,182 based on the currency exchange rate on that date. Subsequently on
July
21, 2008, the acquisition was closed and the amount was settled at approximately
$235,008 based on the currency exchange rate on that date. The change from
June
5, 2008 to July 21, 2008 in USD is due to the change in the currency exchange)
to an account of the Sellers' designation.
F-
27
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
In
addition, the Sellers will receive additional, performance-based consideration
within 30 days of year-end 2008, 2009 and 2010 based on the net revenues
and net
income for such periods of Beijing Maihesi Advertising International Co.,
Ltd.,
a company limited by shares, organized in the People’s Republic of China and
wholly-owned by the Sellers (the "Advertising Entity"), 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 Sellers
will
receive shares of the Company’s common stock with an aggregate value of RMB
2,500,000 (approximately $359,660 based on the currency exchange rate on
June 5,
2008) with a price per share equal to the weighted average trading price
for the
30 trading days immediately prior to the date such amount becomes payable;
(b)
if for the 12-month period ending December 31, 2009, net revenues equal or
exceed 80% of RMB 30,000,000 and net income equals or exceeds RMB 6,000,000,
the
Sellers will receive RMB 4,000,000 (approximately $575,457 based on the currency
exchange rate on June 5, 2008) in the form of cash, the number of shares
of the
Company’s common stock as determined by a price per share equal to the weighted
average trading price for the 30 trading days immediately prior to the date
such
amount becomes payable, or a combination of the two, at the election of the
Sellers; 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 Sellers will receive RMB 8,000,000 (approximately $1,150,914
based on the currency exchange rate on June 5, 2008) in the form of cash,
the
number of shares of the Company’s common stock as determined by a price per
share equal to the weighted average trading price for the 30 trading days
immediately prior to the date such amount becomes payable, or a combination
of
the two, at the election of the Sellers. Pursuant to the terms of the Purchase
Agreement, the Purchaser and the Sellers will mutually select an impartial
auditor to audit and determine, according to U.S. generally accepted accounting
principles, the Advertising Entity's net revenues and net income for the
relevant time-periods.
After
the
closing of the Purchase, the Company became the indirect beneficiary of several
agreements entered into by the Company's affiliates.
In
connection with the closing of the Purchase, CRI News Radio Limited, a Hong
Kong
company wholly owned by the Target, through its subsidiary, a company organized
in the People's Republic of China, Legend Media (Beijing) Information and
Technology Co., Ltd. (the "Consulting Entity"), entered into an Exclusive
Technical, Operational, Business Consulting and Services Agreement (the "Service
Agreement") with the Advertising Entity and the Sellers pursuant to which
the
Consulting Entity became the exclusive provider of technical, operational,
business consulting and other services to the Advertising Entity in exchange
for
a service fee and bonus as described in more detail in the Service Agreement.
The term of the 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 Service Agreement. The Advertising Entity agreed to several
important covenants in the Service Agreement, including (but not limited
to),
agreeing not to appoint any member of the Advertising Entity's senior management
without the Consulting Entity's consent and to grant the Consulting Entity
certain informational rights. In addition, in the Service Agreement, each
of the
Sellers: (a) pledged his 100% equity interest in the Advertising Entity to
the
Consulting Entity as a guarantee of the Advertising Entity's fulfillment
of its
obligations under the Service Agreement; (b) granted to the Consulting Entity
or
its designee an option to purchase any or all of his equity interest in the
Advertising Entity at nominal value; and (c) agreed not to dispose of or
encumber any of his equity interest in the Advertising Entity without the
Consulting Entity's prior written consent.
The
Consulting Entity also entered into an Operating Agreement (the "Operating
Agreement") with the Advertising Entity and the Sellers to secure the
performance of the parties' obligations under the Service Agreement. Pursuant
to
the terms of the Operating Agreement: (a) the Advertising Entity and the
Sellers
agreed not to cause the Advertising Entity to, conduct any transactions which
may have a material adverse effect on the Advertising Entity's assets,
obligations, rights or operations without the Consulting Entity's prior written
consent; (b) the Advertising Entity and the Sellers granted the Consulting
Entity certain informational rights; (c) the Advertising Entity and the Sellers
agreed to submit the Advertising Entity's annual budget and monthly cash
requirement plans to the Consulting Entity for approval, obtain the Consulting
Entity's approval for withdrawals from the Advertising Entity's bank accounts,
and accept corporate policies and guidance from the Consulting Entity with
respect to the appointment and dismissal of senior management, daily operations
and management and financial administrative systems; (d) the Advertising
Entity
and the Sellers agreed to appoint or cause to be appointed the individuals
nominated by the Consulting Entity to become directors, general manager,
chief
financial officer or other senior management of the Advertising Entity; and
(e)
the Sellers unilaterally entered into Authorization Agreements (the
"Authorization Agreements") pursuant to which each of the Sellers authorized
Jeffrey Dash, the Company's Chief Executive Officer, to exercise such Sellers'
voting rights with respect to shares of the Advertising Entity at the Adverting
Entity's shareholders' meeting. The term of the Operating 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 Service Agreement. The
term of
each of the Authorization Agreements is 10 years but it terminates automatically
upon the earlier termination of the Service Agreement.
The
purchase price was determined based on the estimated value of a contract
acquired for advertising rights on the Beijing FM 90.5 radio station. The
Company acquired News Radio Limited in accordance with its growth strategy
in
the PRC radio advertising distribution business. The acquisition gives the
Company effective control of the PRC-based company that has the exclusive
sales
contract for the Beijing, PRC based radio channel FM 90.5. Beijing is a
metropolis in northern PRC with a population of over 17 million. As with
Tianjin, it is one of four municipalities in the PRC with status as a province
in the PRC’s administrative structure. Beijing is the PRC’s second largest city,
after Shanghai, and is recognized as the political, edicational, and cultural
center of the PRC. Beijing has a rapidly developing economy with an expanding
affluent population. Beijing is of strategic importance to the Company’s
objective of building a market leading brand position in the radio advertising
industry. The exclusive sales contract for Beijing FM 90.5 is for four years
(two years plus a two year option) and grants the Company, through its operating
affiliate, Beijing Maihesi International Advertising Co., Ltd., the right
to be
the exclusive advertising agent for the channel, under which the Company
has the
exclusive rights to manage and sell all advertising minutes for the radio
station. The contract provides the Company with an additional 45,990 of radio
advertising minutes per year. The exclusive rights to sell advertising also
extend to program sponsorship which the Company expects will provide additional
advertising inventory for sale. The exclusive sales contract was originally
entered into by News Radio Limited in May 2008 so as of July 3, 2008 the
business was still in start-up phase but in the process of opening an office
and
expanding staff. The Company plans to hire its own staff while sill using
third
party sales and marketing companies in an effort to maximize first year
performance. The exclusive contract for Beijing FM 90.5 is with a subsidiary
of
China Radio International, the owner of the radio channel. As part of the
exclusive sales agreement, the Company, through its operating affiliate,
is
provided with the first right of refusal to be the to be the exclusive agent
for
Beijing FM 90.5 as it expands its content to frequencies outside of
Beijing.
Management
is currently in the process of finalizing its allocation of the purchase
price,
although management believes that most of the allocation will go to the Beijing
FM 90.5 contract. The contract will be amortized over a two-year life, based
on
the initial contract term.
F-
28
LEGEND
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007
Beijing
Guo Guangrong Advertising Agreement
On
August
4, 2008, Beijing Merci International Advertising Co., Ltd (the "Company's
Affiliate"), a company organized in the People’s Republic of China and an
affiliate of Legend Media, Inc. (the "Company"), entered into an Exclusive
Advertising Rights Agreement (the “Advertising Rights Agreement”) with Beijing
Guo Guangrong Advertising Co., Ltd. pursuant to which the Company's Affiliate
agreed to acquire 45,990 advertising minutes per year on FM107.1, a news and
entertainment radio station that broadcasts to the Shenzhen region of China.
The
Advertising Rights Agreement closed on August 31, 2008.
The
annual cost for the advertising minutes is 4,600,000 Chinese Renminbi ("RMB")
(which, as of the date hereof, equates to approximately $675,000) for the first
year of the term of the Advertising Rights Agreement. The annual cost for the
advertising minutes will increase annually by 15% for each year of the term
of
the Agreement. The Company's Affiliate has an option to extend the initial
two-year term of the Advertising Rights Agreement for an additional two-year
term. The Company's Affiliate is required to deposit 1,050,000 RMB (which,
as of
the date hereof, equates to approximately $150,000) towards the first year
cost
of the advertising minutes.
Unregistered
Sale of Series A Convertible Preferred Stock
On
August
29, 2008, the Company completed the sale of 625,000 shares of the Company's
Series A Convertible Preferred Stock, par value $0.001 per share (the "Preferred
Stock"), and warrants (the "Warrants") to purchase 300,000 shares of the
Company's common stock, par value $0.001 per share (the "Common Stock"), to
Maoming China Fund ("Maoming") for gross proceeds to the Company of $1,500,000
in cash. The sale of the Preferred Stock and Warrants (the "Offering") occurred
pursuant to the terms of a Securities Purchase Agreement (the "Purchase
Agreement") dated March 31, 2008, between the Company and Maoming, as previously
disclosed in the Company's Current Report on Form 8-K filed with the Securities
Exchange Commission (the "SEC") on April 4, 2008. The Offering closed in
connection with the Company’s previously announced acquisition of its second
media advertising business operating in the People's Republic of China, News
Radio Limited.
The
Warrants are immediately exercisable at an exercise price of $2.50 per share
until August 28, 2011 (the "Expiration Date") and are exercisable on a cashless
basis at any time after August 29, 2009 and until the Expiration Date if the
Common Stock underlying the Warrants has not been registered with the SEC by
such date.
In
accordance with the terms of the Purchase Agreement, Maoming is obligated to
purchase an additional 208,333 shares of Preferred Stock and additional warrants
to purchase 100,000 shares of Common Stock for $500,000. The Company expects
these securities to be issued on an as-needed basis.
On
August
4, 2008, Beijing Merci International Advertising Co., Ltd (the "Company's
Affiliate"), a company organized in the People’s Republic of China and an
affiliate of Legend Media, Inc. (the "Company"), entered into an Exclusive
Advertising Rights Agreement (the “Advertising Rights Agreement”) with Beijing
Guo Guangrong Advertising Co., Ltd. pursuant to which the Company's Affiliate
agreed to acquire 45,990 advertising minutes per year on FM107.1, a news and
entertainment radio station that broadcasts to the Shenzhen region of China.
The
Advertising Rights Agreement closed on August 31, 2008.
The
annual cost for the advertising minutes is 4,600,000 Chinese Renminbi ("RMB")
(which, as of the date hereof, equates to approximately $675,000) for the first
year of the term of the Advertising Rights Agreement. The annual cost for the
advertising minutes will increase annually by 15% for each year of the term
of
the Agreement. The Company's Affiliate has an option to extend the initial
two-year term of the Advertising Rights Agreement for an additional two-year
term. The Company's Affiliate is required to deposit 1,050,000 RMB (which,
as of
the date hereof, equates to approximately $150,000) towards the first year
cost
of the advertising minutes.
F-
29