10-K: Annual report pursuant to Section 13 and 15(d)
Published on April 15, 2010
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED: DECEMBER 31,
2009
COMMISSION
FILE NUMBER: 000-33067
CHINA
YOUTH MEDIA, INC.
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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87-0398271
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(State
or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S.
Employer
Identification
No.)
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4143
Glencoe Avenue, Marina Del Rey, CA 90292
(Address
of principal executive offices) (Zip Code)
Registrant’s telephone number,
including area code: (310) 728-1450
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009, the last business day of
the registrant’s most recently completed second fiscal quarter, was
approximately $3,809,080. The number of shares outstanding of the Common Stock
($.001 par value) of the Registrant as of the close of business on March 25,
2010 was 158,631,461.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
CHINA
YOUTH MEDIA, INC.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Description
of Business
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3
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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13
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Item
2.
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Properties
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13
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Item
3.
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Legal
Proceedings
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14
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Item
4.
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Reserved
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14
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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14
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Item
6.
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Selected
Financial Data
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17
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
8.
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Financial
Statements and Supplementary Data
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26
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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26
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Item
9A(T).
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Controls
and Procedures
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26
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Item
9B.
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Other
Information
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27
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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27
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Item
11.
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Executive
Compensation
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29
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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31
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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32
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Item
14.
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Principal
Accountant Fees and Services
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34
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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34
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Signatures
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38
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2
PART
I
ITEM
1. Description of
Business
Overview
China
Youth Media, Inc.
China
Youth Media, Inc. is a China focused youth marketing and media company whose
business is to deliver advertising and content to one of the most sought after
and fastest growing demographics in the world. We have secured exclusive rights
from the Chinese government controlled corporation, China Youth Interactive
Cultural Media, which position us to market to China’s student
population with access online, on campus and on mobile. Our strategy
is to provide advertisers and corporations with direct and centralized access to
this coveted consumer group through a dedicated Intranet Television Network
(ITVN) media portal called “Koobee,” campus events and advanced mobile
marketing.
Content Syndication Services
China Youth Media plans to syndicate its youth oriented content to delivery platforms across China. We plan to provide our content to China's fixed line subscribers across the country through two options: on an à la carte channel subscription basis, and as part of a bundled broadband service.
Koobee
The
cornerstone of our China youth marketing strategy is an advertising
supported ITVN media portal called Koobee. Koobee.com is a venue designed for
marketers to deliver traditional TV spots and new media advertising campaigns to
a targeted demographic in one of the world’s fastest growing broadband markets estimated to total more than 30 million. The student
population in China is a valuable but difficult to reach consumer group. Koobee delivers a solution for advertisers and corporations to reach the most active online
community in China and a key segment of the world’s largest youth market.
Koobee
offers a sports channel featuring All Sports Network (ASN) content from
the NFL, NHL, and Pac 10 and Big Ten games; a music channel by BTTV, a
popular youth lifestyle and music entertainment TV channel in China; a travel
and leisure channel by Quest USA; and a fashion channel featuring “China’s Next
Top Model,” part of the international Top Model franchise and based on the hit
“America’s Next Top Model.”
On
Campus
China Youth Media plans to offer marketers an opportunity to sponsor live events and showcase their brands with international touring acts. We also plan to offer coordinated Internet and campus event campaigns that will bring international touring acts and sponsors directly to China’s college students with live ITVN broadcast straight into their dorm rooms.
Mobile
Our partner China Youth Interactive has secured a national mobile video and advertising license. Our plan is to deploy an advanced mobile media and advertising delivery system catering specifically to China’s youth market.
We are
organized in a single operating segment with no long-lived assets outside of the
United States of America. All of our revenues to date have been generated in the
United States. Revenue sources could be from distribution of content, advertising and licensing.
Organizational
History
China
Youth Media, Inc. was organized under the laws of the State of Utah on July 19, 1983 under the name of
Digicorp. On February 22, 2007, we changed the Company’s domicile from the State
of Utah to the State of Delaware effected by the merger of the Company, a Utah
corporation, with and into, Digicorp, Inc., a newly formed wholly owned
subsidiary of the Company that was incorporated under the Delaware General
Corporation Law for the purpose of effecting the change of
domicile.
3
The
Company changed its name from “Digicorp, Inc.” to “China Youth Media, Inc.” (the
“Corporate Name Change”) pursuant to a Certificate of Amendment to our
Certificate of Incorporation filed with the State of Delaware which took effect
as of October 16, 2008. As a result of the Corporate Name Change, our stock
symbol changed to “CHYU” with the opening of trading on October 16, 2008 on the
OTCBB.
References in this document to the “Company,” “we,” “us,” and “our” refer to China Youth Media, Inc. and its direct and indirect wholly-owned subsidiaries.
References in this document to the “Company,” “we,” “us,” and “our” refer to China Youth Media, Inc. and its direct and indirect wholly-owned subsidiaries.
Youth
Media (BVI) Limited
On May 8,
2008, under the laws of the British Virgin Islands, the Company formed Youth
Media (BVI) Limited ("YM BVI"). YM BVI is a wholly-owned subsidiary of the
Company and was established to be the holding company for YMHK and YMBJ (as
identified below).
Youth
Media (Hong Kong) Limited and Youth Media (Beijing) Limited
Youth
Media (Hong Kong) Limited ("YMHK"), a company organized under the laws of Hong
Kong on May 19, 2008, and Youth Media (Beijing) Limited (“YMBJ”), a company
organized under the laws of the People's Republic of China on December 10, 2008,
are wholly-owned subsidiaries of YM BVI and were formed by the Company to take
advantage of its shift in business to aggregation and distribution of
international content and advertising for Internet or online consumption in
China.
PerreoRadio.com
PerreoRadio.com
is our wholly-owned and operated website targeted to the young, urban Latino
demographic offers online radio shows, podcasts, music, and music
videos.
Rebel
Crew Films, Inc.
Rebel
Crew Films is a wholly-owned subsidiary of the Company and was organized under
the laws of the State of California on August 7, 2002. In January 2008, the
Company entered into a license and distribution agreement with Westlake
Entertainment, Inc. which effectively shifted all day-to-day operations related
to our home video library (the "Westlake Agreement"). Effective the
date of the Westlake Agreement, Rebel Crew Films ceased operations and is
currently maintained as a corporation in good standing with no
operations.
Significant
Transactions During The Year Ended December 31, 2009
Content
Aggregation for China Telecom and China Unicom in Hunan Province,
China
On March
23, 2010, the Company executed a syndication agreement with a key content
aggregator for China Telecom and China Unicom in Hunan Province, China. Pursuant
àla carte channel subscription basis, and as part of bundled broadband service. The contract provides for payment on a per subscriber per month basis.
X
Games and Footprint Worldwide
On
October 5, 2009 the Company executed a Content Distribution Agreement (the "X
Games Agreement") with Branded entertainment company Footprint Worldwide which
whom has signed a deal with ESPN, Inc.’s action sports franchise, X Games, to
license video content for exclusive distribution across the Company’s university campus network koobee.com.
4
China
Youth Interactive Cultural Media (CYI)
On June
10, 2008 our subsidiary, YMHK, entered into a Cooperation Agreement (the
“Cooperation Agreement”) with China Youth Net Technology (Beijing) Co., Ltd.
("CYN"), China Youth Interactive Cultural Media (Beijing) Co., Ltd. ("CYI") and
China Youth Net Advertising Co. Ltd. ("CYN Ads") to cooperate with each other to
develop, build and operate a fully managed video and audio distribution network
under the auspices of CYN (the “Campus Network”). In addition, CYN and CYI have
agreed to exclusively grant YMHK the following rights during the term of the
Cooperation Agreement: exclusive right to advertise on the Campus Network;
exclusive right to sell and operate the commercial campus marketing events;
right to provide foreign commercial content to the Campus Network; and enjoy the
rights with respect to the setup, operation, maintenance and expansion of the
Campus Network according to a separate commercial and technical services
agreement. On July 3, 2009, YMHK entered into a new Cooperation
Agreement (the “2009 Cooperation Agreement”), with China Youth Interactive
Cultural Media (Beijing) Co., Ltd. (“CYI”) and China Youth Net Advertising Co.
Ltd. (“CYN Ads”) which replaced the Cooperation Agreement entered into on June
10, 2008 among YMHK, China Youth Net Technology (Beijing) Co., Ltd. (“CYN”), CYI
and CYN Ads pursuant to which the parties agreed to cooperate with each other to
develop, build and operate a fully managed video and audio distribution network
based on, including but not limited to, the China Education and Research
Network, the broadband network infrastructure built in schools, universities and
other education institutions in China (the “Campus Network”). The 2009
Cooperation Agreement has a term of 20 years with an optional renewal term of 10
years.
WinTV
and the English Premier League
In August
2009, the Company entered into an agreement (the "EPL Agreement") with WinTV, a
subscription channel in China run by state-owned Guangdong Provincial Television
pursuant to which the Company secured the online rights to distribute the
2009-2010 season of the English Premier League (“EPL”). The EPL Agreement
is part of a licensing agreement between YMHK and WinTV.
New
China Media
On June
2, 2008, the Company entered into a Content License Agreement with New China
Media, YGP, LLC and TWK Holdings, LLC (New China Media, YGP and TWK collectively
referred to as "Content Providers") providing for the assignment by the Content
Providers and the assumption by us of certain rights of the Content Providers
for the territory of the People's Republic of China ("PRC") to use, transmit and
publicly display via the Internet certain content. On January 8, 2009, the
Content License Agreement was extended by an additional eight (8) years for a
total of ten (10) years.
Xinhua
Sports and Entertainment Limited (formerly Xinhua Finance Media
Limited)
On
December 26, 2008, our subsidiaries YMHK and YMBJ entered into a Joint Venture
Agreement (the "Joint Venture Agreement") with CYI and Xinhua Sports &
Entertainment Limited (“XSEL”), formerly known as Xinhua Finance Media Limited,
to develop business opportunities contemplated by the Cooperation Agreement YMHK
entered into on June 10, 2008 with CYN, CYI and CYN Ads. The Joint Venture
Agreement provides working capital for the purposes of deploying and marketing
the Campus Network. The Joint Venture Agreement provides working capital for a
minimum of twelve months ending December 31, 2009. The Joint Venture Agreement provides that YMHK and YMBJ shall be obligated on a joint and several basis, following written notice from XSEL, to return, repay or reimburse, as the case may be, all of the working capital provided by XSEL, upon demand by XSEL in the sole discretion of XSEL, together with interest accrued at an annual rate of 7 percent. As of the December 31 2009, the Joint Venture Agreement had provided working capital of $2,377,312. An additional $90,000 was provided subsequent to the 2009 fiscal year end.
Recent Developments
Although written demand for payment has not yet been made, we have been advised by XSEL that it will not provide any additional funds to YMHK under the Joint Venture Agreement. As a result, we are seeking additional financing to fund our operations. In addition, we have made overtures to XSEL to restructure the debt obligations of our subsidiaries, YMHK and YMBJ. To date, all such efforts have been unsuccessful. While we believe that the Joint Venture Agreement provides that any and all amounts due to XSEL are not due until twelve months after written demand for payment has been made which demand has not yet been provided, XSEL may claim that such amounts are immediately due and payable based upon certain other language in the Joint Venture Agreement. While we believe such is contrary to the terms of the Joint Venture Agreement, no assurance can be given that we will prevail in the event our interpretation is challenged in any legal proceeding. In addition, no assurance can be made that we will be able to obtain additional financing on acceptable terms, if at all. In this regard, unless we are able to restructure the existing debt obligations of our subsidiaries, YMHK and YMBJ, to XSEL, we believe our ability to obtain any such additional financing will be significantly impaired.
As a result of the foregoing, we have recently substantially reduced our operations and terminated various employees in our subsidiary, YMBJ. While we are trying to maintain limited operations, no assurance can be made that we will be able to continue our business operations for more than a limited period of time, including but not limited to maintaining our ITVN media portal called Koobee. Because of these recent developments, we may be forced to further scale down or possibly cease all business operations, as a result of which investors could lose their investment.
Revenues
During
the year ended December 31, 2009, the Company, including its subsidiaries,
generated revenue primarily from digital content distribution and website ad
revenue.
During
the fiscal year 2009, the Company generated almost exclusively all of its
revenue through the production and distribution of digital content. In the past,
the Company, through its subsidiary Rebel Crew Films, generated revenue through
the direct sales of its licensed home video library and licensing agreements
with third parties that distributed the Company's licensed content. The Company
plans to use a significant portion of its resources going forward to the
aggregation and distribution of international content and advertising for
Internet consumption in China. Consequently, in January 2008 and as described
above, the Company entered into a license and distribution agreement with
Westlake Entertainment, Inc. which effectively shifted all manufacturing and
distribution of its home video library to Westlake Entertainment along with all
day-to-day operations related to its home video library. Effective the date of
the Westlake Agreement, Rebel Crew Films ceased operations and is currently
maintained as a corporation in good standing with no operations.
Customers
We
believe that significant opportunities exist in the China Internet advertising
space, and we are planning to pursue this potential source of revenue.
Our
target customers are:
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Advertising
Agencies with China operations, including Dentsu, Ogilvy, and
Universal McCann;
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Media
Planners, such as
MindShare China and Zenith;
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Large
Brands, such as
Nike, Proctor & Gamble, LG, Samsung, Lenovo, Starbucks, and
Levi’s;
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5
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Premium
Advertisers and Content Owners, including advertising agencies
like WPP, Omnicom and Interpublic; content owners with their own
advertising, such as NBC, CBS, ABC and The New York Times; and infomercial
creators, like QVC and Williams
Group;
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Independent producers, artists, designers
and filmmakers who own untapped content;
and
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Advertising
Networks, including
Advertising.com, ValueClick, ClickBooth, CJ.com and
Zedo.
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Sales
and Marketing
The goal
of our sales and marketing effort is to develop sales opportunities by
increasing the awareness of Koobee among students, advertisers and content
owners.
A key
component of our strategy is the continued building of broad acceptance of
Koobee by students. We are planning a multi-faceted marketing campaign to follow
the launch of Koobee and encourage users to frequent our web portal and
associated services.
Competition
We
operate in the market for media products, services and content development and
delivery, which is a highly competitive market characterized by rapid change,
converging technologies, and increasing competition from companies offering
communication, video, music, on-demand information and entertainment services integrated into other products and media properties.
The
principal competitive factors relating to attracting and retaining users include
the quality of our video content and relevance of advertising; the effectiveness
and efficiency of our marketing services; the accessibility, integration and
personalization of the online services that we offer; and the creativity of the
marketing solutions that we offer.
There are
many popular video websites available in China: Tudou, Rox, 6Rooms, Pomoho ,
56.com
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Almost all of these sites are comparable to YouTube: content is mostly user generated (UGC)
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Other
competitors include major portals such as Baidu, Sina, Tom Online,
TenCent
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This group is similar to US
portals such as Yahoo! and include but do not focus on
video
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These portals are highly popular
as search engines and carry feeds from major news and entertainment
sources
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These sites have large
advertising sales staffs with established relationships to ad
agencies
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China
Central Television (CCTV), Shanghai Media Group, Hunan TV and other major
broadcasters in mainland China offer programming that is a mix of comedy, sports
and drama shows, the majority of which consists of soap operas and other Chinese
content. Broadcasted international content is limited by Chinese
law.
We also
face competition from companies focused on markets where expertise in a
particular segment of the market (e.g., radio, internet, television) may provide
them a competitive advantage.
6
Seasonality
Our
performance may be affected by seasonal revenue fluctuations and variation in
demand between local and national advertisers. The Company’s revenues may vary throughout the year.
Government
Regulation
In the
United States, we are not aware of any existing or probable governmental
regulations that may have a material effect on the normal operations of our
business. There also are no relevant environmental laws that require compliance
by us that may have a material effect on the normal operations of the
business.
The
regulatory framework for the online industry in China that we and or that our
partners operate under is governed and controlled by several government
ministries and agencies. For the purposes of our business operations in China, the ministries and agencies which we may operate under include but are not limited to:
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The China Youth
League
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The Ministry of Public
Security
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The PRC State Administration of
Radio, Film and Television
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The Movie and Television Network
Center of China Youth League
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The Telecommunication
Administrative Bureau of Beijing,
China
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The
various ministries and agencies have issued rules and regulations that regulate
a number of different areas of the online business in China, which we discuss
below:
Foreign
Ownership Restrictions
PRC
regulations currently limit foreign ownership of companies that provide Internet content and related services, including operating a content website.
License
Requirements
There are
a number of aspects to the operation of Koobee and the operations of our wholly
owned subsidiaries Youth Media (Hong Kong) Limited and Youth Media (Beijing)
Limited, which require licenses from various PRC regulatory authorities. The
ability to operate in China is dependent on our partners complying with PRC
regulations related to licensing requirements and maintaining good standing
status with the associated PRC government ministries.
Regulation
of Internet Content
The PRC
government has in place rules and regulations that govern Internet content that
are supervised by a number of ministries and agencies. These rules and
regulations specifically prohibit Internet activities such as the operation of
content websites that result in the publication of content that is found to,
among other things, propagate obscenity, violence, instigate crime, undermine
the cultural traditions of the PRC, or compromise State security. If any website
violates these rules and regulations, the PRC government may shut down their
website.
Regulation
of Information Security
Internet
content in China is regulated and restricted by several ministries and agencies
of the PRC government. According to PRC regulations, the following actions are
subject to criminal punishment in China: (1) improper entry into a computer or
system of strategic importance; (2) dissemination of politically disruptive
information; (3) leaking State secrets; (4) spreading of false commercial
information or information deemed to be destabilizing to the State; or (5)
infringing on intellectual property rights. In particular, the Ministry of
Public Security has direct supervision and inspection rights, with respect to
the aforementioned, over all Internet websites in China and thus we may be
subject to their jurisdiction. Any entity that operates a website in China that
violates these rules and regulations may result in the PRC government shutting
down their website.
7
Regulation
of Content Import
Importing
content from abroad and into China is regulated by several ministries and
agencies of the PRC government, some of which require that copyright license
content agreements be approved and registered with a government agency. Our
ability to operate in China is dependent on our partners complying with PRC
regulations related to the import of content, registration, if necessary, with
the proper PRC government ministries, and maintaining good standing status with
the associated PRC government ministries.
Regulation
of Advertising
According
to PRC laws and regulations, in order to conduct an advertising business, a
company must have an approved business scope that covers such businesses.
We source our advertising business through our strategic
partnerships, including our partnership with Xintai Huade Advertising Company, which to our knowledge, is licensed to conduct such business.
Regulation
of Privacy
PRC law
does not prohibit Internet content providers from collecting and analyzing
personal information from their users. PRC law prohibits Internet content
providers from disclosing to any third parties any information transmitted by
users through their networks unless otherwise permitted by law. If any such
Internet content provider violates these regulations, penalties may be imposed
and the Internet content provider may be liable for damages caused to its
users.
Employees
As of
December 31, 2009, we had 13 full time employees in the United States and China.
None of our employees are covered by a collective bargaining agreement. We
believe that relations with our employees are good.
Available
Information
We file
with or submit to the SEC annual, quarterly and current periodic reports, proxy
statements and other information meeting the informational requirements of the
Exchange Act. You may inspect and copy these reports, proxy statements and other
information, as well as the registration statement and related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet website that contains reports, proxy and information statements and
other information filed electronically by us with the SEC which are available on
the SEC’s website at www.sec.gov. Copies
of these reports, proxy and information statements and other information may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549.
ITEM
1A. Risk Factors
Our
business involves a high degree of risk. In addition to other information in the
Form 10-K, potential investors should carefully consider the risks and
uncertainties described below and the other information in this report before
deciding whether to invest in shares of our common stock. Each of the following
risks may materially and adversely affect our business, results of operations
and financial condition. These risks may cause the market price of our common
stock to decline, which may cause you to lose all or a part of the money you
paid to buy our common stock.
RISKS
RELATED TO OUR BUSINESS
We
have a history of losses which may continue and which may negatively impact our
ability to achieve our business objective and our financial
results.
For the
year ended December 31, 2009 and 2008, we generated revenues of $7,000 and
$107,000, respectively, and incurred net losses of $9.3 million and $3 million,
respectively. At December 31, 2009, we had a working capital deficit of $836,000
and an accumulated deficit of $20.1 million. Our failure to increase our
revenues significantly or improve our gross margins will harm our business. Even
if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If our revenues grow
more slowly than we anticipate, our gross margins fail to improve, or our
operating expenses exceed our expectations, our operating results will
suffer.
Various
conditions raise substantial doubt about our ability to continue as a going
concern; Need For Additional Financing.
At
December 31, 2009, we had an accumulated deficit of approximately $20.1 million
and a working capital deficit of $836,000. During the year ended December 31,
2009, we incurred a loss of $9.3 million. During the year ended December 31,
2009, we primarily relied upon debt investments to fund our operations. These
conditions raise substantial doubt about our ability to continue as a going
concern.
8
We are
actively seeking sources of additional financing in order to maintain and
potentially expand our operations and to fund our debt repayment obligations.
Even if we are able to obtain funding, there can be no assurance that a
sufficient level of sales will be attained to fund such operations or that
unbudgeted costs will not be incurred. Future events, including the problems,
delays, expenses and difficulties frequently encountered by similarly situated
companies, as well as changes in economic, regulatory or competitive conditions,
may lead to cost increases that could make the net proceeds of any new funding
and cash flow from operations insufficient to fund our capital requirements.
There can be no assurances that we will be able to obtain such additional
funding from management or other investors on terms acceptable to us, if at all.
Additional financings, or the possible conversion of any of our debt obligations into equity, will result in dilution for then current stockholders. In addition, see Part I, Item 1 Recent Developments for information on certain matters which may jeopardize our ability to continue operations.
The
reliance of our network connectivity and interoperability services and content
services on third-party communications infrastructure, hardware and software
exposes us to a variety of risks we cannot control.
The
success of our network connectivity and interoperability services and content
services depends on our network infrastructure, including the capacity leased
from telecommunications suppliers. In particular, we rely on telecommunications
providers for leased long-haul and local loop transmission capacity. Our
business also depends upon the capacity, reliability and security of the
infrastructure owned by third parties that is used to connect telephone
calls.
We have
no control over the operation, quality or maintenance of a significant portion
of that infrastructure or whether or not those third parties will upgrade or
improve their equipment. We depend on these companies to maintain the
operational integrity of our connections. If one or more of these companies is
unable or unwilling to supply or expand its levels of service to us in the
future, our operations could be severely interrupted. In addition, rapid changes
in the telecommunications industry have led to the merging of many companies.
These mergers may cause the availability, pricing and quality of the services we
use to vary and could cause the length of time it takes to deliver the services
that we use to increase significantly.
Undetected
or unknown defects in our services could harm our business and future operating
results.
Services
as complex as those we offer or develop frequently contain undetected defects or
errors. Despite testing, defects or errors may occur in our existing or new
services, which could result in loss of or delay in revenues, loss of market
share, failure to achieve market acceptance, diversion of development resources,
and injury to our reputation, any of which could harm our business. The
performance of our services could have unforeseen or unknown adverse effects on
the networks over which they are delivered as well as on third-party
applications and services that utilize our services, which could result in legal
claims against us, harming our business. Furthermore, we often provide
implementation, customization, consulting and other technical services in
connection with the implementation and ongoing maintenance of our services,
which typically involves working with sophisticated software, computing and
communications systems. Our failure or inability to meet customer expectations
in a timely manner could also result in loss of or delay in revenues, loss of
market share, failure to achieve market acceptance, injury to our reputation and
increased costs.
If
we encounter system interruptions, we could be exposed to liability and our
reputation and business could suffer.
We depend
on the uninterrupted operation of various systems, secure data centers and other
computer and communication networks. Our systems and operations are vulnerable
to damage or interruption from:
|
|
·
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Power loss, transmission cable
cuts and other telecommunication
failures;
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·
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Damage or interruption caused by
fire, earthquake, and other natural
disasters;
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·
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Computer viruses or software
defects;
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·
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Physical or electronic break-ins,
sabotage, intentional acts of vandalism, terrorist attacks and other
events beyond our control.
|
Most of
our systems are located at our facilities in Marina Del Rey, California,
Downtown Los Angeles, California, and Beijing, China, all of which are
susceptible to earthquakes. Any damage or failure that causes interruptions in
any of these facilities or our other computer and communications systems could
materially harm our business. Although we carry insurance for property damage
and business interruption, we do not carry insurance or financial reserves for
interruptions or potential losses arising from earthquakes or acts of
terrorism.
In
addition, our ability to provide our services depend on the efficient operation
of the Internet connections from customers to our data centers. These
connections depend upon the efficient operation of Internet service providers
and Internet backbone service providers, all of which have had periodic
operational problems or experienced outages in the past.
We
rely on our intellectual property, and any failure by us to protect, or any
misappropriation of, our intellectual property could harm our
business.
Our
success depends on our internally developed technologies, patents and other
intellectual property. Despite our precautions, it may be possible for a third
party to copy or otherwise obtain and use our trade secrets or other forms of
our intellectual property without authorization. Furthermore, the laws of
foreign countries may not protect our proprietary rights in those countries to
the same extent U.S. law protects these rights in the United States. In
addition, it is possible that others may independently develop substantially
equivalent intellectual property. If we do not effectively protect our
intellectual property, our business could suffer. Additionally, we have filed
patent applications with respect to certain of our technology in the U.S. Patent
and Trademark Office. Patents may not be awarded with respect to these
applications and even if such patents are awarded, such patents may not provide
us with sufficient protection of our intellectual property. In the future, we
may have to resort to litigation to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. This type of litigation, regardless of its
outcome, could result in substantial costs and diversion of management and
technical resources.
9
The
Ad-Support Content business environment is highly competitive, and if we do not
compete effectively, we may not be able to gain market acceptance and market
share.
The
market for ad-supported content services is extremely competitive. Competitors
include developers of content and entertainment companies that service a variety
of domestic and international markets. If we do not compete effectively it may
affect our ability to gain market acceptance and grow and retain our customer
base.
Our
inability to react to changes in our industry and successfully introduce new
products and services could harm our business.
The
Internet and communications network services industry are characterized by rapid
technological change and frequent new product and service announcements which
require us continually to improve the performance, features and reliability of
our services, particularly in response to competitive offerings. In order to
remain competitive and gain market share, we must continually improve our access
technology and software, support the latest transmission technologies, and adapt
our products and services to changing market conditions and customer
preferences. We cannot assure you that we will be able to adapt to these
challenges or respond successfully or in a cost-effective way to adequately meet
them. Our failure to do so would adversely affect our ability to compete and
retain customers or market share.
If
we do not maintain the continued service of our chief executive officer, we may
not develop business operations.
Our
success is dependent upon the continued service of Jay Rifkin, our current Chief
Executive Officer. Although we have entered into a written employment agreement
with him, we do not have key man life insurance on Mr. Rifkin. While our Chief
Executive Officer currently does not, to our knowledge, have any definitive
plans to retire or leave our company in the near future, he could decide to
leave us at any time to pursue other opportunities. The loss of services of Mr.
Rifkin would pose a significant risk to our ability to develop business
opportunities.
The
current global financial crises and deteriorating economic conditions may have a
material adverse impact on our business and financial condition that we
currently cannot predict.
The
economic conditions in the United States and throughout the world have been
deteriorating. Global financial markets have been experiencing a period of
unprecedented turmoil and upheaval characterized by extreme volatility and
declines in prices of securities, diminished liquidity and credit availability,
inability to access capital markets, the bankruptcy, failure, collapse or sale
of financial institutions and an unprecedented level of intervention from the
United States federal government and other governments. Although we cannot
predict the impacts on us of the deteriorating economic conditions, they could
materially adversely affect our business and financial condition, including our
ability to raise any equity or debt financing in the future.
RISKS
RELATED TO OUR SUBSIDIARIES
Our
operating subsidiaries, Youth Media (Beijing) Limited, Youth Media (Hong Kong)
Limited, and Rebel Crew Films all have limited operating histories and therefore
we cannot ensure the long-term successful operation of our business or the
execution of our business plan.
Our
operating subsidiaries Youth Media (Beijing) Limited organized under the laws of
the People's Republic of China on December 10, 2008, Youth Media (Hong Kong)
Limited organized under the laws of Hong Kong on May 19, 2008, and Rebel Crew
Films organized under the laws of the State of California on August 7, 2002.
Because our operating subsidiaries have limited operating history, our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by growing companies in evolving markets in which we operate. While
to date we have not experienced these problems, we must meet many challenges
including:
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·
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Establishing and maintaining
broad market acceptance of our products and converting that acceptance
into direct and indirect sources of
revenue;
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|
|
·
|
Establishing and maintaining our
brand name;
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|
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·
|
Timely and successfully
developing new products;
|
|
|
·
|
Developing and maintaining
strategic relationships to enhance the distribution of our
products.
|
10
Our
business strategy may be unsuccessful and we may be unable to address the risks
we face in a cost-effective manner, if at all. If we are unable to successfully
address these risks our business will be harmed and we may experience a decrease
in revenues.
We
face significant competition which could reduce our market share and materially
and adversely affect our business, financial condition and results of
operations.
The
Internet content market in China is increasingly competitive. Our results of
operations to date may be a result, in part, of our close affiliation with the
Government of China which may not continue to be available to us. A number of
competitors have entered the Internet content business in China. We expect more
companies to enter the market and we expect a wider range of websites that offer
content to be introduced to the China market. Competition from other Internet
content operators, both based in China as well as overseas, is likely to
increase in the future. Other Internet content operators, such as Tudou, Rox,
6Rooms, Pomoho, 56.com, are current, or potential future, competitors. As the
Internet content industry in China is relatively new and constantly evolving,
our current or future competitors may compete more successfully as the industry
matures. In particular, any of these competitors may offer products and services
that provide significant performance, creativity or other advantages over those
offered by us. These products and services may weaken the market strength of our
brand name and achieve greater market acceptance than ours. Furthermore, any of
our current or future competitors may be acquired by, receive investments from
or enter into other commercial relationships with, larger, well-established and
well-financed companies and therefore obtain significantly greater financial,
marketing and development resources than we have. In addition, increased
competition in the Internet content industry in China could make it difficult
for us to retain existing users and attract new users. We also compete with
other forms of entertainment, such as television and movies. If we are unable to
compete effectively in the Internet content market in China, our business,
financial condition and results of operations could be materially and adversely
affected.
The
limited use of personal computers in China and the relatively high cost of
Internet access with respect to per capita gross domestic product may limit the
development of the Internet in China and impede our growth.
Although
the use of personal computers in China has increased in recent years, the
penetration rate for personal computers in China is much lower than in the
United States. In addition, despite a decrease in the cost of Internet access in
China due to a decrease in the cost of personal computers and the introduction
and expansion of broadband access, the cost of personal Internet access, in
contrast with Internet access through Internet cafes, remains relatively high in
comparison to the average per capita income in China. The limited use of
personal computers in China and the relatively high cost of personal Internet
access may limit the growth of our business.
We
have limited business insurance coverage in China.
The
insurance industry in China is still at an early stage of development. In
particular, PRC insurance companies do not offer extensive business insurance
products. As a result, we do not have any business liability or disruption
insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster might result in our incurring substantial costs
and the diversion of resources.
The
PRC’s economic, political and social conditions, as well as government policies,
could affect our business.
The PRC
economy differs from the economies of most developed countries in many respects,
including in the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth since the late 1970s, growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented numerous measures to encourage economic growth and to
guide the allocation of resources. Some of these measures may benefit the
overall PRC economy, but also have a negative effect on us.
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has implemented measures since the late
1970s 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
productive assets in China is still owned by the PRC government. In addition,
the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. These actions, as well as future actions and policies
of the PRC government, could materially affect general economic conditions in
China and could have a material adverse effect on our business and results of
operations.
11
If
we are unable to license or acquire compelling content at reasonable costs or if
we do not develop compelling content, the number of users of our services may
not grow as anticipated, or may decline, which could harm our operating
results.
Our
future success depends in part upon our ability to aggregate compelling content
and deliver that content through our online and other multi-media properties and
programming and delivery technologies. We distribute some of the content that we
license on our online properties, such as audio and video content from third
parties. We have been providing increasing amounts of audio and video content to
our users as reflected in the increase in direct sales of our content, and we
believe that users will increasingly demand high-quality audio and video
content, such as music, film, and other special events. Such content may require
us to make substantial payments to third parties from whom we license or acquire
such content. For example, our entertainment properties rely on film producers
and distributors, and other organizations for a large portion of the content
available on our properties. Our ability to maintain and build relationships
with third-party content providers will be critical to our success. In addition,
as new methods for accessing and delivering content through media formats
becomes available, including through alternative devices, we may need to enter
into amended content agreements with existing third-party content providers to
cover the new devices. We may be unable to enter into new, or preserve existing,
relationships with the third parties whose content we seek to obtain. In
addition, as competition for compelling content increases both domestically and
internationally, our content providers may increase the prices at which they
offer their content to us, and potential content providers may not offer their
content on terms agreeable to us. An increase in the prices charged to us by
third-party content providers could harm our operating results and financial
condition. Further, some of our content licenses with third parties may be
non-exclusive. Accordingly, content providers and other media sources such as
radio or television may be able to offer similar or identical content and
technologies. This increases the importance of our ability to deliver compelling
content and media technologies in order to differentiate from other businesses.
If we are unable to license or acquire compelling content at reasonable prices,
if other companies acquire develop and/or distribute content that is similar to
or the same as that provided by us, or if we do not develop compelling content
or media technologies, the number of users of our services may not grow as
anticipated, or may decline, which could harm our operating
results.
We
may incur substantial costs enforcing our intellectual property rights and any
difficulty with enforcing such rights may cause our results of operations and
financial condition to suffer.
The
decreasing cost of electronic and computer equipment and related technology has
made it easier to create unauthorized versions of audio and audiovisual products
such as compact discs, videotapes and DVDs. Similarly, advances in Internet
technology have increasingly made it possible for computer users to share audio
and audiovisual information without the permission of the copyright owners and
without paying royalties to holders of applicable intellectual property or other
rights. Unauthorized copies and piracy of these products compete against
legitimate sales of these products. Our revenues are derived from our licensed
video content that is potentially subject to unauthorized copying and
widespread, uncompensated dissemination on the Internet. If our proprietary
video content is copied and distributed without authorization we may incur
substantial costs enforcing our intellectual property rights. If we fail to
obtain appropriate relief or enforcement through the judicial process, or if we
fail to develop effective means of protecting our intellectual property, our
results of operations and financial condition may suffer.
Failure
to properly manage our potential growth would be detrimental to holders of our
securities.
Since we
have limited operating history and our total assets at December 31, 2009
consisted of $182,000 in cash and total current assets of $339,000, any
significant growth will place considerable strain on our financial resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employees and maintain
close coordination among our technical, accounting, finance, marketing, sales
and editorial staff. We cannot guarantee that we will be able to do so, or that
if we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
RISKS
RELATED TO OUR COMMON STOCK
Our
historic stock price has been volatile and the future market price for our
common stock is likely to continue to be volatile. Further, the limited market
for our shares will make our price more volatile. This may make it difficult for
you to sell our common stock for a positive return on your
investment.
The
public market for our common stock has historically been very volatile. Over the
past two fiscal years, the market price for our common stock as quoted on the
OTC Bulletin Board has ranged from $0.01 to $0.25. The closing sale price for
our common stock on March 29, 2009 was $0.06 per share. Any future market price
for our shares is likely to continue to be very volatile. This price volatility
may make it more difficult for you to sell shares when you want at prices you
find attractive. We do not know of any one particular factor that has caused
volatility in our stock price. However, the stock market in general has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of companies. Broad market
factors and the investing public’s negative perception of our business may
reduce our stock price, regardless of our operating performance. Further, the
market for our common stock is limited and we cannot assure you that a larger
market will ever be developed or maintained. The average daily trading volume of
our common stock has historically been insignificant. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for you to sell our common stock or to sell our common stock for a positive
return on your investment.
12
Our
common stock is subject to the "Penny Stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.
The SEC
has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, Rule 15g-9 requires:
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That a broker or dealer approve a
person’s account for transactions in penny stocks;
and
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·
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The broker or dealer receive from
the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be
purchased.
|
In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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·
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Obtain financial information and
investment experience objectives of the person;
and
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·
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Make a reasonable determination
that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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·
|
Sets forth the basis on which the
broker or dealer made the suitability determination;
and
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·
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That the broker or dealer
received a signed, written agreement from the investor prior to the
transaction.
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Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent,
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
ITEM
1B. Unresolved Staff
Comments
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
2. Properties
The
Company currently has the following buildings under operating
leases:
The
Company leases approximately 3,800 square feet of space in Marina Del Rey,
California. The operating lease expires September 30, 2012. At year end December
31, 2009, the monthly lease payment, including CAM fees, was $7,700. The monthly
lease payment is subject to a customary 3% percent escalation per annum. The
Company Corporate headquarters are located at this location.
The
Company leases approximately 10,000 square feet of additional space in Marina
Del Rey, California. The operating lease expires December 31, 2010. At year end
December 31, 2009, the monthly lease payment was $13,600. The monthly lease
payment is subject to a customary 3% percent escalation per annum. During
February 2008 and April 2008, the Company entered into commercial sublease
agreements with two non-related parties. It is expected that the future lease
payment obligation of the Company related to this lease will be completely
offset by the subleases and it is anticipated that they will remain subleased
for the remaining term of the lease. For the year ended December 31, 2009, the
sublease agreements resulted in $198,000 in gross revenues.
On July
15, 2008, the Company entered into a commercial lease agreement for
approximately 50m2 of
office space in Beijing, China. The lease expired on June 30, 2009 and required
monthly payments of $1,500.
At year
end December 31, 2009, the Company is confident that these buildings provide
more than adequate space to meet our needs and provide for future
growth.
13
ITEM
3. Legal
Proceedings
We are
not a party to any pending legal proceeding, nor are our properties the subject
of a pending legal proceeding, that is not in the ordinary course of business or
otherwise material to the financial condition of our business. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
ITEM
4. Reserved
PART
II
ITEM
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The
Company common stock is quoted on the Over-the-Counter
Bulletin Board (OTCBB) under the symbol CHYU.OB. The table below delineates on a
quarterly basis the high and low sales prices per share of our common stock as
reported by the OTCBB. The prices set forth in the table below may not be an
accurate indicator of the value of the Company shares. These prices represent
inter-dealer quotations and do not reflect retail markup, markdown or commissions and may not necessarily represent actual transactions.
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Common Stock Price
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High
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Low
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||||||||
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2009
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|||||||||
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First
Quarter Ended
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March
31
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$
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0.13
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$
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0.12
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||||
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Second
Quarter Ended
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June
30
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$
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0.19
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$
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0.19
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||||
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Third
Quarter Ended
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September
30
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$
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0.07
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$
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0.07
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||||
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Fourth
Quarter Ended
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December
31
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$
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0.08
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$
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0.08
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||||
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2008
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|||||||||
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First
Quarter Ended
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March
31
|
$
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0.06
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$
|
0.06
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||||
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Second
Quarter Ended
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June
30
|
$
|
0.10
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$
|
0.10
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||||
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Third
Quarter Ended
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September
30
|
$
|
0.09
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$
|
0.09
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||||
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Fourth
Quarter Ended
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December
31
|
$
|
0.15
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$
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0.15
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||||
Holders
of Record
As of
March 29, 2010, there were approximately 287 holders of record of the Company
common stock.
Dividend
Policy
We have
not declared any dividends to date. We have no present intention of paying any
cash dividends on our common stock in the foreseeable future, as we intend to
use earnings, if any, to generate growth. The payment by us of dividends, if
any, in the future, rests within the discretion of our Board of Directors and
will depend, among other things, upon our earnings, our capital requirements and
our financial condition, as well as other relevant factors. There are no
restrictions in our articles of incorporation or bylaws that restrict us from
declaring dividends.
14
Recent
Sales of Unregistered Securities
Capitalization
Amendment
Pursuant
to a Certificate of Amendment to our Certificate of Incorporation filed with the
State of Delaware which took effect as of October 16, 2008, the number of our
authorized shares of Common Stock, par value $.001 per share, of the Company has
been increased from 60,000,000 to 500,000,000 and the number of our authorized
shares of Preferred Stock, par value $.001 per share, has been increased from
1,000,000 to 2,000,000 (the "Capitalization Amendment").
Recent
Sales of Unregistered Securities
We sold
the following equity securities during the fiscal years ended December 31, 2009
and December 31, 2008 that were not registered under the Securities Act of 1933,
as amended (the "Securities
Act").
Preferred
Stock - Series A
On May
23, 2008, the Company filed with the State of Delaware a Certificate of
Designation authorizing its Series A Convertible Preferred Stock consisting of
500,000 shares, each of $0.001 par value and convertible into shares of Common
Stock at a rate of one thousand (1,000) shares of Common Stock for every one
share of Series A Convertible Preferred Stock at the option of the holder at any
time subsequent to the filing of an amendment to the Company’s certificate of
incorporation with the Secretary of State of the State of Delaware whereby the
authorized Common Stock is increased to a minimum of 200,000,000 shares. In
addition, the Series A Convertible Preferred Stock (i) has no voting rights
prior to conversion except as otherwise provided under Delaware law, (ii) has no
mandatory or optional redemption rights, (iii) has no preemptive rights, and
(iv) shall pay cash dividends only in the event cash dividends have been
declared on the Company’s Common Stock.
On June
2, 2008, the Company entered into a Content License Agreement (the "Content
License Agreement") with New China Media, LLC (“New China Media”), YGP, LLC
(“YGP”) and TWK Holdings, LLC (“TWK”) (New China Media, YGP and TWK collectively
referred to as “Content Providers”) providing for (i) the assignment by Content
Providers and the assumption by the Company of certain rights of Content
Providers for the territory of the People’s Republic of China to use, transmit
and publicly display via the Internet certain content; and (ii) the purchase by
YGP, New China Media and TWK of 16,200 shares, 3,000 shares and 12,000 shares of
Series A Convertible Preferred Stock of the Company for $16,200, $3,000 and
$12,000, respectively. On May 14, 2009 the Company issued 12,000,000 shares of
common stock to TWK, pursuant to a notice of conversion, in which TWK agreed to
convert the entire amount of their shares of Series A Convertible Preferred Stock of the Company into 12,000,000 shares of common stock.
On June
10, 2008, the Company’s subsidiary, Youth Media (Hong Kong) Limited (“YMHK”),
entered into a Cooperation Agreement with China Youth Net Technology (Beijing)
Co., Ltd. (“CYN”), China Youth Interactive Cultural Media (Beijing) Co., Ltd.
(“CYI”) and China Youth Net Advertising Co. Ltd. (“CYN Ads”). In conjunction
with the Cooperation Agreement, on June 10, 2008, the Company agreed to issue an
aggregate of 71,020 shares of its Series A Convertible Preferred Stock to
designees of CYN.
On
November 3, 2009, the Company agreed to issue an aggregate of 19,000,000 shares
of its common stock, in conjunction with, a new Cooperation Agreement (the “2009
Cooperation Agreement”) entered into by YMHK, on July 3, 2009, with China Youth
Interactive Cultural Media (Beijing) Co., Ltd. (“CYI”) and China Youth Net
Advertising Co. Ltd. (“CYN Ads”) which replaced the Cooperation Agreement
entered into on June 10, 2008 among YMHK, China Youth Net Technology (Beijing)
Co., Ltd. (“CYN”), CYI and CYN Ads pursuant to which the parties agreed to
cooperate with each other to develop, build and operate a fully managed video
and audio distribution network based on, including but not limited to, the China
Education and Research Network, the broadband network infrastructure built in
schools, universities and other education institutions in China (the “Campus
Network”). In consideration of the rights granted to YMHK under the 2009
Cooperation Agreement, YMHK agreed to pay CYI an amount equal to 20% of YMBJ's
annual after-tax profits and dividends, if any, as audited by YMBJ's independent
auditor and which YMHK will obtain from YMBJ for each financial year of YMBJ
during the term of the 2009 Cooperation Agreement.
The
19,000,000 shares of common stock agreed to be issued under the 2009 Cooperation
Agreement replace and are in lieu of the 71,020 shares of the Company's Series A
Convertible Preferred Stock (convertible into 71,020,000 shares of common stock)
which were agreed to be issued to designees of CYN under the Cooperation
Agreement entered into on June 10, 2008. At December 31, 2009,
the 19,000,000 shares of common stock agreed to be issued under the 2009 Cooperation Agreement had not yet been issued.
All of the foregoing securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act and/or Rule 506 thereunder.
Common
Stock
During
March 2008, the Company sold 10,000,000 shares of its common stock to an
unaffiliated accredited investor at a price of $0.03 per share, resulting in
gross proceeds of $300,000.
During
June 2008, the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended. The Company
issued and sold to the accredited investors an aggregate of 1,583,335 shares of
its common stock. These issuances resulted in aggregate gross
proceeds to the Company of $47,500.
15
On August
29, 2008, the Company entered into a subscription agreement with Year of the
Golden Pig, LLC ("YGP, LLC"), pursuant to which the Company sold 2.5 Units, with
each Unit consisting of a $100,000 principal amount of a 12% Convertible
Promissory Note (the "YGP, LLC Note") due three years from its issuance and
350,000 Common Stock Purchase Warrants, with each Warrant entitling the holder
thereof to purchase at any time beginning from the date of issuance through five
years thereafter one share of Common Stock at a price of $0.09 per share subject
to the Company's filing of a certificate of amendment to its certificate of
incorporation increasing the number of its available shares for
issuance. The subscription agreement with YGP, LLC provided the
Company with $250,000 in gross proceeds. Pursuant to the subscription
agreement with YGP, LLC, the Company issued 875,000 Purchase
Warrants.
On
September 30, 2008, the Company entered into a subscription agreement with Mojo
Music, Inc. ("Mojo Music"), of which Jay Rifkin, the Company's President and
Chief Executive Officer, is the sole managing member, in which the Company sold
1.5 Units, with each Unit consisting of a $100,000 principal amount of a 12%
Convertible Promissory Note due three years from its issuance and 350,000 Common
Stock Purchase Warrants, with each Warrant entitling the holder thereof to
purchase at any time beginning from the date of issuance through five years
thereafter one share of Common Stock at a price of $0.09 per
share. The subscription agreement with Mojo Music provided the
Company with $150,000 in gross proceeds. Pursuant to the subscription
agreement with Mojo Music, the Company issued 525,000 Purchase
Warrants.
See Note 3 Other Current
Assets for information on the Consulting Agreement between the
Company and American Capital Ventures, Inc. (“ACV”) and the issuance of shares
thereunder. On February 6, 2009, pursuant to a letter of agreement with
ACV, notwithstanding anything to the contrary to the Consulting Agreement
between ACV and the Company, the Company agreed to issue in advance of the
thirteenth month of the Consulting Agreement 250,000 shares of the Company's
common stock that will be deducted from the 1,000,000 (one million) shares of
the Company's common stock that were scheduled to be issued on the thirteenth
month of the Consulting Agreement so that the remaining shares of the Company's
common stock to be issued to ACV on such date are 750,000, unless the Consulting
Agreement is earlier terminated pursuant to the terms thereof. On September 29,
2009, pursuant to the Consulting Agreement between the Company and ACV, the 750,000 shares of the Company's common stock were issued.
On
January 8, 2009, the Content License Agreement was further extended by an
additional eight (8) years for a total of ten (10) years. In consideration
for the increase in the term of the agreement, New China Media received
4,000,000 shares of the Company's common stock. The Content License
Agreement extension was valued at $600,000 based on the fair value of the
associated underlying shares of the Company’s common stock on the date of the
extension agreement. See
Note 5 Intangible Assets.
On
October 22, 2009, the Company issued 234,789 shares of the Company’s common to one of the directors of the Company stock pursuant to a Conversion and Note Termination Agreement dated July 1, 2008
pursuant to which the entire principal amount outstanding and all interest
accrued from inception of a certain promissory note through the date of the
Conversion Note would be converted into 234,789 shares of the Company's common
stock. See Note 10 Note
Payable - Related Party.
On
October 22, 2009, the Company issued 200,000 shares of the Company's common stock to another director pursuant to a Reimbursement Termination Agreement pursuant to which
amounts owed to such director of the Company, as fees for services as the Audit
Committee Chairwoman, totaling $6,000, with a conversion price of $0.03 per
share, would be converted into 200,000 shares of the Company's common stock.
On
December 31, 2009, the Company issued 100,000 shares of the Company's common
stock pursuant to a Consulting Agreement ("Consulting Agreement") with ROAR, LLC
("ROAR") pursuant to the terms of which, ROAR will receive 300,000 shares of the
Company's common stock. The Consulting Agreement was valued at $30,000 based on
the value of the underlying shares of the company's common stock on the
effective date of the Consulting Agreement. At December 31, 2009, 200,000 shares
of the Company's common stock remained to be issued.
See Note
11 Convertible Note Payable–Related Party in the Notes to the Consolidated
Financial Statements for information on the conversion of the Rebel Holdings
Convertible Note into shares of the Company's common stock.
All of the foregoing securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act and/or Rule 506 thereunder.
Recent Stock Option Grants and Other Grants of Warrants
On May 6,
2009, the Board of Directors adopted, subject to stockholder approval which was
obtained at the annual stockholders meeting held on June 19, 2009, an amendment
to the 2005 Plan that increased the number of shares subject to the Stock Plan
from 15,000,000 shares to 50,000,000 shares.
16
On May
11, 2009, with the consent of Jay Rifkin, the Company’s President and Chief
Executive Officer, the Company canceled options held by him to purchase
4,400,000 shares of common stock, exercisable at $0.85 per share. Further,
on May 11, 2009, the Company granted Mr. Rifkin options to purchase 3,750,000
shares of common stock with an exercise price of $0.13 per share, which equals
the closing price of the Company’s common stock on the date of grant, which
stock options vest fully on the date of grant. In addition, on May 11,
2009, the Company granted Mr. Rifkin options to purchase 20,000,000 shares of
the Company's common stock with an exercise price of $0.13 per share, which
stock options shall vest annually over a period of four years from the date of
grant.
On May
11, 2009, with the consent of each of the Company’s four non-employee directors,
the Company cancelled options held by such directors to purchase an aggregate of
1,450,000 shares of common stock, exercisable at prices ranging from $0.25 to
$1.50 per share. On the same date, the Company granted options to such four
directors to purchase an aggregate of 1,200,000 shares of common stock, with an
exercise price of $0.13 per share, which stock options vest fully on the date of
grant. In addition, on May 11, 2009, the Company granted each of the four
directors options to purchase 2,000,000 shares each with an exercise price of
$0.13 per share, which stock options shall vest annually over a period of four
years from the date of grant.
On May
11, 2009, the Company granted to three employees options to purchase an
aggregate of 7,000,000 shares of common stock with an exercise price of $0.13
per share. These stock options vest annually over four years from the date of
grant.
On May 11, 2009, the Company granted a consultant, as consideration for services on behalf of the Company, a vested warrant with a term of seven years to purchase 1,250,000 shares of common stock with an exercise price of $0.03 per share.
ITEM
6. Selected Financial
Data
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and all
associated notes hereto contained in this Form 10-K. The discussion and analysis
and results of operations thereto contain historical information and
forward-looking statements based on current assumptions that involve risks and
uncertainties. This Form 10-K contains forward-looking statements attributed to
third parties that also involve risks and uncertainties. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements. In
many cases, you can identify forward-looking statements by terminology, such as
"may," "should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements are only predictions.
Known and unknown risks, uncertainties and other factors could cause our actual
results to differ materially from those projected in any forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including but not limited to, those set forth under "Risk
Factors" appearing under "Item 1A. Risk Factors" and elsewhere in this report on
Form 10-K. This Form 10-K contains forward-looking statements as defined by
Section 21E Application of Safe Harbor for Forward-Looking Statements of the
Securities Exchange Act of 1934 and as such are entitled to the protection
provisions of these laws.
The
Company is confident that the expectations implied in the forward-looking
statements are based upon reasonable assumptions. However, no assurance can be
given that they will be attained or that any divergence will be immaterial.
Given the uncertainty and assumptions in the forward-looking statements
discussed in this Form 10-K, the forward-looking events may not occur and actual
results may differ materially and adversely from those expressed or implied by
the forward-looking statements. Consequently, the Company disclaims any
obligation to publicize or undertake any updates or revisions to any
forward-looking statements contained herein with respect to any change in the
Company expectation of any such forward-looking statement or assumptions they
may be based on.
The
following "Overview" section is a brief summary of the significant issues
addressed in this MD&A. Investors should read the relevant associated
sections of the MD&A for a complete discussion of the issues summarized
below. The entire MD&A should be read in conjunction with ITEM 8. Financial
Statements and Supplementary Data.
Overview
China
Youth Media, Inc.
China
Youth Media, Inc. is a China focused youth marketing and media company whose
business is to provide advertisers and corporations with direct and centralized
access to China’s massive but difficult to reach student population. The
cornerstone of the Company’s China youth marketing strategy is Koobee, a large
scale, advertising supported Intranet Television Network (ITVN) media portal
that is initially targeting China’s campus-based college students, estimated to
total more than 30 million young people.
References in this document to the “Company,” “we,” “us,” and “our” refer to China Youth Media, Inc. and its direct and indirect wholly-owned subsidiaries.
References in this document to the “Company,” “we,” “us,” and “our” refer to China Youth Media, Inc. and its direct and indirect wholly-owned subsidiaries.
17
Koobee
Koobee is
a venue designed for marketers to deliver traditional TV spots and new media
advertising campaigns to a highly targeted demographic in the world’s fastest
growing broadband market. Koobee plans offer delivery of TV-style entertainment primarily
to the computers of these students,
providing a solution for advertisers and corporations to reach the
most active online community in China and a key segment of the world’s largest
youth market.
Koobee
offers a sports channel featuring All Sports Network
(ASN) content from the NFL, NHL, and Pac 10 and Big Ten games; a music
channel by BTTV, a popular youth lifestyle and music entertainment TV channel in
China; a travel and leisure channel by Quest USA; and a fashion channel
featuring “China’s Next Top Model,” part of the international Top Model
franchise and based on the hit U.S. TV show “America’s Next Top Model.”
With Koobee, we intend to
provide advertisers the impact of TV with the ROI of the Internet. We expect
this combination to be competitive and sufficiently appealing to capture market
share in China’s fast growth online advertising industry.
Content Syndication Services
China Youth Media plans to deliver premium content to this targeted demographic through its online video portal, www.koobee.com, and will syndicate its youth oriented content to complimentary delivery platforms across China. We plan to provide our content to China Telecom and China Unicom subscribers through two options: on an à la carte channel subscription basis, and as part of a bundled broadband service.
Online
We plan to strategically position
Koobee, the advertising supported ITVN media portal, to be the engine that
drives multiple revenue streams, including brand sponsorships, interactive
advertising and eCommerce. Koobee is a venue designed for marketers to deliver
traditional TV spots and new media advertising campaigns to a highly targeted
’s fastest growing broadband market.
On
Campus
China Youth Media plans to offer marketers an
opportunity to sponsor live events and showcase their brands. We also plan to offer coordinated Internet and campus event campaigns that will bring
international touring acts and sponsors directly to China’s college students
with live ITVN broadcast straight into their dorm rooms.
On Mobile
Our strategic partner China Youth Interactive Cultural Media secured a national mobile video and advertising license. Our plan is to deploy an
advanced mobile media and advertising delivery system catering specifically to
China’s youth market. We anticipate offering opt-in surveys and data collection, as well
as coordinated Internet, campus event and mobile campaigns.
Advertising
Services
China
Youth Media seeks to enable brands to achieve their media objective by providing
tailor-made advertising services and niche-targeted media campaigns.
18
Significant
Transactions During The Year Ended December 31, 2009
Content
Aggregation for China Telecom and China Unicom in Hunan Province,
China
On March
23, 2010, the Company executed a syndication agreement with a key content
aggregator for China Telecom and China Unicom in Hunan Province, China. Pursuant
to the terms of the syndication agreement, the Company will provide its youth
focused content to China Telecom and Unicom subscribers in Hunan Province
through two options: on an à la carte channel subscription basis, and as part of a bundled broadband service. The contract provides for payment on a per subscriber per month basis.
X
Games and Footprint Worldwide
On
October 5, 2009 the Company executed a Content Distribution Agreement (the "X
Games Agreement") with Branded entertainment company Footprint Worldwide which
whom has signed a deal with ESPN, Inc.’s action sports franchise, X Games, to
license video content for exclusive distribution across the Company's university campus network koobee.com.
China
Youth Interactive Cultural Media (CYI)
On June
10, 2008 our subsidiary, YMHK, entered into a Cooperation Agreement (the
“Cooperation Agreement”) with China Youth Net Technology (Beijing) Co., Ltd.
("CYN"), China Youth Interactive Cultural Media (Beijing) Co., Ltd. ("CYI") and
China Youth Net Advertising Co. Ltd. ("CYN Ads") to cooperate with each other to
develop, build and operate a fully managed video and audio distribution network
under the auspices of CYN (the “Campus Network”). In addition, CYN and CYI have
agreed to exclusively grant YMHK the following rights during the term of the
Cooperation Agreement: exclusive right to advertise on the Campus Network;
exclusive right to sell and operate the commercial campus marketing events;
right to provide foreign commercial content to the Campus Network; and enjoy the
rights with respect to the setup, operation, maintenance and expansion of the
Campus Network according to a separate commercial and technical services
agreement. On July 3, 2009, YMHK entered into a new Cooperation
Agreement (the “2009 Cooperation Agreement”), with China Youth Interactive
Cultural Media (Beijing) Co., Ltd. (“CYI”) and China Youth Net Advertising Co.
Ltd. (“CYN Ads”) which replaced the Cooperation Agreement entered into on June
10, 2008 among YMHK, China Youth Net Technology (Beijing) Co., Ltd. (“CYN”), CYI
and CYN Ads pursuant to which the parties agreed to cooperate with each other to
develop, build and operate a fully managed video and audio distribution network
based on, including but not limited to, the China Education and Research
Network, the broadband network infrastructure built in schools, universities and
other education institutions in China (the “Campus Network”). The 2009
Cooperation Agreement has a term of 20 years with an optional renewal term of 10
years.
WinTV
and the English Premier League
In August
2009, the Company entered into an agreement (the "EPL Agreement") with WinTV, a
subscription channel in China run by state-owned Guangdong Provincial Television
pursuant to which the Company secured the online rights to distribute the
2009-2010 season of the English Premier League (“EPL”). The EPL Agreement
is part of a licensing agreement between YMHK and WinTV.
New
China Media
On June
2, 2008, the Company entered into a Content License Agreement with New China
Media, YGP, LLC and TWK Holdings, LLC (New China Media, YGP and TWK collectively
referred to as "Content Providers") providing for the assignment by the Content
Providers and the assumption by us of certain rights of the Content Providers
for the territory of the People's Republic of China ("PRC") to use, transmit and
publicly display via the Internet certain content. On January 8, 2009, the
Content License Agreement was extended by an additional eight (8) years for a
total of ten (10) years.
Xinhua
Sports and Entertainment Limited (formerly Xinhua Finance Media
Limited)
On
December 26, 2008, our subsidiaries YMHK and YMBJ entered into a Joint Venture
Agreement (the "Joint Venture Agreement") with CYI and Xinhua Sports &
Entertainment Limited (“XSEL”), formerly known as Xinhua Finance Media Limited,
to develop business opportunities contemplated by the Cooperation Agreement YMHK
entered into on June 10, 2008 with CYN, CYI and CYN Ads. The Joint Venture
Agreement provides working capital for the purposes of deploying and marketing
the Campus Network. The Joint Venture Agreement provides working capital for a
minimum of twelve months ending December 31, 2009. The Joint Venture Agreement provides that YMHK and YMBJ shall be obligated on a joint and several basis, following written notice from XSEL, to return, repay or reimburse, as the case may be, all of the working capital provided by XSEL, upon demand by XSEL in the sole discretion of XSEL, together with interest accrued at an annual rate of 7 percent. As of the December 31 2009, the Joint Venture Agreement had provided working capital of $2,377,312. An additional $90,000 was provided subsequent to the 2009 fiscal year end.
Recent Developments
Although written demand for payment has not yet been made, we have been advised by XSEL that it will not provide any additional funds to YMHK under the Joint Venture Agreement. As a result, we are seeking additional financing to fund our operations. In addition, we have made overtures to XSEL to restructure the debt obligations of our subsidiaries, YMHK and YMBJ. To date, all such efforts have been unsuccessful. While we believe that the Joint Venture Agreement provides that any and all amounts due to XSEL are not due until twelve months after written demand for payment has been made which demand has not yet been provided, XSEL may claim that such amounts are immediately due and payable based upon certain other language in the Joint Venture Agreement. While we believe such is contrary to the terms of the Joint Venture Agreement, no assurance can be given that we will prevail in the event our interpretation is challenged in any legal proceeding. In addition, no assurance can be made that we will be able to obtain additional financing on acceptable terms, if at all. In this regard, unless we are able to restructure the existing debt obligations of our subsidiaries, YMHK and YMBJ, to XSEL, we believe our ability to obtain any such additional financing will be significantly impaired.
As a result of the foregoing, we have recently substantially reduced our operations and terminated various employees in our subsidiary, YMBJ. While we are trying to maintain limited operations, no assurance can be made that we will be able to continue our business operations for more than a limited period of time, including but not limited to maintaining our ITVN media portal called Koobee. Because of these recent developments, we may be forced to further scale down or possibly cease all business operations, as a result of which investors could lose their investment.
19
Our
Wholly-Owned Subsidiaries
Youth
Media (BVI) Limited
On May 8,
2008, under the laws of the British Virgin Islands, the Company formed Youth
Media (BVI) Limited ("YM BVI"). YM BVI is a wholly-owned subsidiary of the
Company and was established for the purpose of incorporating the Company's
wholly-owned subsidiary in Hong Kong.
Youth
Media (Hong Kong) Limited and Youth Media (Beijing) Limited
Youth
Media (Hong Kong) Limited ("YMHK"), a company organized under the laws of Hong
Kong on May 19, 2008, and Youth Media (Beijing) Limited (“YMBJ”), a company
organized under the laws of the People's Republic of China on December 10, 2008,
are wholly-owned subsidiaries of YM BVI and were formed by the Company to take
advantage of its shift in business to aggregation and distribution of
international content and advertising for Internet or online consumption in
China.
Rebel
Crew Films, Inc.
Rebel
Crew Films is a wholly-owned subsidiary of the Company and was organized under
the laws of the State of California on August 7, 2002. In January 2008, the
Company entered into a license and distribution agreement with Westlake
Entertainment, Inc. which effectively shifted all day-to-day operations related
to our home video library (the "Westlake Agreement"). Effective the
date of the Westlake Agreement, Rebel Crew Films ceased operations and is
currently maintained as a corporation in good standing with no
operations.
PerreoRadio.com
PerreoRadio.com
is our wholly-owned and operated website targeted to the young, urban Latino
demographic offers online radio shows, podcasts, music, and music
videos.
Company
History
China
Youth Media, Inc. was organized under the laws of the State of Utah on July 19, 1983 under the name of
Digicorp. On February 22, 2007, we changed the Company’s domicile from the State
of Utah to the State of Delaware effected by the merger of the Company, a Utah
corporation, with and into, Digicorp, Inc., a newly formed wholly owned
subsidiary of the Company that was incorporated under the Delaware General
Corporation Law for the purpose of effecting the change of
domicile.
The
Company changed its name from “Digicorp, Inc.” to “China Youth Media, Inc.” (the “Corporate Name Change”) pursuant to a Certificate of Amendment to our
Certificate of Incorporation filed with the State of Delaware which took effect
as of October 16, 2008. The Corporate Name Change was approved and authorized by
the Board of Directors of the Company and by the holders of shares representing
a majority of our voting securities which holders have given their written
consent. As a result of the Corporate Name Change, our stock symbol changed to
“CHYU” with the opening of trading on October 16, 2008 on the
OTCBB.
The
Company is organized in a single operating segment with no long-lived assets
outside of the United States of America. All of our revenues to date have been
generated in the United States, but with the development of our China ITVN media
portal, we expect that a portion of our future revenues will be from other
countries.
Revenue
Sources
During
the year ended December 31, 2009, the Company, including its subsidiaries,
generated revenue primarily from digital content distribution and website ad
revenue.
Advertising Supported Intranet
Television Network Media Website - Koobee is a large scale,
advertising supported Intranet Television Network (ITVN) media portal that is
initially targeting China’s campus based college students, estimated to total
more than 30 million young people. Koobee is a venue for marketers to deliver
traditional TV spots and new media advertising campaigns to a vast, upwardly
mobile, targeted demographic. Advertisers and channel owners will have available
to them multiple touch points ranging from interstitial interactive ads to
banners within social networking clubs and sponsored competitions, all with
accurate ad tracking that ensures clients realize value from unique and fully
licensed content. We expect this combination to be competitive and sufficiently
appealing to capture market share in China’s fast growth online advertising
industry. We believe that significant opportunities exist in the China Internet
advertising space, and we will actively pursue this potential source of revenue
during the year ending December 31, 2010.
20
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operation are
based upon the accompanying financial statements which have been prepared in
accordance with the generally accepted accounting principles in the United
States of America. The preparation of the financial statements requires that we
make estimates and assumptions that affect the amounts reported in assets,
liabilities, revenues and expenses. Management evaluates on an on-going basis
our estimates with respect to the valuation allowances for accounts receivable,
income taxes, accrued expenses and equity instrument valuation, for example. We
base these estimates on various assumptions and experience that we believe to be
reasonable. The following critical accounting policies are those that are
important to the presentation of our financial condition and results of
operations and require management’s most difficult, complex, or subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain.
The
following critical accounting policies affect our more significant estimates
used in the preparation of our financial statements and, in particular, our most
critical accounting policy relates to the valuation of our intangible assets and
stock based compensation.
Allowance for Doubtful
Account - Our allowance for doubtful accounts relates to accounts
receivable. The allowance for doubtful accounts is an estimate prepared by
management that identifies a certain portion of receivables that may go
uncollected. In determining adequacy of the allowance for doubtful account, we
consider customer balances in receivables, historical bad debts, customer
concentrations, current economic trends and changes in customer payment
patterns. Changes in the financial condition of our customer may change, which
would require additional allowances. The allowance for doubtful account is
reviewed quarterly, and adjustments are made as deemed necessary.
Beneficial Conversion Feature of
Convertible Notes Payable - The Beneficial Conversion Feature ("BCF") of
a convertible note, is normally characterized as the convertible portion or
feature of certain notes payable that provide a rate of conversion that is below
market value or in-the-money when issued. The Company accounts for BCF in
accordance with the guidelines established by Emerging Issues Task Force
("EITF") 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios. The Company records a BCF related to the
issuance of a convertible note when issued and also records the estimated fair
value of the warrants issued with those convertible notes. The BCF of a
convertible note is measured by allocating a portion of the note's proceeds to
the warrants and as a reduction of the carrying amount of the convertible note
equal to the intrinsic value of the conversion feature, both of which are
credited to additional paid-in-capital. The Company calculates the fair value of
warrants issued with the convertible note using the Black-Scholes valuation
model and uses the same assumptions for valuing employee options in accordance
with SFAS No. 123R. The only difference is that the contractual life of the
warrants is used. The value of the proceeds received from a convertible note is
then allocated between the conversion feature and warrants on a relative fair
value basis. The allocated fair value is recorded in the consolidated financial
statements as a debt discount (premium) from the face amount of the note and
such discount is amortized over the expected term of the convertible note (or to
the conversion date of the note, if sooner) and is credited to interest
expense.
Goodwill and Other Intangible
Assets - Goodwill and Intangible Assets correspond to the excess cost
over fair value of certain assets during acquisition. In accordance with the
provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets, goodwill and intangible assets acquired that are determined to
have an indefinite useful life are not subject to amortization, but instead are
tested for impairment at periodic intervals. Intangible assets with a useful
life that can be estimated are amortized over their respective estimated useful
lives to their estimated residual values and are reviewed periodically for
impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Certain events or changes in circumstances
may occur that indicate that goodwill or assets are impaired and consequently
require testing on a periodic basis. Determining the fair value of goodwill or
assets is subjective in nature and involves using estimates and assumptions. We
base our fair value estimates on assumptions we believe to be reasonable but
that are inherently uncertain. To date we have not recognized impairments on any
of our goodwill and other intangible assets.
Stock-Based Compensation - We
have adopted the provisions of SFAS No. 123(R), Share-Based Payment, which
requires that share-based payments be reflected as an expense based upon the
grant-date fair value of those grants. Accordingly, the fair value of each
option grant, non-vested stock award and shares issued under our employee stock
purchase plan, were estimated on the date of grant. We estimate the fair value
of these grants using the Black-Scholes model which requires us to make certain
estimates in the assumptions used in this model, including the expected term the
award will be held, the volatility of the underlying common stock, the discount
rate, dividends and the forfeiture rate. The expected term represents the period
of time that grants and awards are expected to be outstanding. Expected
volatilities were based on historical volatility of our stock. The risk-free
interest rate approximates the U.S. treasury rate corresponding to the expected
term of the option. Dividends were assumed to be zero. Forfeiture estimates are
based on historical data. These inputs are based on our assumptions, which we
believe to be reasonable but that include complex and subjective variables.
Other reasonable assumptions could result in different fair values for our
stock-based awards. Stock-based compensation expense, as determined using the
Black-Scholes option pricing model, is recognized on a straight line basis over
the service period, net of estimated forfeitures. To the extent that actual
results or revised estimates differ from the estimates used, those amounts will
be recorded as a cumulative adjustment in the period that estimates are
revised.
21
Results
of Operations
Comparison
of Year End December 31, 2009 to 2008
Revenues
Sales - We generated revenues
of $7,000 and $107,000 for the years ended December 31, 2009 and December 31,
2008, respectively. During the fiscal year 2009, the Company generated almost
exclusively all of its revenue through the production and distribution of
digital content. In the past, the Company, through its subsidiary Rebel Crew
Films, generated revenue through the direct sales of its licensed home video
library and licensing agreements with third parties that distributed the
Company's licensed content. The Company plans to use a significant portion of
its resources going forward to the aggregation and distribution of international
content and advertising for Internet consumption in China. Consequently, in
January 2008, the Company entered into a license and distribution agreement with
Westlake Entertainment, Inc. which effectively shifted all manufacturing and
distribution of its home video library to Westlake Entertainment along with all
day-to-day operations related to its home video library. Effective the date of
the Westlake Agreement, Rebel Crew Films ceased operations and is currently
maintained as a corporation in good standing with no operations.
Other Income - In March 2006,
the Company entered into a commercial lease agreement for additional office
space (the "Hollman Lease"). The Hollman Lease requires monthly payments of base
rent which increase from $12,475 in September 2006 to $14,041 in December 2010.
During February 2008 and April 2008, the Company entered into commercial
sublease agreements with two non-related parties. For the year ended December
31, 2009, the sublease agreements resulted in $198,000 in gross
revenues.
Operating
Expenses
Operating expenses were $5.4
million and $2.6 million during the years ended December 31, 2009 and 2008,
respectively. A decrease in the cost of sales, depreciation expense and legal
expense partially offset the increase in the component that was almost
exclusively responsible for the increase in operating expenses during the twelve
months ended December 31, 2009 which was stock based compensation expense from
grants of nonqualified stock options to our employees and non-employee
directors.
Stock based compensation
expense from grants of nonqualified stock options to our employees and
non-employee directors increased significantly to $2,236,000 during the year
ended December 31, 2009 from $163,000 during the year ended December 31, 2008.
The increase in stock based compensation expense from grants of nonqualified
stock options during the year ended December 31, 2009 resulted primarily from
issuances of nonqualified stock options to employees with the
Company.
Cost of sales during the
twelve months ended December 31, 2009 was zero which represents a significant
decrease from $55,000 during the twelve months ended December 31, 2008 . The
decrease in cost of sales can be attributed to the shift in Company strategy to
the aggregation and distribution of international content and advertising for
Internet consumption in China.
Salaries and employee benefits,
excluding stock based compensation expense, reflected an increase to
$556,000 during the year ended December 31, 2009 from $443,000 during the year
ended December 31, 2008. The increase in costs reflect a shift in our Company
strategy which resulted in part in a targeted hiring of employees that are
related to the normal operations of the Company's subsidiary in
Beijing.
The
remaining operating expenses consisted of professional fees, rent expense,
amortization expense and general and administrative expenses. Professional fees
were $14,000 less during the year ended December 31, 2009 compared to the year
ended December 31, 2008. The decrease in professional fees are in large part due
to significant decreases in amounts paid for legal and accounting fees related
to our operations in China and the establishment of our subsidiaries in Hong
Kong and Beijing.
Legal expense decreased from
the previous year. Legal fees decreased by $71,000 during the year ended
December 31, 2009. During the year ended December 31, 2009 and 2008, legal fees
were $171,000 and $241,000, respectively. For the year ended December 31, 2009
the majority of legal fees were related to the development of contracts and
review of major company transactions. In addition, legal fees during this period
were composed of fees paid for S.E.C. filing related matters, private placement
agreements and in preparation for financing activities. During the year ended
December 31, 2008, legal fees were almost exclusively related to the
establishment of our subsidiaries in Hong Kong and Beijing along with S.E.C.
filing related expenses.
Consulting fees increase by
$69,000 during the year ended December 31, 2009. At December 31, 2009 and 2008,
consulting fees were $255,000 and $187,000, respectively. During the year ended
December 31, 2009, the majority of consulting expense was related to business
development, investor relations and merger and acquisition consulting along with
other development costs associated with our operations in China. During the year
ended December 31, 2008, consulting expense was related to sales contracting
work and the development of our operations in China.
22
Rent expense increased by
approximately $44,000 during the year ended December 31, 2009 compared to the
year ended December 31, 2008 due to the Company’s leases and the associated
customary 3% increase in the base rent and to a lesser extent because of
additional commercial office space leased by the Company in Beijing, China in
July 2008, with base rent of $1,500 per month.
General and administrative
expense increased by approximately $611,000 during the year ended
December 31, 2009 compared to the year ended December 31, 2008 and is primarily
attributed to the costs associated with the development, building of and
operation of our fully managed video and audio distribution network and, to a
lesser extent, the strategic overall expansion of the business to the
aggregation and distribution of international content and advertising for
Internet consumption in China.
Net
Loss
For the
years ended December 31, 2009 and 2008 the Company had a net loss of
approximately $9.3 million and $3 million, respectively and is primarily
attributed to a significant decrease in revenues generated. The Company
increased its operating expenses during the year ended 2009 as compared to 2008
primarily due to the expansion of normal operations and other development
efforts in the Company's subsidiary in Beijing.
Interest
Income and Other, Net
Given the
financials constraints of the Company and its reliance on financing activities,
interest expense related to the financing of capital increase to $283,000 during
the year ended December 31, 2009 from $274,000 during the year ended December
31, 2008.
Taxes
At
December 31, 2009, we had a net operating loss carryforward of approximately
$7.76 million to offset future taxable income for federal income tax purposes.
The utilization of the loss carryforward to reduce any future income taxes will
depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The carryforward expires
beginning in 2021.
A change
in the ownership of a majority of the fair market value of our common stock can
delay or limit the utilization of existing net operating loss carryforwards
pursuant to Internal Revenue Code Section 382. The Company believes that such a
change occurred on December 29, 2005 and again during the year ended December
31, 2008. The Company is evaluating the net operating loss carryforward
limitation imposed by Internal Revenue Code Section 382 for net operating losses
incurred before the change dates.
Liquidity
and Capital Resources
Our principal sources of
liquidity are cash generated from financing activities and, to date and
to a lesser extent, cash from current operations. As of December 31, 2009, our
cash and cash equivalents were $182,000. We had a working capital deficit of
approximately $836,000 at December 31, 2009 and we continue to have recurring
losses. In the past we have primarily relied upon financing activities and loans
from related parties to fund our operations. These conditions raise substantial
doubt about our ability to continue as a going concern. We are actively seeking
sources of additional financing in order to maintain and potentially expand our
operations and to fund our debt repayment obligations. Even if we are able to
obtain funding, there can be no assurance that a sufficient level of sales will
be attained to fund such operations or that unbudgeted costs will not be
incurred. Future events, including the problems, delays, expenses and
difficulties frequently encountered by similarly situated companies, as well as
changes in economic, regulatory or competitive conditions, may lead to cost
increases that could make the net proceeds of any new funding and cash flow from
operations insufficient to fund our capital requirements. There can be no
assurances that we will be able to obtain such additional funding from
Recent Developments above for information on certain matters which may jeopardize our ability to continue operations.
Total assets were $5,094,000
at December 31, 2009 versus $8,962,000 at December 31, 2008. The change in total
assets is primarily attributable to several major transactions conducted by the
Company resulting in a significant decrease in Intangible Assets during the year
ended December 31, 2009. See Note 5 Intangible Asset.
Accounts receivable decreased
by $162,000 during the twelve months ended December 31, 2009 as compared to the
year ended December 31, 2008. The decrease in accounts receivable resulted
primarily from the change in strategy of the Company to focus on developing an
Internet media portal in China. The Company will continue to focus Company
resources to the development and operation of our Internet media portal and to
the aggregation and distribution of international content and advertising for
Internet consumption in China.
23
Intangible Assets net for the
twelve months ended December 31, 2009 and 2008 was $4,665,000 and $8,537,000,
respectively. This significant decrease in the Company's intangible assets was
almost exclusively as a result of the capitalization of a new Cooperation
Agreement entered into by the Company as described in Note 5 Intangible Assets,
China IPTV and Mobile
License, which resulted in the recording of a one-time non-cash
impairment loss that was partially offset by the capitalization of the Content
License Agreement extension entered into by the Company on January 8, 2009 as
described in Note 5 Intangible Assets, Content License
Agreement.
Operating activities used
$2,060,000 of cash during the year ended December 31, 2009 compared to $926,000
during the year ended December 31, 2008. The change in cash used for operating
activities resulted primarily from a shift in Company strategy to focus on the
development and operation of our Internet media portal and to the aggregation
and distribution of international content and advertising for Internet
consumption in China.
During
the year ended December 31, 2009, there was no sales revenue related to the sale
of our licensed content which resulted in an associated decrease in cost of
sales. As we continue to focus Company resources to the development and
operation of our Internet media portal and to the aggregation and distribution
of international content and advertising for Internet consumption in China, the
Company anticipates that all revenues henceforth will be generated from our
operations in China.
Cash used in investing
activities for the year ended December 31, 2009 of $74,000 resulted
primarily from the purchase of computer hardware and to securing the online
rights to distribute certain content and other licensing agreements which were
offset by the expiration of the licensed content of our Spanish language home
video library. Cash used in investing activities for the year ended December 31,
2008 of $5,500, resulted from the purchase of computer hardware.
Contractual
Obligations as of December 31, 2009
Operating Leases - Set forth
below is a summary of our current obligations as of December 31, 2009 comprised
exclusively of rental lease obligations to make future payments due by the
period indicated below.
|
Operating Lease Payments
|
Minimum
Payments
|
|||
|
2010
|
$ | 239,566 | ||
|
2011
|
82,757 | |||
|
2012
|
63,508 | |||
|
Total
|
$ | 385,831 | ||
In August
2005 the Company entered into a commercial lease agreement for office space. The
lease requires monthly payments of base rent in the amount of $5,890 from August
21, 2005 through September 30, 2012. Further, on each anniversary date the base
rent is subject to a 3% increase over the previous year. In March 2006 the
Company entered into a commercial lease agreement for additional office space.
The additional lease requires monthly payments of base rent which increase from
$12,475 in September 2006 to $14,041 in December 2010. On July 15, 2008, the
Company entered into a commercial lease agreement for office space in Beijing,
China. The lease requires monthly payments of $1,500 for twelve
months.
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Recently
Issued Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Update No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees”. This update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share - Amendments to Section 260-10-S99”, which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement and Disclosures Topic 820 - Measuring Liabilities at Fair Value”, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures - Overall, for the fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of topic 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
24
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to Section 480-10-S99” which represents an update to section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued standards that establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We have begun to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2010. As the Codification was not intended to change or alter existing GAAP, it will not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued standards that responds to concerns about the application of certain key provisions of FASB Interpretation (FIN) 46(R), including those regarding the transparency of the involvement with variable interest entities. Specifically, the standards require a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”) and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. In addition, the standard requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement and is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In June 2009, the FASB issued standards that eliminate the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This standard is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In May 2009, the FASB issued standards that requires management to evaluate subsequent events through the date the financial statements are either issued, or available to be issued. Companies are required to disclose the date through which subsequent events have been evaluated. This standard is effective for interim or annual financial periods ending after June 15, 2009. The Company evaluated its December 31, 2009 financial statements for subsequent events through March 29, 2010, the date the financial statements were available to be issued. Other than the agreements and events in Note 19, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
In April 2009, the FASB issued standards that require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods. This standard applies to all financial instruments within the scope of Statement 107 held by publicly traded companies, as defined by APB 28, and requires that a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
25
In April 2009, the FASB issued standards that provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This standard is effective for interim and annual periods ending after June 15, 2009. We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
In May 2008, the FASB issued standards that identify the sources of accounting principles and the framework for selecting the principles 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). We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
In May 2008, the FASB issued standards that require the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This standard became effective for the Company on January 1, 2009 and requires retroactive application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position, cash flows, or results of operations.
In April 2008, the FASB issued standards that amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and was effective for fiscal years beginning after November 15, 2008. This standard was effective for the Company beginning January 1, 2009. We do not expect the adoption of this to have a material impact on the Company’s income statement, financial position or cash flows.
In March 2008, the FASB issued standards that amends and expand the disclosure requirements and with the intent to provide users of financial statements with an enhanced understanding of: a) How and why an entity uses derivative instruments; b) How derivative instruments and related hedged items are accounted for and its related interpretations; and c) How derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows and was effective for fiscal years beginning after November 15, 2008. This standard was effective for the Company beginning in the first quarter of fiscal 2009. We do not expect the adoption of this standard to have a material effect on the Company’s consolidated results of operations and financial condition.
In December 2007, the FASB issued standards that requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. This standard also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. This standard was effective for the Company beginning January 1, 2009 and we will apply it prospectively to business combinations completed on or after that date.
ITEM
7A. Quantitative and Qualitative
Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
8.
Financial Statements and
Supplementary Data
See
Financials Statements on Page 40 of this Annual Report on Form
10-K.
ITEM
9.
Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
ITEM
9A (T). Controls and
Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that, as of
December 31, 2009, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is: (1) accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure;
and (2) recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. There was no change to our
internal controls or in other factors that could affect these controls during
our last fiscal year that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, the chief executive officer
and chief financial officer and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
26
Our
evaluation of internal control over financial reporting includes using the COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on
our evaluation under the frameworks described above, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
This
annual report 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 requirements 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.
ITEM
9B. Other
Information
Not
applicable.
PART
III
ITEM
10. Directors, Executive Officers and
Corporate Governance
The
following table sets forth the names and ages of the members of our Board of
Directors and our executive officers and the positions held by
each.
|
Name |
Age |
Position |
||
|
Jay
Rifkin |
54 |
Chief
Executive Officer, Director |
||
|
William
B. Horne |
41 |
Director |
||
|
Alice
M. Campbell |
59 |
Director |
||
|
Alan
Morelli |
48 |
Director |
||
|
David
M. Kaye |
55 |
Director |
Officers
are elected annually by the Board of Directors (subject to the terms of any
employment agreement), to hold such office until an officer’s successor has been
duly appointed and qualified, unless an officer sooner dies, resigns or is
removed by the Board. Some of our directors, director nominees and executive
officers also serve in various capacities with our subsidiary Rebel Crew Films.
There are no family relationships among any of our directors and executive
officers.
Below is
a brief description of the above persons’ business experience during the past
five years based on information supplied by each of them.
Jay Rifkin, Chief Executive Officer,
Principal Financial Officer and Director. Mr. Rifkin has been our Chief
Executive Officer since September 30, 2005 and has been a member of our Board of
Directors since March 26, 2006. From 2004 to Present, Mr. Rifkin has been the
sole Managing Member of Rebel Holdings, LLC. In 1995, Mr. Rifkin founded Mojo
Music, Inc., a music publishing company, and he has been President of Mojo
Music, Inc. since it was founded. Mr. Rifkin has served as Producer and
Executive Producer on various motion pictures and is also a music producer,
engineer and songwriter. Mr. Rifkin received a Grammy Award for Best Children’s
Album and an American Music Award for Favorite Pop/Rock Album for his work on
Disney’s "The Lion King," and received a Tony nomination for "The Lion King" on
Broadway. From 1988 to 2004, Mr. Rifkin, through Mojo Music, Inc., served as a
Managing Member of Media Ventures, LLC, an entertainment cooperative founded by
Mr. Rifkin and composer Hans Zimmer. In 1995, Mr. Rifkin founded Mojo Records,
LLC, which in 1996 became a joint venture with Universal Records, and was
subsequently sold to Zomba/BMG Records in 2001.
William B. Horne, Director.
Mr. Horne has been a member of our Board of Directors since July 20, 2005. From
July 20, 2005 to April 20, 2007, Mr. Horne was our Chief Financial Officer. From
September 30, 2005 until December 29, 2005, Mr. Horne also served as our Chief
Executive Officer and Chairman of our Board of Directors. Mr. Horne is currently the Cheif Financial Officer of Physical Therapy Holdings, Inc. From July 2005 until October 2008, Mr. Horne
was Chief Financial Officer of Patient Safety Technologies, Inc., a public company quoted on the OTC Bulletin Board, and was Chief Executive Officer from January 2007 until May 2008.
From May 2002 to April 2005, Mr. Horne held the position of Chief Financial
Officer of Alaska Wireless Communications, a privately held advanced cellular
communications company, which was subsequently sold to General Communications, Inc. (Nasdaq: GNCMA). Since January 2002, Mr. Horne has also provided
strategic financial consulting services to both private and public companies.
From November 1996 to December 2001, Mr. Horne held the position of Chief
Financial Officer of The Phoenix Partners, a venture capital limited partnership
27
Alice M. Campbell, Director.
Ms. Campbell has been a member of our Board of Directors since July 16, 2005.
From June 23, 2005 until January 30, 2006, Ms. Campbell served as a director of
IPEX, Inc., a public company quoted on the OTC Bulletin Board. Ms. Campbell
served as a director of Patient Safety Technologies, Inc., a public company
quoted on the OTC Bulletin Board, from October 22, 2004 until January 26, 2007.
Since 2001, Ms. Campbell has been, and is currently, an investigator and
consultant specializing in research and litigation services, financial
investigations and computer forensics for major companies and law firms
throughout the United States. Ms. Campbell is a certified fraud specialist, as
well as a certified instructor for the Regional Training Center of the United
States Internal Revenue Service and for the National Business Institute. From
1979 to 2001, Ms. Campbell served as a special agent for the United States
Treasury Department where she conducted criminal investigations and worked
closely with the United States Attorney’s Office and with several federal
agencies, including the Internal Revenue Service, Federal Bureau of
Investigation, Secret Service, Customs Service, State Department, Drug
Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms and U.S. Postal
Service.
Alan Morelli, Director. Mr.
Morelli has been one of our directors since March 26, 2006. Mr. Morelli is a
consultant who has served as Managing Director of Analog Ventures, LLC, a
consulting firm located in Pacific Palisades, California, since 1997. Mr.
Morelli is also currently serving as a director of Physical Therapy Holdings,
Inc. and Precise Exercise Equipment. Physical Therapy Holdings, Inc. develops
tools for outpatient clinics. Precise developed innovative commercial fitness or
rehabilitation technology used in health clubs and consumer equipment since
1994. Mr. Morelli received a B.S. from Rutgers University (1983) and a J.D. from
Georgetown University Law Center (1986).
David M. Kaye, Director. Mr.
Kaye has been one of our directors since March 26, 2006. Mr. Kaye is an attorney
and has been a partner in the law firm of Kaye Cooper Fiore Kay & Rosenberg,
LLP, located in Florham Park, New Jersey, since the firm’s inception in February
1996. Since 1980, Mr. Kaye has been a practicing attorney in the New York City
metropolitan area specializing in corporate and securities matters. Mr. Kaye received his B.A. from George
Washington University (1976) and his J.D. from the Benjamin N. Cardozo School of Law, Yeshiva University (1979).
Audit
Committee
The Audit
Committee is appointed by the Board of Directors in fulfilling its
responsibilities to oversee: (1) the integrity of our financial statements and
disclosure controls; (2) the qualifications and independence of our independent
accountants; (3) the performance of our independent accountants; and (4)
compliance with legal and regulatory requirements. The Audit Committee presently
consists of Alice M. Campbell and William B. Horne. Ms. Campbell is Chairwoman
of the Audit Committee. The Board has determined that Ms. Campbell and Mr. Horne
are each an "audit committee financial expert" as defined under Item 407(d)(5)
of Regulation S-K promulgated pursuant to the Securities Exchange Act of 1934,
as amended.
Compensation
Committee
The
Compensation Committee is appointed by the Board of Directors to discharge the
responsibilities of the Board relating to compensation of our executive
officers. The Compensation Committee presently consists of Alice M. Campbell,
William B. Horne, Alan Morelli and David M. Kaye. Ms. Campbell is Chairwoman of
the Compensation Committee.
Code
of Ethics
We have
adopted a Code of Ethics and Business Conduct that applies to our Chief
Executive Officer and Chief Financial Officer, which is filed as Exhibit 14.1 to
our annual report on Form 10-KSB for the fiscal year ended June 30, 2005. Upon
request, we will provide to any person without charge a copy of our Code of
Ethics. Any such request should be made to Attn: Secretary, China Youth Media,
Inc., 4143 Glencoe Avenue, Marina Del Rey, CA 90292. We are in the process of
building a website where our Code of Ethics will be available to
investors.
Section
16(A) Beneficial Ownership Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other of our
equity securities. Officers, directors and greater than ten percent stockholders
are required by SEC regulations to furnish us with copies of all Section 16(a)
forms they file.
28
Based
solely on our review of the copies of any Section 16(a) forms received by us or
written representations from the reporting persons, we believe that with respect
to the fiscal year ended December 31, 2009, all the reporting persons complied
with all applicable filing requirements, except that William B. Horne filed one report late relating to one transaction, Alice M. Campbell filed one report late relating to one transaction and Dennis Pelino filed one report late relating to one transaction.
Item
11. Executive
Compensation
The
following summary compensation tables set forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the years ended December 31, 2009 and, December 31, 2008, of those persons
who were, at December 31, 2009 (i) the chief executive officer and (ii) the
other most highly compensated executive officers of the Company, whose total
compensation was in excess of $100,000 (the named executive
officers):
Summary
Compensation Table
|
Name and Principal Position
|
Year
|
Salary($)
(2)
|
Bonus
($)
|
Stock
Awards
($) |
Option Awards
($) (3)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
|
|||||||||||||||||||||||||
|
Jay Rifkin, (1)
|
2009
|
$ | 165,000 | $ | 0 | $ | 0 | $ | 2,771,683 | $ | 0 | $ | 0 | $ | 0 | $ | 2,936,683 | |||||||||||||||||
|
President
and
|
2008
|
$ | 165,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 165,000 | |||||||||||||||||
|
Chief
Executive Officer
|
||||||||||||||||||||||||||||||||||
|
(1)
|
Mr. Rifkin was appointed
President on September 30, 2005, and Chief Executive Officer and director
nominee on December 29,
2005.
|
|
(2)
|
Consists of salary for
2009. Consists of accrued salary for 2008, none of which has
been paid as of December 31,
2009.
|
|
(3)
|
Represents the dollar amount
recognized for financial reporting purposes of stock options awarded in
2009 computed in accordance with SFAS
123(R).
|
Equity
Awards
The
following table provides certain information concerning equity awards held by
the named executive officers as of December 31, 2009.
Outstanding
Equity Awards at December 31, 2009
|
Options Awards
|
|||||||||||||
|
No. of Securities
Underlying
Unexercised
Options (#)
|
No. of Securities
Underlying
Unexercised
Options (#)
|
Option
Exercise
|
Option
Expiration
|
||||||||||
|
Name
|
Exercisable
|
Unexercisable
|
Price ($)
|
Date
|
|||||||||
|
Jay
Rifkin
|
112,500 | 37,500 | $ | 0.20 |
11/8/2016
|
||||||||
| 3,750,000 | 0 | $ | 0.13 |
5/11/2019
|
|||||||||
| 0 | 20,000,000 | $ | 0.13 |
5/11/2019
|
|||||||||
29
Benefit
Plans
Effective
July 20, 2005, the Board of Directors approved our Stock Option and Restricted
Stock Plan. Under the Stock Option and Restricted Stock Plan, we can issue
restricted shares of common stock, options to purchase shares of common stock
(both incentive stock options and non-incentive stock options) and warrants to
purchase shares of common stock to employees, directors and consultants. The
number of shares subject to the Stock Option and Restricted Stock Plan may not
exceed 15,000,000 shares. The Stock Option and Restricted Stock Plan is
administered by our Compensation Committee. On July 14, 2006, the stockholders
approved our Stock Option and Restricted Stock Plan. On May 6, 2009, the Board
of Directors adopted, subject to stockholder approval which was obtained at the
annual stockholders meeting held on June 19, 2009, an amendment to the 2005 Plan
that increased the number of shares subject to the Stock Plan from 15,000,000
shares to 50,000,000 shares.
Compensation
of Directors
During
2009, the Company did not compensate any of its directors in cash. The
Chairperson of the Audit Committee is entitled to receive $6,000 annually paid
in cash. During 2009, the Company did not pay this amount. All directors are
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their duties to the Company. In addition, directors are eligible to receive
restricted shares of common stock and stock options pursuant to our Stock Option
Restricted Stock Plan described above.
The
following table provides certain summary information concerning the compensation
paid to directors, other than Jay Rifkin (our Chief Executive Officer), during
2009. All compensation paid to Mr. Rifkin is set forth in the table under
"Executive Compensation."
Director
Compensation
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Stock
Awards
($)
|
Option
Awards ($)
(1)
|
All Other
Compensation ($)
|
Total ($)
|
|||||||||||||||
|
Alan
Morelli
|
0 | 0 | $ | 265,498 | 0 | $ | 265,498 | |||||||||||||
|
Alice
M. Campbell
|
0 | 0 | $ | 268,416 | 0 | $ | 268,416 | |||||||||||||
|
David
M. Kaye
|
0 | 0 | $ | 265,498 | 0 | $ | 265,498 | |||||||||||||
|
William
B. Horne
|
0 | 0 | $ | 274,251 | 0 | $ | 274,251 | |||||||||||||
|
(1)
|
Represents
the dollar amount recognized for financial reporting purposes of stock
options awarded in 2009 computed in accordance with Financial Accounting
Standards 123R.
|
Employment
Agreements with Executive Officers
Jay Rifkin, Chief Executive Officer of the Company, is employed pursuant to an employment agreement entered into as of November 2, 2009, and effective as of July 1, 2009, at an initial annual base salary of $200,000. The term of the employment agreement is three years and will automatically renew for successive one-year terms unless either party delivers to the other party written notice of termination at least 30 days before the end of the then current term. The annual base salary will increase at least 10% in the second year of the term and at least 10% more in the third year of the employment term. The agreement also contains customary provisions for disability, death, confidentiality, indemnification and non-competition. If Mr. Rifkin voluntarily terminates the agreement without good reason or if we terminate the agreement for cause, we must pay Mr. Rifkin all accrued compensation through the date of termination and provide life, accident and disability insurance, and health, dental and vision benefits to Mr. Rifkin and his dependents for a period of three months after termination. If we terminate the agreement without cause, if Mr. Rifkin terminates the agreement for good reason or if the agreement is terminated upon the death or disability of Mr. Rifkin, then we must pay Mr. Rifkin or his estate all unpaid compensation through the duration of the three-year employment term and must provide insurance and health benefits through the duration of such term. Good Reason is defined in the agreement as: (i) material breach of the agreement by us including, without limitation, any diminution in title, office, rights and privileges of Mr. Rifkin or failure to receive base salary payments on a timely basis; (ii) relocation of the principal place for Mr. Rifkin to provide his services to any location more than 20 miles away from 4143 Glencoe Ave, Marina Del Rey, Ca 90292; (iii) failure to maintain in effect directors’ and officers’ liability insurance covering Mr. Rifkin; (iv) any assignment or transfer of any of our rights or obligations under the agreement; or (v) any change in control of our company including, without limitation, if Mr. Rifkin shall cease to own a majority of our outstanding voting securities. The foregoing agreement replaced an employment agreement entered into with Mr. Rifkin effective as of September 30, 2005.
Mr. Rifkin was previously granted options to purchase 4,400,000 shares of common stock with an exercise price equal to the FMV of the common stock on September 30, 2005 and vesting annually over a period of three years from December 29, 2005. On May 11, 2009, with the consent of Jay Rifkin, the Company canceled options held by him to purchase 4,400,000 shares of common stock, exercisable at $0.85 per share. Further, on May 11, 2009, the Company granted Mr. Rifkin options to purchase 3,750,000 shares of common stock with an exercise price of $0.13 per share, which equals the closing price of the Company’s common stock on the date of grant, which stock options vest fully on the date of grant. In addition, on May 11, 2009, the Company granted Mr. Rifkin options to purchase 20,000,000 shares of the Company’s common stock with an exercise price of $0.13 per share, which stock options shall vest annually over a period of four years from the date of grant. Under the current employment agreement, Mr. Rifkin is also eligible to receive shares of common stock and stock options from time to time and an annual bonus as determined by the Board of Directors.
Mr. Rifkin was previously granted options to purchase 4,400,000 shares of common stock with an exercise price equal to the FMV of the common stock on September 30, 2005 and vesting annually over a period of three years from December 29, 2005. On May 11, 2009, with the consent of Jay Rifkin, the Company canceled options held by him to purchase 4,400,000 shares of common stock, exercisable at $0.85 per share. Further, on May 11, 2009, the Company granted Mr. Rifkin options to purchase 3,750,000 shares of common stock with an exercise price of $0.13 per share, which equals the closing price of the Company’s common stock on the date of grant, which stock options vest fully on the date of grant. In addition, on May 11, 2009, the Company granted Mr. Rifkin options to purchase 20,000,000 shares of the Company’s common stock with an exercise price of $0.13 per share, which stock options shall vest annually over a period of four years from the date of grant. Under the current employment agreement, Mr. Rifkin is also eligible to receive shares of common stock and stock options from time to time and an annual bonus as determined by the Board of Directors.
30
|
ITEM
12.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
|
The
following table sets forth certain information, as of March 29, 2010 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of the named executive officers
and directors; and (iii) our directors and named executive officers as a group.
Except as otherwise indicated, each of the stockholders listed below has sole
voting and investment power over the shares beneficially owned.
|
Name of Beneficial Owner (1)
|
Common Stock
Beneficially Owned (2)
|
Percentage of
Common Stock (2)
|
||||||
|
Jay
Rifkin
|
96,830,063 |
(3)
|
58.80 | % | ||||
|
William
B. Horne
|
747,289 |
(4)
|
1.73 | % | ||||
|
Alice
M. Campbell
|
612,500 |
(5)
|
1.65 | % | ||||
|
Alan
Morelli
|
400,000 |
(6)
|
1.57 | % | ||||
|
David
M. Kaye
|
462,500 |
(7)
|
1.57 | % | ||||
|
Dennis
Pelino
|
34,977,778 |
(8)
|
21.67 | % | ||||
|
TWK
Holdings, LLC
|
12,000,000 |
(9)
|
7.56 | % | ||||
|
All
named executive officers and directors as a group (5
persons)
|
99,052,352 | 56.70 | % | |||||
|
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o China
Youth Media, Inc., 4143 Glencoe Avenue, Marina Del Rey, CA
90292.
|
|
(2)
|
Applicable
percentage ownership is based on 158,631,461 shares of common stock
outstanding as of March 29, 2010 plus, for each stockholder, any
securities that stockholder has the right to acquire within 60 days of
March 29, 2010 pursuant to options, warrants, conversion privileges or
other rights. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common
stock that a person has the right to acquire beneficial ownership of upon
the exercise or conversion of options, convertible stock, warrants or
other securities that are currently exercisable or convertible or that
will become exercisable or convertible within 60 days of March 29, 2010
are deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such person,
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other
person.
|
|
(3)
|
Includes: (a) 88,354,605 shares
held by Rebel Holdings, LLC ("Rebel Holdings") of which Mr. Rifkin is the
sole managing member; (b) 2,421,292 shares which are directly held by Mr.
Rifkin; (c) 1,666,666 shares issuable upon conversion of a $150,000
principal amount convertible note held by Mojo Music, Inc. of which Mr.
Rifkin is the sole managing member, with a conversion price of $0.09 per
share; (d) 525,000 shares issuable upon exercise of stock warrants with an
exercise price of $0.09 per share; (e) 3,750,000 shares issuable upon
exercise of stock options with an exercise price of $0.13 per share, which
stock options are fully vested as of May 11, 2009; (f) 20,000,000 shares
issuable upon exercise of stock options with an exercise price of $0.13,
which stock options vest annually over a period of four years from May 11,
2010; and (g) 150,000 shares issuable upon exercise of stock options with
an exercise price of $0.20 per share, which stock options vest annually
over a period of three years from November 8, 2007. For the purposes of the applicable percentage of beneficial ownership, included are only those shares beneficially owned, plus any securities that Mr. Rifkin has the right to acquire within 60 days of March 29, 2010 pursuant to options, warrants, conversion privileges or other rights and does not include 20,037,500 shares issuable upon exercise of stock options which are not exercisable within such 60 day period. Mr. Rifkin’s reported beneficial ownership does not include certain shares of common stock issued and issuable for which certain shareholders have granted Mr. Rifkin an irrevocable proxy to vote for certain directors.
|
|
(4)
|
Includes (a) 284,789 shares owned
by Mr. Horne; (b) 350,000 shares issuable upon exercise of stock options
with an exercise price of $0.13 per share, which stock options are fully
vested as of May 11, 2009; (c) 150,000 shares issuable upon exercise of
stock options with an exercise price of $0.20 per share which stock
options vest annually over a period of four years from November 8, 2007;
and (d) 2,000,000 shares issuable upon exercise of stock options with an
exercise price of $0.13, which stock options vest annually over a period
of four years from May 11, 2010. For the purposes of the applicable percentage of beneficial ownership, included are only those shares beneficially owned, plus any securities that Mr. Horne has the right to acquire within 60 days of March 29, 2010 pursuant to options, warrants, conversion privileges or other rights and does not include 2,037,500 shares issuable upon exercise of stock options which are not exercisable within such 60 day period. Mr. Horne has granted Mr. Rifkin an
irrevocable proxy to vote the shares of common stock issuable upon
exercise of such stock options for certain
directors.
|
31
|
(5)
|
Represents (a) 200,00 shares owned by Ms. Campbell; (b) 300,000 shares issuable upon exercise of stock
options with an exercise price of $0.13 per share, which stock options are
fully vested as of May 11, 2009; (c) 150,000 shares issuable upon exercise
of stock options with an exercise price of $0.20 per share which stock
options vest annually over a period of four years from November 8, 2007;
and (d) 2,000,000 shares issuable upon exercise of stock options with an
exercise price of $0.13, which stock options vest annually over a period
of four years from May 11, 2010. For the purposes of the applicable percentage of beneficial ownership, included are only those shares beneficially owned, plus any securities that Ms. Campbell has the right to acquire within 60 days of March 29, 2010 pursuant to options, warrants, conversion privileges or other rights and does not include 2,037,500 shares issuable upon exercise of stock options which are not exercisable within such 60 day period. Ms. Campbell has granted Mr. Rifkin an irrevocable proxy to vote the shares of common stock issuable upon exercise of such stock options for certain directors.
|
|
(6)
|
Includes: (a) 275,000 shares issuable upon exercise of stock options with an exercise price of $0.13 per share, which stock options are fully vested as of May 11, 2009; (b) 2,000,000 shares issuable upon exercise of stock options with an exercise price of $0.13, which stock options vest annually over a period of four years from May 11, 2010; and (c) options to purchase 250,000 shares of common stock with an exercise price of $0.14 per share, which stock options vest annually over a period of four years from August 29, 2007. For the purposes of the applicable percentage of beneficial ownership, included are only those shares beneficially owned, plus any securities that Mr. Morelli has the right to acquire within 60 days of March 29, 2010 pursuant to options, warrants, conversion privileges or other rights and does not include 2,125,000 shares issuable upon exercise of stock options which are not exercisable within such 60 day period.
|
|
(7)
|
Includes (a) 275,000 shares
issuable upon exercise of stock options with an exercise price of $0.13
per share, which stock options are fully vested as of May 11, 2009; (b)
options to purchase 250,000 shares issuable upon exercise of stock options
with an exercise price of $0.20 per share which stock options vest
annually over a period of four years from November 8, 2007; and (c)
2,000,000 shares issuable upon exercise of stock options with an exercise
price of $0.13, which stock options vest annually over a period of four
years from May 11, 2010. For the purposes of the applicable percentage of beneficial ownership, included are only those shares beneficially owned, plus any securities that Mr. Kaye has the right to acquire within 60 days of March 29, 2010 pursuant to options, warrants, conversion privileges or other rights and does not include 2,062,500 shares issuable upon exercise of stock options which are not exercisable within such 60 day period.
|
|
(8)
|
Includes (a) 9,000,000 shares
which are directly held by Mr. Pelino; (b) 7,000,000 shares which are held
by New China Media LLC of which Mr. Pelino is the sole managing member;
(c) 16,200,000 shares which are held by Year of the Golden Pig LLC (“YGP”)
of which Mr. Pelino is the sole managing member; (d) 2,777,777 shares
issuable upon conversion of a $250,000 principal amount of a convertible
note held by YGP; and (e) 875,000 shares issuable upon exercise of stock
warrants with an exercise price of $0.09 per share. The address for Dennis
Pelino is 400 Alton Road Suite 3107, Miami Beach, FL
33129.
|
|
(9)
|
Includes 12,000,000 shares which
are directly held by TWK Holdings, LLC. The address for TWK Holdings, LLC
is 3 Lorong Bukit Candan 3, Taman Impian Batu 4 1/2, Jalan IPOH, 51100 KL,
Malaysia.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table shows information with respect to each equity compensation plan
under which the Company’s common stock is authorized for issuance as of the
fiscal year ended December 31, 2009.
Equity
Compensation Plan Information
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
|
||||||||||
|
Plan category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
40,958,333 | $ | 0.13 | 9,041,667 | ||||||||
|
Equity compensation plans not approved by security
holders
|
550,000 | $ | 0.42 | -0- | ||||||||
|
Total
|
41,508,333 | $ | 0.14 | 9,041,667 | ||||||||
|
ITEM
13.
|
Certain Relationships and
Related Transactions, and Director
Independence
|
Since
January 1, 2009, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party: (i) in which the amount involved exceeds the lesser of $120,000 or one
percent of the average of our total assets at year-end for the last three
completed fiscal years; and (ii) in which any director, executive officer,
shareholder who beneficially owns 5% or more of our common stock or any member
of their immediate family had or will have a direct or indirect material
interest, except as follows:
32
Our
management believes that all of the below transactions were on terms at least as
favorable as could have been obtained from unrelated third parties.
On June
2, 2008, the
Company entered into a Content License Agreement with New China Media, YGP, LLC and TWK Holdings, LLC
(“TWK”) (New China Media, YGP and TWK collectively referred to as “Content
Providers”) providing for (i) the assignment by Content Providers and the
assumption by the Company of certain rights of Content Providers for the
territory of the People’s Republic of China to use, transmit and publicly
display via the Internet certain content; and (ii) the purchase by YGP, New
China Media and TWK of 16,200 shares, 3,000 shares and 12,000 shares of Series A
Convertible Preferred Stock of the Company for $16,200, $3,000 and $12,000,
respectively. On December 16, 2008, pursuant to a notice of conversion, New
China Media and YGP agreed to convert the entire amount of their respective
shares of Series A Convertible Preferred Stock of the Company into 3,000,000 and
16,200,000 shares of Common Stock, respectively. On January 8, 2009, the Content
License Agreement was extended by an additional eight years for a total of ten
years. In connection with such extension, the Company agreed to issue to New
China Media 4,000,000 shares of the Company’s Common Stock for $4,000. On May
14, 2009 the Company issued 12,000,000 shares of common stock to TWK, pursuant
to a notice of conversion, in which TWK agreed to convert the entire amount of
their shares of Series A Convertible Preferred Stock of the Company into
12,000,000 shares of common stock.
Effective
on June 10, 2008, the Company’s subsidiary, Youth Media (Hong Kong) Limited,
entered into a Cooperation Agreement (the “Cooperation Agreement”) with China
Youth Net Technology (Beijing) Co., Ltd. (“CYN”), China Youth Interactive
Cultural Media (Beijing) Co., Ltd. and China Youth Net Advertising Co. Ltd.
pursuant to which the parties agreed to cooperate with each other to develop,
build and operate a fully managed video and audio distribution network based on,
including but not limited to, the China Education and Research Network, the
broadband network infrastructure built in schools, universities and other
education institutions. In conjunction with Cooperation Agreement, the Company
issued an aggregate of 71,020 shares of its Series A Convertible Preferred Stock
to three designees of CYN. On November 3, 2009, the Company agreed to issue an
aggregate of 19,000,000 shares of its common stock, in conjunction with, a new
Cooperation Agreement (the “2009 Cooperation Agreement”) entered into by YMHK,
on July 3, 2009, with China Youth Interactive Cultural Media (Beijing) Co., Ltd.
(“CYI”) and China Youth Net Advertising Co. Ltd. (“CYN Ads”) which replaced
the Cooperation Agreement entered into on June 10, 2008 among YMHK, China Youth
Net Technology (Beijing) Co., Ltd. (“CYN”), CYI and CYN Ads pursuant to which
the parties agreed to cooperate with each other to develop, build and operate a
fully managed video and audio distribution network based on, including but not
limited to, the China Education and Research Network, the broadband network
infrastructure built in schools, universities and other education institutions
in China (the “Campus Network”). In consideration of the rights granted to
YMHK under the 2009 Cooperation Agreement, YMHK agreed to pay CYI an amount
equal to 20% of YMBJ's annual after-tax profits and dividends, if any, as
audited by YMBJ's independent auditor and which YMHK will obtain from YMBJ for
each financial year of YMBJ during the term of the 2009 Cooperation
Agreement. The 19,000,000 shares of common stock agreed to be issued under
the 2009 Cooperation Agreement replace and are in lieu of the 71,020 shares of
the Company's Series A Convertible Preferred Stock (convertible into 71,020,000
shares of common stock) which were agreed to be issued to designees of CYN under
the Cooperation Agreement entered into on June 10, 2008. At December 31,
2009, 3,000 of the 71,020 shares of the Company's Series A Convertible Preferred
Stock (convertible in 3,000,000 share of common stock) remained outstanding. At
December 31, 2009, the 19,000,000 shares of common stock agreed to be issued
under the 2009 Cooperation Agreement had not yet been issued.
On
September 10, 2008, the Company, on the one hand, and Jay Rifkin, the Company’s
President and Chief Executive Officer, and Rebel Holdings, LLC (“Rebel
Holdings”), of which Mr. Rifkin is the sole managing member, on the other hand,
entered into a Loan Consolidation and Amendment to Security Agreement (the “Loan
Consolidation Agreement”), effective as of July 1, 2008. Pursuant to the Loan
Consolidation Agreement, the parties agreed to consolidate various outstanding
loans made to the Company by Jay Rifkin and Rebel Holdings and other amounts
incurred by or due to Mr. Rifkin, in each case through June 30, 2008, into one
convertible promissory note payable to Rebel Holdings in the principal amount of
$2,078,047, with a maturity date of July 1, 2010 and interest at the prime rate
(the “Consolidated Note”). The Consolidated Note provided that the
principal amount thereof shall, at the option of Rebel Holdings, be convertible
at a conversion price equal to the lesser of, or more favorable to Rebel
Holdings, of the following (i) $0.03 per share of Common Stock (which represents
the offering price of the Company’s Common Stock in its most recently completed
equity financing transaction) provided a notice of conversion is submitted no
later than 45 days after September 10, 2008, or (ii) the then current offering
terms for any bona fide pending offering of the Company, provided a notice of
conversion pursuant thereto is submitted no later than 30 days following the
completion of the offering, and contains such other terms and conditions as set
forth therein. On May 14, 2009 the Company issued Rebel Holdings 69,268,233,
pursuant to a notice of conversion provided within the allowable time period, in
which Rebel Holdings elected to convert the entire principal amount outstanding
under the Consolidated Note into 69,268,233 shares of common stock at $0.03 per
share.
On May
11, 2009, with the consent of Jay Rifkin, the Company’s President and Chief
Executive Officer, the Company canceled options held by him to purchase
4,400,000 shares of common stock, exercisable at $0.85 per
share. Further, on May 11, 2009, the Company granted Mr. Rifkin
options to purchase 3,750,000 shares of common stock with an exercise price of
$0.13 per share, which equals the closing price of the Company’s common stock on
the date of grant, which stock options vest fully on the date of
grant. In addition, on May 11, 2009, the Company granted Mr.
Rifkin options to purchase 20,000,000 shares of the Company's common stock with
an exercise price of $0.13 per share, which stock options shall vest annually
over a period of four years from the date of grant.
33
The
securities were issued in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
On May
11, 2009, with the consent of each of the Company’s four non-employee directors,
the Company cancelled options held by such directors to purchase an aggregate of
1,450,000 shares of common stock, exercisable at prices ranging from $0.25 to
$1.50 per share. On the same date, the Company granted options to
such four directors to purchase an aggregate of 1,200,000 shares of common
stock, with an exercise price of $0.13 per share, which stock options vest fully
on the date of grant. In addition, on May 11, 2009, the Company
granted each of the four directors options to purchase 2,000,000 shares each
with an exercise price of $0.13 per share, which stock options shall vest
annually over a period of four years from the date of grant.
On
October 22, 2009, the Company issued 234,789 shares of the Company’s common
stock to William B. Horne, a director, pursuant to a Conversion and Note Termination Agreement dated July 1, 2008
pursuant to which the entire principal amount outstanding and all interest
accrued from inception of a certain promissory note through the date of the
Conversion Note would be converted into 234,789 shares of the Company's common
stock. See Note 10 Note
Payable - Related Party.
On
October 22, 2009, the Company issued 200,000 shares of the Company’s common
stock to Alice M. Campbell, a director, pursuant to a Reimbursement Termination Agreement pursuant to which
amounts owed to a director of the Company, as fees for services as the Audit
Committee Chairwoman, totaling $6,000, with a conversion price of $0.03 per
share, would be converted into 200,000 shares of the Company's common stock.
Director
Independence
Our board
of directors currently consists of five members. They are Jay Rifkin, William B.
Horne, Alice M. Campbell, Alan Morelli and David M. Kaye. Morelli and Kaye are independent directors. We have determined their independence using the general independence criteria set forth in the Nasdaq Marketplace Rules.
|
Item
14.
|
Principal Accountant Fees and
Services.
|
Audit
Fees
The
aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements, for the reviews of the
financial statements included in our annual report on Form 10-K, and for other
services normally provided in connection with statutory filings were $40,000 and
$40,000 for the years ended December 31, 2009 and December 31, 2008,
respectively.
Audit-Related
Fees
We did
not incur any fees for the years ended December 31, 2009 and December 31, 2008,
respectively, for professional services rendered by our principal accountants
that are reasonably related to the performance of the audit or review of our
financial statements and not included in "Audit Fees."
All
Other Fees
During
the year ended 2009, we received additional professional services in the amount
of $5,250 rendered by our principal accountants in connection with the
preparation of our tax returns and other tax compliance services.
Audit
Committee Pre-Approval Policies and Procedures
Our Audit
Committee was formed during the year ended December 31, 2005. The fees for audit
services were approved by our chief executive officer and the full board
approved the financial statements filed on Forms 10-Q and 10-K. Management is
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditor.
PART
IV
|
Item
15.
|
Exhibits and Financial
Statement Schedules
|
The
following documents are filed as part of this report:
|
(1)
|
Financial
Statements
|
Financial
Statements are listed in the Table of Contents to the Financial Statements on
page 40 of this report.
|
(2)
|
Financial
Statement Schedules
|
No
financial statement schedules are included because such schedules are not
applicable, are not required, or because required information is included in the
financial statements or notes thereto.
34
|
(3)
|
Exhibits
|
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Stock
Purchase Agreement dated as of December 20, 2005 among Digicorp, Rebel
Crew Films, Inc., Rebel Holdings, LLC and Cesar Chatel (Incorporated by
reference to the Company’s Form 8-K filed with the Securities and Exchange
Commission on December 21, 2005)
|
|
|
2.2
|
Letter
Agreement dated December 20, 2005 among Digicorp, Rebel Crew Films, Inc.,
Rebel Holdings, LLC and Cesar Chatel (Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
December 21, 2005)
|
|
|
2.3
|
Purchaser
and Company Disclosure Schedules to Stock Purchase Agreement dated as of
December 20, 2005 among Digicorp, Rebel Crew Films, Inc., Rebel Holdings,
LLC and Cesar Chatel (Incorporated by reference to the Company’s Form 8-K
filed with the Securities and Exchange Commission on January 5,
2006)
|
|
|
3.1
|
Articles
of Incorporation (Utah) (Incorporated by reference to the Company’s
registration statement on Form 10-SB (File No. 000-33067) filed with the
Securities and Exchange Commission on August 9, 2001)
|
|
|
3.2
|
Certificate
of Incorporation of Digicorp, Inc. (Delaware) (Incorporated by reference
to the Company’s quarterly report on Form 10-QSB for the quarter ended
September 30, 2006, filed with the Securities and Exchange Commission on
December 13, 2006)
|
|
|
3.3
|
State
of Utah Articles of Merger of Digicorp, a Utah corporation, into Digicorp,
Inc., a Delaware corporation (Incorporated by reference to the Company’s
quarterly report on Form 10-QSB for the quarter ended September 30, 2006,
filed with the Securities and Exchange Commission on December 13,
2006)
|
|
|
3.4
|
State
of Delaware Articles of Merger of Digicorp, a Utah corporation, into
Digicorp, Inc., a Delaware corporation (Incorporated by reference to the
Company’s quarterly report on Form 10-QSB for the quarter ended September
30, 2006, filed with the Securities and Exchange Commission on December
13, 2006)
|
|
|
3.5
|
Certificate
of Designation filed with the State of Delaware on May 23, 2008,
authorizing our Series A Convertible Preferred Stock consisting of 500,000
shares, each of $.001 par value (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
June 4, 2008)
|
|
|
3.6
|
Certificate
of Amendment to our Certificate of Incorporation filed with the Secretary
of State of Delaware effective as of October 16, 2008 authorizing the
increase of the number of our authorized shares of Common Stock, par value
$.001 per share, from 60,000,000 to 500,000,000 and the number of our
authorized shares of Preferred Stock, par value $.001 per share, from
1,000,000 to 2,000,000, and our name change from “Digicorp, Inc.” to
“China Youth Media, Inc.” (Incorporated by reference to the Company's Form
8-K filed with the Securities and Exchange Commission on October 16,
2008)
|
|
|
3.7
|
Bylaws
(Incorporated by reference to the Company’s registration statement on Form
10-SB (File No. 000-33067) filed with the Securities and Exchange
Commission on August 9, 2001)
|
|
|
3.8
|
Amendment
No. 1 to Bylaws (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on July 21,
2005)
|
|
35
|
9.1
|
Voting
Agreement dated December 29, 2005 by and among Jay Rifkin and the
stockholders of Digicorp listed on the signature pages thereto
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
|
|
|
10.1*
|
China Youth Media, Inc.
Stock Option and Restricted Stock Plan as Amended*
|
|
|
10.2*
|
Employment Agreement dated as of November 2, 2009, and effective as of July 1, 2009 by and between China Youth Media, Inc. and Jay Rifkin
|
|
|
10.3
|
Standard
Industrial/Commercial Multi-Tenant Lease dated July 18, 2005 between The
Welk Group, Inc. and Rebel Crew Films, Inc. (Incorporated by reference to
the Company’s Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
|
|
|
10.4
|
Content
License Agreement dated June 2, 2008 by and between Digicorp, Inc. and New
China Media, LLC, YGP, LLC and TWK Holdings, LLC (Incorporated by
reference to the Company's Form 8-K filed with the Securities and Exchange
Commission on June 4, 2008)
|
|
|
10.5
|
Supply
Agreement for Content dated May 31, 2008 by and between Youth Media (Hong
Kong) Limited, a subsidiary of the Company, Yes Television (Hong Kong)
Limited, and New China Media LLC (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
June 4, 2008)
|
|
|
10.6
|
Cooperation Agreement dated July 3, 2009 among China Youth Interactive Cultural Media (Beijing) Co., Ltd., China Youth Net Advertising Co. Ltd. and Youth Media (Hong Kong) Limited (Incorporated by reference to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009, filed with the Securities and Exchange Commission on November 16, 2009)
|
36
|
10.7
|
Loan
Consolidation and Amendment to Security Agreement dated as of September
10, 2008 among Digicorp, Inc., Rebel Holdings, LLC and Jay Rifkin
(Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on September 19,
2008)
|
|
|
10.8
|
Secured
Convertible Consolidated Promissory Note between Digicorp, Inc. and Rebel
Holdings, LLC, dated September 10, 2008 (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
September 19, 2008).
|
|
|
14.1
|
Code
of Ethics (Incorporated by reference to the Company’s annual report on
Form 10-KSB for the fiscal year ended June 30, 2005, filed with the
Securities and Exchange Commission on September 28,
2005)
|
|
|
21.1*
|
Subsidiaries
of the Registrant
|
|
|
31.1*
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
|
31.2*
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
|
32.1*
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
|
|
32.2*
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
* Filed
herewith
37
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CHINA
YOUTH MEDIA, INC.
|
|||
|
Date:
April 13, 2010
|
By:
|
/s/ Jay Rifkin
|
|
|
Jay
Rifkin
|
|||
|
Chief
Executive Officer
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Jay Rifkin
|
||||
|
Jay
Rifkin
|
Chief
Executive Officer and Director
(Principal
Executive Officer,
Principal
Financial Officer and
Principal
Accounting Officer)
|
April 13, 2010
|
||
|
/s/ William B. Horne
|
||||
|
William
B. Horne
|
Director
|
April 13, 2010
|
||
|
/s/ Alice M. Campbell
|
||||
|
Alice
M. Campbell
|
Director
|
April 13, 2010
|
||
|
/s/ Alan Morelli
|
||||
|
Alan
Morelli
|
Director
|
April 13, 2010
|
||
|
/s/ David M. Kaye
|
||||
|
David
M. Kaye
|
Director
|
April 13,
2010
|
38
China
Youth Media, Inc.
Consolidated
Financial Statements
Table
of Contents
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
40
|
|
|
Consolidated
Balance Sheets
|
41
|
|
|
Consolidated
Statements of Operations
|
42
|
|
|
Consolidated
Statements of Cash Flows
|
43
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
44
|
|
|
Notes
to the Consolidated Financial Statements
|
|
45-63
|
39
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Of China
Youth Media, Inc.
We have
audited the accompanying consolidated balance sheets of China Youth Media, Inc.
(Company) as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders’ equity (deficit), and cash flows for the two
years then ended. These consolidated 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 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. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
audits provide 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 China Youth
Media, Inc. as of December 31, 2009 and 2008 and the results of their operations
and their cash flows for the two years then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed further in Note 2, the
Company has incurred significant losses. The Company’s viability is dependent
upon its ability to obtain future financing and the success of its future
operations. These factors raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plan in regard to these matters is
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/s/
Tarvaran Askelson & Company, LLP
Laguna
Niguel, California
April 13, 2010
40
|
CHINA
YOUTH MEDIA, INC.
|
||||||||
|
Consolidated
Balance Sheet (Audited)
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 181,723 | $ | 34,425 | ||||
|
Accounts
receivable, net
|
— | 161,604 | ||||||
|
Other
current assets
|
157,432 | 112,500 | ||||||
|
TOTAL
CURRENT ASSETS
|
339,155 | 308,529 | ||||||
|
Property
and equipment, net
|
65,457 | 16,778 | ||||||
|
Intangible
assets, net
|
4,664,879 | 8,537,503 | ||||||
|
Other
Assets
|
24,916 | 98,968 | ||||||
|
TOTAL
ASSETS
|
$ | 5,094,407 | $ | 8,961,778 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 106,382 | $ | 197,582 | ||||
|
Accrued
liabilities
|
1,068,293 | 848,006 | ||||||
|
Note
payable - related party
|
— | 5,000 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
1,174,675 | 1,050,588 | ||||||
|
LONG
TERM LIABILITIES
|
||||||||
|
Convertible
notes payable - related party
|
150,000 | 2,228,047 | ||||||
|
Convertible
note payable
|
250,000 | 250,000 | ||||||
|
Note
payable
|
2,377,312 | 100,000 | ||||||
|
Beneficial
conversion feature
|
(277,128 | ) | (207,489 | ) | ||||
|
TOTAL
LONG TERM LIABILITIES
|
2,500,184 | 2,370,558 | ||||||
|
TOTAL
LIABILITIES
|
$ | 3,674,859 | $ | 3,421,146 | ||||
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
|
Preferred
stock, $0.001 par value: 2,000,000 shares authorized;
|
||||||||
|
Series
A Preferred Stock, $0.001 par value; 500,000 shares
authorized;
|
||||||||
|
3,000
shares issued and outstanding at December 31, 2009;
|
||||||||
|
83,020
shares issued and outstanding at December 31, 2008;
|
3 | 83 | ||||||
|
Common
stock, $0.001 par value: 500,000,000 shares authorized;
|
||||||||
|
158,631,461
shares issued and outstanding at December 31, 2009;
|
||||||||
|
71,828,439
shares issued and outstanding at December 31, 2008;
|
158,631 | 71,828 | ||||||
|
Paid-in
capital
|
21,420,227 | 16,313,219 | ||||||
|
Accumulated
other comprehensive income
|
(213 | ) | — | |||||
|
Accumulated
deficit
|
(20,159,100 | ) | (10,844,498 | ) | ||||
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
1,419,548 | 5,540,632 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$ | 5,094,407 | $ | 8,961,778 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
41
|
CHINA YOUTH MEDIA, INC.
|
||||||||
|
Consolidated
Statements of Operations and Comprehensive Income
(Audited)
|
||||||||
|
Years
Ended
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
REVENUE
|
||||||||
|
Sales
|
$ | 7,000 | $ | 106,898 | ||||
|
Total
revenue
|
7,000 | 106,898 | ||||||
|
OPERATING
EXPENSES
|
||||||||
|
Cost
of sales
|
— | 54,678 | ||||||
|
Selling,
general and administrative expenses
|
5,389,363 | 2,533,725 | ||||||
|
Total
operating expenses
|
5,389,363 | 2,588,403 | ||||||
|
Operating
loss
|
(5,382,363 | ) | (2,481,505 | ) | ||||
|
Other
Income (expense)
|
||||||||
|
Interest
income (expense)
|
(281,044 | ) | (274,332 | ) | ||||
|
Rental
Income
|
198,049 | 148,103 | ||||||
|
Loss
on Abandonment
|
— | (130,317 | ) | |||||
|
Loss
on Impairment Goodwill
|
(27,800 | ) | (132,200 | ) | ||||
|
Loss
on Impairment IP Holdings
|
(3,821,444 | ) | (106,861 | ) | ||||
|
Total
other income (expense)
|
(3,932,239 | ) | (495,607 | ) | ||||
|
NET
LOSS
|
$ | (9,314,602 | ) | $ | (2,977,112 | ) | ||
|
BASIC
AND DILUTED NET LOSS PER COMMON SHARE
|
$ | (0.07 | ) | $ | (0.08 | ) | ||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING
|
127,263,088 | 38,573,023 | ||||||
|
Other
Comprehensive Income
|
||||||||
|
Foreign
currency translation adjustment
|
(213 | ) | — | |||||
|
Net
income
|
(9,314,602 | ) | (2,977,112 | ) | ||||
|
COMPREHENSIVE
INCOME
|
$ | (9,314,815 | ) | $ | (2,977,112 | ) | ||
The
accompanying notes are an integral part of these consolidated financial
statements.
42
|
CHINA YOUTH MEDIA, INC.
|
||||||||
|
Consolidated
Statements of Cash Flows (Audited)
|
||||||||
|
Years Ended
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (9,314,602 | ) | $ | (2,977,112 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Loss
on Abandonment
|
— | 130,317 | ||||||
|
Loss
on Impairment of Goodwill
|
27,800 | 132,200 | ||||||
|
Loss
on Impairment of IP Holdings
|
4,325,054 | 106,861 | ||||||
|
Depreciation
|
16,809 | 27,202 | ||||||
|
Amortization
of licenses
|
128,243 | 820,182 | ||||||
|
Amortization
of beneficial conversion feature
|
92,861 | 135,078 | ||||||
|
Stock-based
compensation to employees and directors
|
2,236,141 | 162,654 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
161,604 | 143,237 | ||||||
|
Inventories
|
— | 15,436 | ||||||
|
Other
assets
|
29,120 | 33,397 | ||||||
|
Accounts
payable and accrued liabilities
|
237,131 | 413,885 | ||||||
|
Deferred
revenue
|
— | (69,672 | ) | |||||
|
Net
cash used in operating activities
|
(2,059,839 | ) | (926,335 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of licenses and developed content
|
(262,500 | ) | — | |||||
|
Purchases
of property and equipment
|
(65,488 | ) | (3,530 | ) | ||||
|
Purchases
of intangible assets
|
254,026 | (2,010 | ) | |||||
|
Net
cash used in investing activities
|
(73,962 | ) | (5,540 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of common stock
|
4,000 | 347,500 | ||||||
|
Proceeds
from issuance of preferred stock
|
— | 31,200 | ||||||
|
Proceeds
from issuance of convertible notes
|
— | 250,000 | ||||||
|
Proceeds
from issuance of convertible note related party
|
— | 232,000 | ||||||
|
Proceeds
from note
|
2,277,312 | 100,000 | ||||||
|
Net
cash provided by financing activities
|
2,281,312 | 960,700 | ||||||
|
Effect
of exchange rate
|
(213 | ) | — | |||||
|
Net
increase (decrease) in cash and cash equivalents
|
147,298 | 28,825 | ||||||
|
Cash
and cash equivalents at beginning of period
|
34,425 | 5,600 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 181,723 | $ | 34,425 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid for income taxes
|
$ | — | $ | — | ||||
|
Interest
paid
|
$ | — | $ | — | ||||
|
Non-cash
investing and financing activity:
|
||||||||
|
Beneficial
conversion feature
|
162,500 | 226,352 | ||||||
|
Shares
issued pursuant to consulting agreement
|
$ | 100,000 | $ | — | ||||
|
Acquisition
of intangible assets for stock
|
$ | 600,000 | $ | 9,199,800 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
43
|
CHINA
YOUTH MEDIA, INC.
|
||||||||||||||||||||||||||||||||
|
Consolidated
Statements of Stockholders' Equity (Deficit)
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Shareholders’
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Income
|
Equity
(Deficit)
|
|||||||||||||||||||||||||
|
BALANCES,
December 31, 2007
|
—
|
—
|
39,545,104
|
$
|
39,545
|
$
|
6,243,079
|
$
|
(7,867,386
|
) |
—
|
$
|
(1,584,762
|
) | ||||||||||||||||||
|
Issuance
of preferred stock
|
83,020
|
83
|
9,211,717.00
|
9,211,800
|
||||||||||||||||||||||||||||
|
Issuance
of common stock
|
32,283,335
|
32,283
|
469,417.00
|
501,700
|
||||||||||||||||||||||||||||
|
Debt
Discount, net effect
|
226,352.00
|
226,352
|
||||||||||||||||||||||||||||||
|
Compensation
expense, stock option issuances
|
162,654.00
|
162,654
|
||||||||||||||||||||||||||||||
|
Net
loss
|
-2,977,112
|
(2,977,112
|
) | |||||||||||||||||||||||||||||
|
BALANCES,
December 31, 2008
|
83,020
|
83
|
71,828,439
|
$
|
71,828
|
$
|
16,313,219.00
|
$
|
(10,844,498
|
) |
$
|
—
|
$
|
5,540,632
|
||||||||||||||||||
|
Conversion
of preferred stock
|
(12,000
|
) |
(12
|
) |
12,000,000
|
12,000
|
(11,920
|
) |
—
|
|||||||||||||||||||||||
|
Cancellation of preferred stock
|
(68,020
|
) |
(68
|
) |
—
|
—
|
68
|
—
|
||||||||||||||||||||||||
|
Issuance
of common stock
|
74,803,022
|
74,803
|
2,720,287
|
2,795,090
|
||||||||||||||||||||||||||||
|
Debt
Discount, net effect
|
162,500
|
162,500
|
||||||||||||||||||||||||||||||
|
Compensation
expense, stock option issuances
|
2,236,141
|
2,236,141
|
||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(213
|
) |
(213
|
) | ||||||||||||||||||||||||||||
|
Net
loss
|
(9,314,602
|
) |
(9,314,602
|
) | ||||||||||||||||||||||||||||
|
BALANCES,
December 31, 2009
|
3,000
|
3
|
158,631,461
|
$
|
158,631
|
$
|
21,420,227
|
$
|
(20,159,100
|
) |
$
|
(213
|
) |
$
|
1,419,548
|
|||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
44
CHINA
YOUTH MEDIA, INC.
Notes
to the Consolidated Financial Statements
December
31, 2009
1.
Description of Business
China
Youth Media, Inc. ("the
Company") was organized under the laws of the State of Utah on July 19,
1983 under the name of Digicorp. Pursuant to shareholder approval, on October 6,
2006, the Board of Directors of the Company approved and authorized the Company
to enter into an Agreement and Plan of Merger by and between the Company and
Digicorp, Inc., a Delaware corporation and newly formed wholly-owned subsidiary
of the Company that was incorporated under the Delaware General Corporation Law
for the purpose of effecting a change of domicile. Effective February
22, 2007, the Company changed its domicile from Utah to Delaware with the name
of the surviving corporation being Digicorp, Inc.
Pursuant
to a Certificate of Amendment to our Certificate of Incorporation filed with the
State of Delaware which took effect as of October 16, 2008, the Company's name
changed from "Digicorp, Inc." to "China Youth Media, Inc." (the "Corporate Name
Change"). As a result of the Corporate Name Change, our stock symbol
changed to "CHYU" with the opening of trading on October 16, 2008 on the
OTCBB.
China
Youth Media, Inc.
China
Youth Media, Inc. is a China focused youth marketing and media company whose
business is to provide advertisers and corporations with direct and centralized
access to China’s massive but difficult to reach student
population.
Youth
Media (BVI) Limited
On May 8,
2008, under the laws of the British Virgin Islands, the Company formed Youth
Media (BVI) Limited ("YM BVI"). YM BVI is a wholly-owned subsidiary
of the Company and was established for the purpose of incorporating the
Company's wholly-owned subsidiary in Hong Kong.
Youth
Media (Hong Kong) Limited and Youth Media (Beijing) Limited
Youth
Media (Hong Kong) Limited ("YMHK"), a company organized under the laws of Hong
Kong on May 19, 2008, and Youth Media (Beijing) Limited (“YMBJ”), a company
organized under the laws of the People's Republic of China on December 10, 2008,
are wholly-owned subsidiaries of YM BVI and were formed by the Company to take
advantage of its shift in business to aggregation and distribution of
international content and advertising for Internet or online consumption in
China.
Rebel
Crew Films, Inc.
Rebel
Crew Films is a wholly-owned subsidiary of the Company and was organized under
the laws of the State of California on August 7, 2002. In January 2008, the
Company entered into a license and distribution agreement with Westlake
Entertainment, Inc. which effectively shifted all day-to-day operations related
to our home video library (the "Westlake Agreement"). Effective the
date of the Westlake Agreement, Rebel Crew Films ceased operations and is
currently maintained as a corporation in good standing with no
operations.
PerreoRadio.com
PerreoRadio.com
is our wholly-owned and operated website targeted to the young, urban Latino
demographic offers online radio shows, podcasts, music, and music
videos.
2.
Basis of Presentation and Significant Accounting Policies.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with the Generally Accepted Accounting Principles in the United States of
America ("GAAP").
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
45
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. At December
31, 2009, the Company had an accumulated deficit of $20.1 million and a working
capital deficit of $836,000. During the year ended December 31, 2009, the
Company incurred a loss of approximately $9.3 million. During the year ended
December 31, 2009, the Company primarily relied upon financing activities to
fund its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management is currently
seeking additional financing and believes that these avenues will continue to be
available to the Company to fund its operations, however no assurances can be
made. The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. These estimates are based on
knowledge of current events and anticipated future events and accordingly,
actual results may differ from those estimates.
Foreign
Operations and Foreign Currency Transactions
The
Company's functional currency is the United States Dollar (the "US Dollar").
From time to time, and with the contemplation of expanding the Company's
operations in China, the Company enters into transactions denominated in foreign
currencies, such as, the People's Republic of China and SAR Hong Kong, whose
principal units are the Renminbi ("RMB") and the Hong Kong Dollar ("HK Dollar"),
respectively.
The
Company’s subsidiary in Hong Kong uses the US Dollar as its functional
currency.
The
Company's subsidiary in China, whose principal country of operations is the PRC,
uses the RMB as its functional currency. The financial position and results of
operations are therefore recorded in RMB. In accordance with ASC 830 "Foreign
Currency Translation" which codified Statement of Financial Accounts Standards
("SFAS") No. 52, "Foreign Currency Translation," the Company's China
subsidiary's financial statements are translated into U.S. Dollars (USD).
According to the Statement, all assets and liabilities are translated at the
exchange rate on the balance sheet date, stockholder's equity are translated at
the historical rates and statement of operations items are translated at the
weighted average exchange rate for the year.
The
average rate of exchange in 2009 for the Chinese Yuan to the United States
Dollar is based on the exchange rate quoted by the Federal Reserve Bank of New
York which represents the noon buying rate in the City of New York and is
certified for customs purposes. These exchange rates are not intended to imply
that the foreign exchange rates quoted could have been, or could be, converted,
realized or settled into U.S. dollars or any other currency at the quoted rate
on the date of the transaction.
The
Company's China subsidiary's assets and liabilities denominated in RMB at the
balance sheet date are translated at the going market rate of exchange at that
date. The registered equity capital denominated in the functional currency is
translated at the historical rate of exchange at the time of capital
contribution. The resulting translation adjustments are reported under Other
Comprehensive Income in accordance with Accounting Standard Codification ASC 220
that codified SFAS No. 130, "Reporting Comprehensive Income. At December 31,
2009 and 2008, the comprehensive loss was $213 and zero, respectively,
differences and amounts were immaterial.
The
Company’s foreign operations have been, and will continue to be, affected by
periodic changes or developments in the foreign countries’ political and
economic conditions, as well as, changes in laws and regulations. Any such
changes could have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
Risks
related to cash
The
Company maintains cash in bank and deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Risks
related to our foreign operations
The
Chinese economy differs from the economies of most developed countries in many
respects, including in the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the Chinese economy has experienced significant growth since
the late 1970s, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented numerous measures
to encourage economic growth and to guide the allocation of resources. Some of
these measures may benefit the overall Chinese economy, but also have a negative
effect on us.
46
The
Company's subsidiary Youth Media (Beijing) Limited's operations are carried out
in China and consequently, the Company's business, financial condition and
results of operations may be affected by the political, economic and legal
environment in China, and by the general state of the Chinese economy. The
Company's operations in the China are subject to specific considerations and
significant risks not typically associated with companies in North America. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
Cash
and Cash equivalents
The
Company considers only highly liquid investments such as money market funds and
commercial paper with maturities of 90 days or less at the date of their
acquisition as cash and cash equivalents.
Fair
Value of Financial Instruments
The
accounting standards regarding disclosures about fair value of financial
instruments defines financial instruments and required fair value disclosure of
those instruments. This accounting standard defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosure requirements for fair value measures. Receivables,
investments, payables, short and long term debt and warrant liabilities
qualified as financial instruments. Management believes the carrying amounts of
receivables, payables and debt are a reasonable estimate of fair value because
of the short period of time between the origination of such instruments, their
expected realization, and if applicable, their stated interest rate is
equivalent to interest rates currently available. The three levels are defined
as follows:
|
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
assets or liability, either directly or indirectly, for substantially the
full term of the financial
instruments.
|
|
Level
3
|
inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under the accounting standards regarding accounting for certain financial
instruments with characteristics of both liabilities and equity, accounting for
derivative instruments and hedging activities, accounting for derivative
financial instruments indexed to, and potentially settled in, a company’s own
stock, and the accounting standard regarding determining whether an instrument
(or embedded feature) is indexed to an entity’s own stock. The accounting
standard 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. This standard provides a 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 this
accounting standard scope exception. All warrants issued by the Company are
denominated in U.S. dollars.
Goodwill
In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No.
142"), goodwill is defined as the excess of the purchase price over the
fair value assigned to individual assets acquired and liabilities assumed and is
tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) on an annual basis in the Company's fourth
fiscal quarter or more frequently if indicators of impairment exist. The
performance of the test involves a two-step process. The first step of the
impairment test involves comparing the fair value of the Company's reporting
units with each respective reporting unit's carrying amount, including goodwill.
The fair value of reporting units is generally determined using the income
approach. If the carrying amount of a reporting unit exceeds the reporting
unit's fair value, the second step of the goodwill impairment test is performed
to determine the amount of any impairment loss. The second step of the goodwill
impairment test involves comparing the implied fair value of the reporting
unit's goodwill with the carrying amount of that goodwill. In accordance with
SFAS No. 142, no amortization is recorded for goodwill with indefinite useful
life. Goodwill impairment of approximately $28,000 and $132,000, related to
PerreoRadio intangible assets, was recognized during the years ended December
31, 2009 and 2008, respectively.
Intangible
Assets
In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No.
142"), intangible assets that are determined not to have an indefinite
useful life are subject to amortization. The Company amortizes intangible assets
using the straight-line method over their estimated useful lives.
47
Impairment
of Long-Lived and Intangible Assets
In
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS No. 144”), the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. The Company assesses the recoverability of the long-lived and
intangible assets by comparing the carrying amount to the estimated future
undiscounted cash flow associated with the related assets. Impairment of
approximately $17,000 and $107,000, related to the licensed home video library
intangible assets, was recognized during the years ended December 31, 2009 and
2008. Impairment of approximately $3,805,000, related to the China IPTV and
Mobile license intangible assets, was recognized during the year ended December
31, 2009.
Stock-Based
Compensation
The
Company accounts for stock-based compensation awards in accordance with the
provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment ("SFAS No.
123R"), which addresses the accounting for employee stock options. SFAS
No. 123R revises the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting-Based Compensation ("SFAS
No. 123"), and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees (“APB No. 25”). SFAS No. 123R requires that the cost of all
employee stock options, as well as other equity-based compensation arrangements,
be reflected in the financial statements over the vesting period based on the
estimated fair value of the awards. During the years ended December 31, 2009 and
December 31, 2008, the Company had stock-based compensation expense related to
issuances of stock options and warrants to the Company's employees, directors
and consultants of $2.2 million and $163,000, respectively.
Revenue
Recognition
Advertising Supported Intranet
Television Network Media Website - Koobee.com is a large scale,
advertising supported Intranet Television Network (ITVN) media portal that is
targeting China’s campus based college students, estimated to total more than 30
million young people. Koobee is a venue for marketers to deliver traditional TV
spots and new media advertising campaigns to a vast, upwardly mobile, targeted
demographic. Advertisers and channel owners will have available to them multiple
touch points ranging from interstitial interactive ads to banners within social
networking clubs and sponsored competitions, all with accurate ad tracking that
ensures clients realize value from unique and fully licensed content. Koobee
provides advertisers the impact of TV with the ROI of the Internet. We expect
this combination to be competitive and sufficiently appealing to capture market
share in China’s fast growth online advertising industry. We believe that
significant opportunities exist in the China Internet advertising space, and we
will actively pursue this potential source of revenue during the year ending
December 31, 2010.
Accounts
Receivable
Accounts
receivable are recorded at the invoice amount and do not bear interest. Accounts
receivable at December 31, 2009 and December 31, 2008 are presented net of an
allowance for doubtful accounts of zero and $15,000, respectfully.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is the Company's estimate of the amount of
probable credit losses in the Company's existing accounts receivable. The
Company determines the allowance based on historical write-off experience. The
Company reviews its allowance for doubtful accounts periodically. Past due
balances are reviewed individually for collectability. Account balances are
charged off against the allowance after all means of collection have been
exhausted and potential for recovery is considered remote. The Company does not
have any off-balance-sheet exposure related to its customers.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line
method over the useful lives of the assets, generally from three to seven years.
Property and equipment at December 31, 2009 and December 31, 2008 are presented
net of accumulated depreciation of $41,000 and $24,000,
respectfully.
Beneficial
Conversion Feature of Convertible Notes Payable
The
Company accounts for convertible notes payable in accordance with the guidelines
established by APB Opinion No. 14, Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants ("APB No. 14"), Emerging Issues
Task Force ("EITF") 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios and EITF 00-27, Application of Issue No 98-5 To Certain Convertible
Instruments. The Beneficial Conversion Feature ("BCF") of a convertible
note, is normally characterized as the convertible portion or feature of certain
notes payable that provide a rate of conversion that is below market value or
in-the-money when issued. The Company records a BCF related to the issuance of a
convertible note when issued and also records the estimated fair value of the
warrants issued with those convertible notes.
48
The BCF
of a convertible note is measured by allocating a portion of the note's proceeds
to the warrants and as a reduction of the carrying amount of the convertible
note equal to the intrinsic value of the conversion feature, both of which are
credited to additional paid-in-capital. The Company calculates the fair value of
warrants issued with the convertible note using the Black-Scholes valuation
model and uses the same assumptions for valuing employee options in accordance
with SFAS No. 123R. The only difference is that the contractual life of the
warrants is used.
The value
of the proceeds received from a convertible note is then allocated between the
conversion feature and warrants on a relative fair value basis. The allocated
fair value is recorded in the consolidated financial statements as a debt
discount (premium) from the face amount of the note and such discount is
amortized over the expected term of the convertible note (or to the conversion
date of the note, if sooner) and is credited to interest expense.
Income
Taxes
The
Company follows Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (SFAS 109) that requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the income tax basis and financial reporting basis of assets
and liabilities. Provision for income taxes consists of taxes currently due plus
deferred taxes. Because the Company had no operations within the United States
there is no provision for US income taxes and there are no deferred tax amounts
as of December 31, 2009 and 2008.
The
charge for taxation is based on the results for the year as adjusted for items
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it relates to items credited or
charged directly to equity, in which case the deferred tax is also recorded in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption of FIN 48
had no affect on the Company’s financial statements.
Advertising
Costs
The
Company expenses advertising costs when incurred. Advertising expense for the
years ended December 31, 2009 and 2008 was $6,000 and $7,000,
respectively.
Subsequent
Events
During
May 2009 and February 2010, the FASB issued new authoritative pronouncement
regarding recognized and non-recognized subsequent events. This guidance
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. The Company adopted this guidance during
its second fiscal quarter and it had no impact on the Company’s results of
operations or financial position.
Recent Accounting
Pronouncements
In September 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Update No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees”. This update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share - Amendments to Section 260-10-S99”, which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement and Disclosures Topic 820 - Measuring Liabilities at Fair Value”, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures - Overall, for the fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of topic 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
49
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to Section 480-10-S99” which represents an update to section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued standards that establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We have begun to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2010. As the Codification was not intended to change or alter existing GAAP, it will not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued standards that responds to concerns about the application of certain key provisions of FASB Interpretation (FIN) 46(R), including those regarding the transparency of the involvement with variable interest entities. Specifically, the standards require a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”) and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. In addition, the standard requires additional disclosures about the involvement with a VIE and any significant changes in risk exposure due to that involvement and is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In June 2009, the FASB issued standards that eliminate the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This standard is effective for fiscal years beginning after November 15, 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.
In May 2009, the FASB issued standards that requires management to evaluate subsequent events through the date the financial statements are either issued, or available to be issued. Companies are required to disclose the date through which subsequent events have been evaluated. This standard is effective for interim or annual financial periods ending after June 15, 2009. The Company evaluated its December 31, 2009 financial statements for subsequent events through March 29, 2010, the date the financial statements were available to be issued. Other than the agreements and events in Note 19, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
In April 2009, the FASB issued standards that require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods. This standard applies to all financial instruments within the scope of Statement 107 held by publicly traded companies, as defined by APB 28, and requires that a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
50
In April 2009, the FASB issued standards that provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This standard is effective for interim and annual periods ending after June 15, 2009. We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
In May 2008, the FASB issued standards that identify the sources of accounting principles and the framework for selecting the principles 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). We do not expect the adoption of this standard to have a material impact on the Company’s income statement, financial position or cash flows.
In May 2008, the FASB issued standards that require the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This standard became effective for the Company on January 1, 2009 and requires retroactive application. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position, cash flows, or results of operations.
In April 2008, the FASB issued standards that amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and was effective for fiscal years beginning after November 15, 2008. This standard was effective for the Company beginning January 1, 2009. We do not expect the adoption of this to have a material impact on the Company’s income statement, financial position or cash flows.
In March 2008, the FASB issued standards that amends and expand the disclosure requirements and with the intent to provide users of financial statements with an enhanced understanding of: a) How and why an entity uses derivative instruments; b) How derivative instruments and related hedged items are accounted for and its related interpretations; and c) How derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows and was effective for fiscal years beginning after November 15, 2008. This standard was effective for the Company beginning in the first quarter of fiscal 2009. We do not expect the adoption of this standard to have a material effect on the Company’s consolidated results of operations and financial condition.
In December 2007, the FASB issued standards that requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. This standard also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. This standard was effective for the Company beginning January 1, 2009 and we will apply it prospectively to business combinations completed on or after that date.
3.
Other Current Assets
On
September 1, 2008 the Company entered into a consulting agreement ("ACV
Consulting Agreement") with American Capital Ventures, Inc. ("ACV, Inc.").
Pursuant to the terms of the ACV Consulting Agreement, ACV, Inc. will provide
the Company with investor relations consulting services for a period of two
years and in consideration, ACV, Inc. will receive 2.5 million shares of the
Company's Common Stock of which 1.5 million shares will be issued during the
initial twelve-month term and the remainder will be issued on the thirteenth
month of the agreement term. The ACV Consulting Agreement was valued at $225,000
based on the fair value of the underlying shares of the Company's common stock
on the effective date of the agreement and will be amortized on a straight-line
basis over the agreement term of two years. The balance recorded in other
current assets at December 31, 2009 corresponds to the current portion of the
prepaid expense of $75,000 related to the ACV Consulting Agreement.
On
October 26, 2009, the Company entered into a Consulting Agreement ("Consulting
Agreement") with ROAR,LLC ("ROAR"). Pursuant to the terms of the Consulting
Agreement, ROAR will provide the Company with content acquisition services for a
period of three months and in consideration ROAR will receive 300,000 shares of
the Company's common stock. The Consulting Agreement was valued at $30,000 based
on the value of the underlying shares of the company's common stock on the
effective date of the Consulting Agreement and will be amortized on a
straight-line bases over a term of three months. At December 31, 2009, a balance
recorded of $10,000 in other current assets remained as a prepaid expense
associated with the Consulting Agreement.
In
December 2009, the Company's subsidiary, YMBJ, entered into bandwidth service
agreements with two Chinese Content Delivery Networks ("CDN Agreements")
pursuant to the terms of which the Company will receive bandwidth and other
services for a period of twelve months. At December 31, 2009, the balance
remaining in other current assets related to the CDN Agreements was
$51,200.
51
From
August 2009 to September 2009, the YMBJ recorded $24,000 in prepaid expenses
pursuant to a two Technical Services Agreements ("Technical Service Agreements")
entered into by YMBJ with certain service providers pursuant to the terms of
which the Company will receive technical services and bandwidth for a period
ranging from nine to eleven months. At December 31, 2009, the balance remaining
in the other current assets related to the Technical Services Agreement was
$19,100.
4.
Property and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line
method over the useful lives of the assets, generally from three to seven years.
Property and equipment at December 31, 2009 and 2008 consist of the
following:
|
Property and Equipment
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Computer
Software and Equipment
|
$ | 99,093 | $ | 33,846 | ||||
|
Office
Furniture and Equipment
|
6,869 | 6,628 | ||||||
|
Total
Property and Equipment
|
$ | 105,962 | $ | 40,474 | ||||
|
Less:
Accumulated Depreciation
|
(40,505 | ) | (23,696 | ) | ||||
|
Property
and Equipment, net
|
$ | 65,457 | $ | 16,778 | ||||
For the
years ended December 31, 2009 and 2008, annual depreciation expense totaled
$16,800 and $27,200, respectively.
5.
Intangible Assets
Intangible
assets consist of capitalized Content License & Distribution Agreements,
China IPTV & Mobile Licenses, license fees for licensed content the Company
acquired from owners including producers, studios and distributors, as well as
the Company's Koobee.com and PerreoRadio.com suite of websites and internet
properties.
In August
2009, the Company entered into an agreement (the "EPL Agreement") with WinTV, a
subscription channel in China run by state-owned Guangdong Provincial Television
pursuant to which the Company secured the online rights to distribute the
2009-2010 season of the English Premier League (“EPL”). The EPL Agreement
is part of a licensing agreement between YMHK and WinTV and has a term of six
months. During the year ended December 31, 2009, amortization expense
related to the EPL Agreement was $219,000.
Koobee.com
has been determined to have an indefinite useful life based primarily on the
renewability of the domain name. Intangible assets with an indefinite life
are not subject to amortization, but will be subject to periodic evaluation for
impairment.
Content License Agreement
- - On June 2, 2008, the Company entered into a Content License
Agreement (the “Content License Agreement”) with New China Media, LLC ("New
China Media"), YGP, LLC ("YGP") and TWK Holdings, LLC ("TWK") (collectively
referred to as "Content Providers"). In consideration for the license to certain
content by the Content Providers, the Content License Agreement provided for the
issuance of 31,200 shares of the Company’s Series A Convertible Preferred Stock,
that are convertible to 31,200,000 shares of the Company’s common
stock. The Content License was valued at $2,808,000 based on the fair value
of the associated underlying shares of the Company’s common stock. The
Content License Agreement has a term of 2 years with an automatic renewal term
of an additional 2 years and, as such, has an estimated useful life of 4
years. The Content License Agreement will be amortized over the respective
estimated useful life and will be reviewed periodically for impairment in
accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. On January 8, 2009, the Content
License Agreement was extended by an additional eight (8) years for a total of
ten (10) years. In consideration for the increase in the term of the
agreement, New China Media received four million (4,000,000) shares of the
Company's common stock. The Content License Agreement extension was valued
at $600,000 based on the fair value of the associated underlying shares of the
Company’s common stock on the date of the extension agreement.
China IPTV and Mobile License
- - On June 10, 2008, the Company’s subsidiary, YMHK, entered into a Cooperation
Agreement (the “Cooperation Agreement”) with China Youth Net Technology
(Beijing) Co., Ltd. (“CYN”), China Youth Interactive Cultural Media (Beijing)
Co., Ltd. (“CYI”) and China Youth Net Advertising Co. Ltd. (“CYN Ads”) that
provided for the issuance of an aggregate of 71,020 shares of the Company’s
Series A Convertible Preferred Stock that are convertible to 71,200,000 shares
of the Company common stock to three designees of CYN in consideration for,
and in addition to any other right that is granted by CYN and CYI to YMHK.
Under the Cooperation Agreement, CYN and CYI have agreed to exclusively grant
YMHK or any third party/parties designated by YMHK with the following rights
during the term of the Cooperation Agreement and any renewal period of the term:
(a) exclusive right to advertise on the fully managed video and audio
distribution network based on, including but not limited to, the China Education
and Research Network, the broadband network infrastructure built in schools,
universities and other education institutions in China (the “Campus Network”)
and to source advertising business for this purpose; (b) exclusive right to sell
and operate the commercial campus marketing events; (c) right to provide foreign
commercial content to the Campus Network (excluding non-profit, educational
content exchange and those contents that are not permitted to be disseminated
through the Campus Network under applicable Chinese laws); and (d) enjoy the
rights with respect to the setup, operation, maintenance and expansion of the
Campus Network according to a separate commercial and technical services
agreement. The Cooperation Agreement was valued at $6,391,800 based on the
fair value of the associated underlying shares of the Company’s common stock.
The Cooperation Agreement has a term of 20 years with an optional renewal term
of 10 years and, as such, has an estimated useful life of 30 years. The
Cooperation Agreement will be amortized over the respective estimated useful
life and will be reviewed periodically for impairment in accordance with FASB
Statement No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets.
52
On
November 3, 2009, the Company agreed to issue an aggregate of 19,000,000 shares
of its common stock, in conjunction with, a new Cooperation Agreement (the “2009
Cooperation Agreement”) entered into by YMHK, on July 3, 2009, with China Youth
Interactive Cultural Media (Beijing) Co., Ltd. (“CYI”) and China Youth Net
Advertising Co. Ltd. (“CYN Ads”) which replaced the Cooperation Agreement
entered into on June 10, 2008 among YMHK, China Youth Net Technology (Beijing)
Co., Ltd. (“CYN”), CYI and CYN Ads pursuant to which the parties agreed to
cooperate with each other to develop, build and operate a fully managed video
and audio distribution network based on, including but not limited to, the China
Education and Research Network, the broadband network infrastructure built in
schools, universities and other education institutions in China (the “Campus
Network”). In consideration of the rights granted to YMHK under the 2009
Cooperation Agreement, YMHK agreed to pay CYI an amount equal to 20% of YMBJ's
annual after-tax profits and dividends, if any, as audited by YMBJ's independent
auditor and which YMHK will obtain from YMBJ for each financial year of YMBJ
during the term of the 2009 Cooperation Agreement. Further, on the effective
date of the 2009 Cooperation Agreement, recognizing that the underlying assets
of the Cooperation Agreement dated June 10, 2008 were substantially the same
underlying assets of the 2009 Cooperation Agreement and that the fair value of
such assets were valued at $2,090,000 based on the fair value of the associated
underlying 19,000,000 shares of the Company's common stock issued in conjunction
with the 2009 Cooperation Agreement, in accordance with FASB Statement No.
144, Accounting for Impairment
or Disposal of Long-Lived Assets, the Company determined that a
triggering event had occurred and conducted an impairment analysis during the
quarter ending December 31, 2009 which resulted in recording an impairment loss
of approximately $3,805,000.
The 2009
Cooperation Agreement was valued at $2,090,000 based on the fair value of the
associated underlying 19,000,000 shares of the Company's common stock issued in
conjunction with the 2009 Cooperation Agreement. The 2009 Cooperation Agreement
has a term of 20 years with an optional renewal term of 10 years and, as such,
has an estimated useful life of 30 years. The 2009 Cooperation Agreement will be
amortized over the respective estimated useful life and will be reviewed
periodically for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.
The
19,000,000 shares of common stock agreed to be issued under the 2009 Cooperation
Agreement replace and are in lieu of the 71,020 shares of the Company's Series A
Convertible Preferred Stock (convertible into 71,020,000 shares of common stock)
which were agreed to be issued to designees of CYN under the Cooperation
Agreement entered into on June 10, 2008. At December 31, 2009, 3,000 of the
71,020 shares of the Company's Series A Convertible Preferred Stock (convertible
in 3,000,000 share of common stock) remained outstanding. At December 31, 2009,
the 19,000,000 shares of common stock agreed to be issued under the 2009
Cooperation Agreement had not yet been issued.
During
the years ended December 31, 2009 and 2008, amortization expense related to the
Content License Agreements and China IPTV Licenses was $660,400 and $721,200,
respectively.
In the
past, the Company, through its subsidiary Rebel Crew Films, generated revenue
through the direct sales of its licensed home video library and licensing
agreements with third parties. However, the Company plans to use a
significant portion of its resources going forward to the aggregation and
distribution of international content and advertising for Internet and online
consumption in China. Consequently, during the quarter ending December 31,
2009, recognizing that revenues and cash flows would be lower than expected from
sales of its licensed home video library and licensing agreements with third
parties, the Company determined that a triggering event had occurred and
conducted an impairment analysis in the quarter ended December 31, 2009 which
resulted in recording an impairment loss. During the quarter ended December
31, 2009, the Company recognized an impairment charge of $16,600 related to our
licensed home video library. Licensed content acquired is capitalized at
the time of purchase. The term of the licensed content agreements usually
vary between one to five years (the "Title Term"). At the end of
the Title Term, the Company generally has the option of discontinuing
distribution of the title or extending the Title Term. The Company amortizes the
capitalized license fees, on a straight line basis over the Title
Term. During the years ended December 31, 2009 and 2008, amortization
expense related to the licensed content was $13,000 and $99,000,
respectively.
The
PerreoRadio suite of websites consists of the following Internet domain names
and all materials, intellectual property, goodwill and records in connection
therewith (the "PerreoRadio Assets" or "PerreoRadio"): Perreoradio.com,
Radioperreo.com, Perreomobile.com, Perreotv.com, Puroperreo.com,
Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com, Machetemusic.net,
Machetemusic.org, Machetemusica.com and Musicamachete.com. The PerreoRadio
Assets, initially valued at $160,000, were determined to have an indefinite
useful life based primarily on the renewability of the proprietary domain
names. Therefore, the PerreoRadio Assets were not subject to amortization,
but were rather subject to periodic evaluation for impairment. During the
quarter ending December 31, 2009, the Company determined that the revenue and
cash flows would be lower than expected from the PerreoRadio Assets and as such,
a triggering event occurred and we conducted an impairment analysis which
resulted in the recognition of an impairment loss. At December 31, 2009,
the Company recognized a goodwill impairment charge of $27,800 related to the
PerreoRadio Assets.
53
Intangible
assets and accumulated amortization at December 31, 2009 and 2008 are comprised
of the following:
|
Intangible
Assets
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
China
IPTV & Mobile Licenses
|
$ | 2,352,500 | $ | 6,391,800 | ||||
|
YesTV
China IPTV Rights
|
3,408,000 | 2,808,000 | ||||||
|
Domain
Assets
|
7,833 | 2,010 | ||||||
|
PerreoRadio
Assets
|
- | 27,800 | ||||||
|
Licensed
and Developed Content
|
- | 283,104 | ||||||
|
Total
Intangible Assets
|
5,768,333 | 9,512,714 | ||||||
|
Less:
Accumulated Amortization
|
(1,103,454 | ) | (975,211 | ) | ||||
|
Intangible
Assets, net
|
$ | 4,664,879 | $ | 8,537,503 | ||||
In
connection with the China IPTV, Mobile and Licensed Content agreements, the
Company expects to record the following amortization expense over the next four
years:
|
Fiscal
Year Ended
|
Amortization
|
|||
|
December
31, 2010
|
$ | (445,300.00 | ) | |
|
December
31, 2011
|
$ | (445,300.00 | ) | |
|
December
31, 2012
|
$ | (445,300.00 | ) | |
|
December
31, 2013
|
$ | (445,300.00 | ) | |
6.
Other Assets
The
balance recorded in other current assets at December 31, 2009 correspond to
security deposits of $18,400 related to our lease holdings, $1,500 related to
Water and Power Utility deposit requirements, $5,100 of deferred rental
income.
7.
Income Taxes
The
components of net loss before income tax consist of approximately
following:
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
U.S.
Operations
|
$ | (3,641,762 | ) | $ | (2,197,661 | ) | ||
|
Hong
Kong Operations
|
(4,936,221 | ) | (779,451 | ) | ||||
|
PRC
Operations
|
(736,619 | ) | - | |||||
| $ | (9,314,602 | ) | $ | (2,977,112 | ) | |||
Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes. Significant components of the
Company's deferred tax assets as of December 31, 2009 and 2008 are as
follows:
|
Deferred
Tax Assets
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Federal
Net Operating Loss Carryforward
|
$ | 2,637,788 | $ | 2,589,137 | ||||
|
State
Net Operating Loss Carryforward
|
685,825 | 671,575 | ||||||
|
Foreign
Net Operating Loss Carryforward
|
186,667 | - | ||||||
|
Stock
Based Compensation
|
957,560 | 2,650,593 | ||||||
|
Amortization
|
904,127 | 117,810 | ||||||
|
Other
accruals
|
- | - | ||||||
|
Deferred
Revenue
|
- | - | ||||||
|
Beneficial
Conversion Feature
|
(118,722 | ) | (88,888 | ) | ||||
|
Total
Gross Deferred Tax Asset
|
5,253,246 | 5,940,227 | ||||||
|
Less
Valuation Allowance
|
(5,253,246 | ) | (5,940,227 | ) | ||||
|
Net
Deferred Tax Asset
|
$ | - | $ | - | ||||
54
The
ultimate realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Based upon the Company's loss for the year
ended December 31, 2009, the Company has provided a valuation allowance in the
amount of $5,253,000, an decrease of $687,000. The amount of deferred
tax assets considered realizable could change if future taxable income is
realized. A component of the Company's deferred tax assets are
federal and state net operating loss carryforwards of approximately $7.76
million and $7.76 million, respectively, for the year ended December 31,
2009. A greater than 50% change in the ownership of the Company's
common stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to the Internal Revenue Code Section 382. The
Company believes that such a change occurred on December 29, 2005 and again
during the year ended December 31, 2008. The Company is evaluating
the net operating loss carryforward limitation imposed by Internal Revenue Code
Section 382 for net operating losses incurred before the change
dates. The net operating losses will begin to expire in 2021 and
2011, respectively.
The
Company adopted ASC 740 on January 1, 2007. The implementation of ASC 740
did not have a material impact on the Company’s consolidated financial
statements, results of operations or cash flows. Management has evaluated all
significant tax positions at December 31, 2009 and 2008 concluding that
there are no material uncertain tax positions.
At
December 31, 2009 and 2008, the Company did not have a tax
provision. During the year ended December 31, 2009, the Company
recorded $1,600 in franchise tax fees to the State of California.
55
For the
years ended December 31, 2009 and 2008, a reconciliation of the federal
statutory tax rate to the Company's effective tax rate is as
follows:
|
Effective
Tax Rate
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Federal
statutory tax rate
|
(34)% | (34)% | ||||||
|
State
and local income taxes, net of federal tax benefit
|
0.00% | 0.00% | ||||||
|
Rate difference from foreign operations
|
17.50% | 0.00% | ||||||
|
Cancellation of options
|
23.90% | 0.00% | ||||||
|
Non
deductible items
|
0.00% | 0.08% | ||||||
|
Valuation
allowance
|
(7.40)% | 33.94% | ||||||
|
Total
effective tax rate
|
(0.00)% | 0.02% | ||||||
8.
Loss Per Common Share
Income
(loss) per common share is based on the weighted average number of common shares
outstanding. The Company complies with SFAS No. 128, Earnings Per Share, which
requires dual presentation of basic and diluted earnings per share on the face
of the statements of operations. Basic per share earnings or loss excludes
dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted per share earnings or loss reflect the potential dilution that could
occur if convertible preferred stock or debentures, options and warrants were to
be exercised or converted or otherwise result in the issuance of common stock
that is then shared in the earnings of the entity.
Since the
effects of outstanding options, warrants and the conversion of convertible
preferred stock and convertible debt are anti-dilutive in all periods presented,
shares of common stock underlying these instruments have been excluded from the
computation of Loss per Common Share.
As of
December 31, 2009, there were outstanding (i) 40,958,333 options and 550,000
warrants issued pursuant to the Company's Stock Option Plan, (ii) 2,650,000
shares issuable upon conversion of outstanding warrants that were issued outside
the Company's Stock Option Plan, (iii) 3,000,000 shares reserved for issuance
upon conversion of Series A Convertible Preferred Stock and
(iv) 4,444,444 shares reserved for issuance upon conversion of
outstanding convertible promissory notes.
9.
Accounts Payable
Accounts
payable at December 31, 2009 included amounts owed to certain vendors related to
the normal operation of our fully managed video and audio distribution network
in China, legal and accounting expenses, and expense reimbursement amounts due
to Jay Rifkin, the Company’s President and Chief Executive Officer for travel
and other expenses.
10.
Accrued Liabilities
Accrued
liabilities at December 31, 2009 and 2008 are comprised of the
following:
|
Accrued
Liabilities
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Obligations
on license agreements
|
$ | 110,095 | $ | 47,595 | ||||
|
Accrued
salaries
|
330,000 | 330,000 | ||||||
|
Accrued
professional fees
|
- | 90,000 | ||||||
|
Interest
|
264,513 | 77,016 | ||||||
|
Deferred
Rent Expense
|
21,988 | - | ||||||
|
Lease
Security Deposits
|
32,000 | 32,000 | ||||||
|
Accrued
Liabilities due to vendors
|
219,740 | 128,669 | ||||||
|
Other
|
89,956 | 39,414 | ||||||
| $ | 1,068,293 | $ | 744,693 | |||||
11.
Note Payable - Related Party
On July
13, 2006, William Horne, the Company's former Chief Financial Officer and
Director, loaned the Company $5,000. As consideration for the loan,
the Company issued Mr. Horne a demand promissory note (the "July 06 Note") at a
rate equal to the prime rate published in The Wall Street Journal from time to
time until the date of payment in full. Pursuant to the terms of a
Conversion and Note Termination Agreement dated July 1, 2008, by and between Mr.
Horne and the Company (the "Conversion Note"), the entire principal amount
outstanding and all interest accrued from inception of the July 06 Note through
the date of the Conversion Note, totaling approximately $813, and other various
amounts owed to Mr. Horne totaling approximately $1,231, will be converted into
234,789 shares of Common Stock (the "Conversion Shares") which shares were
issued on October 22, 2009. The conversion of the note was based upon a common
stock value of $0.03 per share, which represented the offering price of the
Company's Common Stock in its most recently completed equity financing
transaction on the date of the Conversion Note.
56
12.
Convertible Note Payable - Related Party
Rebel
Holdings Convertible Note
On
September 10, 2008, the Company, on the one hand, and Jay Rifkin, the Company’s
President and Chief Executive Officer, and Rebel Holdings, LLC (“Rebel
Holdings”), of which Mr. Rifkin is the sole managing member, on the other hand,
entered into a Loan Consolidation and Amendment to Security Agreement (the “Loan
Consolidation Agreement”), effective as of July 1, 2008. Pursuant to the Loan
Consolidation Agreement, the parties agreed to consolidate various outstanding
loans made to the Company by Jay Rifkin and Rebel Holdings and other amounts
incurred by or due to Mr. Rifkin, in each case through June 30, 2008, into one
convertible promissory note payable to Rebel Holdings in the principal amount of
$2,078,047, with a maturity date of July 1, 2010 and interest at the prime rate
(the “Consolidated Note”). The Consolidated Note provided that the principal
amount thereof shall, at the option of Rebel Holdings, be convertible at a
conversion price equal to the lesser of, or more favorable to Rebel Holdings, of
the following (i) $0.03 per share of Common Stock (which represents the offering
price of the Company’s Common Stock in its most recently completed equity
financing transaction) provided a notice of conversion is submitted no later
than 45 days after September 10, 2008, or (ii) the then current offering terms
for any bona fide pending offering of the Company, provided a notice of
conversion pursuant thereto is submitted no later than 30 days following the
completion of the offering, and contains such other terms and conditions as set
forth therein. On May 14, 2009 the Company issued Rebel Holdings 69,268,233
shares of common stock, pursuant to a notice of conversion provided within the
allowable time period, in which Rebel Holdings elected to convert the entire
principal amount outstanding under the Consolidated Note into 69,268,233 shares
of common stock at $0.03 per share. The securities were issued in reliance upon
the exemption from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended.
Mojo
Music Convertible Note
Other
convertible notes payable -
related party — On September 30, 2008, the Company entered into a
subscription agreement with Mojo Music, Inc. (“Mojo Music”). Jay Rifkin, the
Company’s President and Chief Executive Officer, is the sole managing member of
Mojo Music. The Company sold 1.5 Units, with each Unit consisting of a $100,000
Convertible Promissory Note bearing interest at 12% per annum, due three years
from the date of issuance and warrants to purchase an aggregate of up to 350,000
shares of its Common Stock. The warrants are exercisable for a period of five
years and have an exercise price equal to $0.09 per share subject to the
Company’s filing of a certificate of amendment to its certificate of
incorporation increasing the number of its available shares for issuance. The
subscription agreement with Mojo Music provided the Company with $150,000 in
gross proceeds. Pursuant to the subscription agreement with Mojo Music, the
Company issued 525,000 Purchase Warrants. See Note 18
Warrants.
As the
effective conversion price of the Mojo Music Convertible Promissory Note on the
date of issuance was below the fair market value of the underlying common stock,
the Company recorded debt discount in the amount of $28,300 based on the
intrinsic value of the beneficial conversion feature of the Mojo Music
Convertible Promissory Note. The warrant issued to Mojo Music in conjunction
with the convertible note will expire after September 30, 2013. The Company
recorded debt discount in the amount of $28,300 based on the estimated fair
value of the warrants. In accordance with EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the debt discount as a result of the
beneficial conversion feature of the Mojo Music Convertible Promissory Note and
the estimated fair value of the warrants was amortized as non-cash interest
expense over the term of the debt using the effective interest method. During
the year ended December 31, 2009, interest expense of $18,900 has been recorded
from the debt discount amortization.
13.
Convertible Note Payable
On August
29, 2008, the Company entered into a subscription agreement with Year of the
Golden Pig, LLC (“YGP, LLC”). The Company sold 2.5 Units, with each Unit
consisting of a $100,000 Convertible Promissory Note bearing interest at 12% per
annum, due three years from the date of issuance and warrants to purchase an
aggregate of up to 350,000 shares of its Common Stock. The warrants are
exercisable for a period of five years and have an exercise price equal to $0.09
per share subject to the Company’s filing of a certificate of amendment to its
certificate of incorporation increasing the number of its available shares for
issuance. The subscription agreement with YPG, LLC provided the Company with
$250,000 in gross proceeds. Pursuant to the subscription agreement with YGP,
LLC, the Company issued 875,000 Purchase Warrants. See Note 18
Warrants.
As the
effective conversion price of the YPG, LLC Convertible Promissory Note on the
date of issuance was below the fair market value of the underlying common stock,
the Company recorded debt discount in the amount of $112,700 based on the
intrinsic value of the beneficial conversion feature of the YPG, LLC Convertible
Promissory Note. The warrant issued to YPG, LLC in conjunction with the
convertible note will expire after August 29, 2013. The Company recorded debt
discount in the amount of $57,100 based on the estimated fair value of the
warrants. In accordance with EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the debt discount as a result of the
beneficial conversion feature of the YGP, LLC Convertible Promissory Note and
the estimated fair value of the warrants was amortized as non-cash interest
expense over the term of the debt using the effective interest method. During
the year ended December 31, 2009, interest expense of $56,600 has been recorded
from the debt discount amortization.
57
14.
Related Party Transactions
All
material intercompany transactions have been eliminated upon consolidation of
these our entities. During the year ended December 31, 2009, cash
transfers between the Company and its subsidiary in Hong Kong, Youth Media (Hong
Kong) Limited, in the aggregate amount of $1,124,200, have been eliminated upon
consolidation. During the year ended December 31, 2009, cash
transfers between the Company's subsidiary in Hong Kong, Youth Media (Hong Kong)
Limited, and the Company's subsidiary in Beijing, China, Youth Media (Beijing)
Limited, in the aggregate amount of $780,000, have been eliminated upon
consolidation.
15.
Note Payable
On
December 26, 2008, the subsidiaries of the Company, YMHK and YMBJ, entered into
a Joint Venture Agreement (the “Joint Venture Agreement”) with China Youth
Interactive Media (Beijing) Company Limited (“CYI”) and Xinhua Sports and
Entertainment Limited (formerly Xinhua Finance Media Limited) (“XSEL”) to
develop business opportunities contemplated by the Campus Network Agreements
(the “Joint Venture”) (YMHK, YMBJ and CYI henceforth the “JV
Companies”). Pursuant to the Joint Venture agreement, XSEL will
provide working capital to YMHK in monthly increments for the twelve month
period ending December 31, 2009 for the operations of the Joint Venture and, to
the extent covered by the budget as set forth in the business plans, for the
general overhead of the JV Companies. Each of the JV Companies shall
be obligated on a joint and several basis, following written notice from XSEL,
to return, repay or reimburse, as the case may be, all of the working capital
provided by XSEL, upon demand by XSEL in the sole discretion of XSEL with twelve
months notice following the conclusion of the twelve month period ending
December 31, 2009, together with interest accrued at an annual rate of 7
percent. The earliest date that any twelve-month written notice can
be given is January 1, 2010 in which event the working capital will be due
January 1, 2011. At December 31, 2009, the Joint Venture Agreement
with XSEL provided the Company with $2.38 million in gross proceeds and the
Company recognized the amount as a $2.38 million principal amount of a 7%
Promissory Note (the "Xinhua Note") due January 1, 2011. See Note 19
Subsequent Events for additional principal amounts from XSEL related to the
Joint Venture Agreement.
16.
Beneficial Conversion Feature
As noted
in Note 11 Convertible
Note Payable - Related Party, the Company recorded debt discount in the
amount of $28,300 based on the intrinsic value of the beneficial conversion
feature of the Mojo Music Convertible Promissory Note and debt discount in the
amount of $28,300 based on the estimated fair value of the warrants that were
issued in conjunction with the Mojo Music Convertible Promissory
Note. During the year ended December 31, 2009, interest expense of $18,900
has been recorded from the debt discount amortization.
As noted
in Note 12 Convertible
Note Payable, the Company recorded debt discount in the amount of
$112,700 based on the intrinsic value of the beneficial conversion feature of
the YPG, LLC Convertible Promissory Note and debt discount in the amount of
$57,100 based on the estimated fair value of the warrants that were issued in
conjunction with the YPG, LLC Convertible Promissory Note. During the year ended
December 31, 2009, interest expense of $56,600 has been recorded from the debt
discount amortization.
On May
11, 2009, the Company granted a consultant, as consideration for services on
behalf of the Company, a vested warrant with a term of 7 seven years to purchase
1,250,000 shares of common stock with an exercise price of $0.03 per share. The
Company recorded debt discount in the amount of $162,500 based on the estimated
fair value of the warrant. In accordance with EITF No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the debt discount as a result of the
beneficial conversion feature of the estimated fair value of the warrant was
amortized as non-cash interest expense over the term of the warrant. During
the year ended December 31, 2009, interest expense of $17,400 has been recorded
from the debt discount amortization.
17.
Commitment and Contingencies
Rent
expense during the years ended December 31, 2009 and 2008 was $276,000 and
$232,000, respectively. In August 2005, the Company entered into a
commercial lease agreement for office space. The lease requires
monthly payments of base rent in the amount of $5,890 from August 21, 2005
through September 30, 2012. Further, on each anniversary date, the
base rent is subject to a 3% increase over the previous year.
In March
2006, the Company entered into a commercial lease agreement for additional
office space (the "Hollman Lease"). The Hollman Lease requires
monthly payments of base rent which increase from $12,475 in September 2006 to
$14,041 in December 2010. During February 2008 and April 2008, the Company
entered into commercial sublease agreements with two non-related
parties. It is expected that the future lease payment obligation of
the Company related to the Hollman Lease will be completely offset by the
subleases and it is anticipated that they will remain subleased for the
remaining term of the Hollman Lease. For the year ended December 31,
2009, the sublease agreements resulted in $198,000 in gross
revenues.
58
On July
15, 2008, the Company entered into a commercial lease agreement for office space
in Beijing, China. The lease requires monthly payments of $1,500 for twelve
months.
Approximate
future minimum rent payments under these leases are as follows:
|
Operating
Lease Payments
|
Minimum Payments
|
|||
|
2010
|
$ |
239,566
|
||
|
2011
|
82,757
|
|||
|
2013
|
63,508
|
|||
|
Total
|
$
|
634,986
|
||
18.
Stock Based Compensation
Effective
July 20, 2005, the Board of Directors of the Company approved the 2005 Stock
Option and Restricted Stock Plan (the "2005 Plan"). The 2005 Plan
reserves 15,000,000 shares of common stock for grants of incentive stock
options, nonqualified stock options, warrants and restricted stock awards to
employees, non-employee directors and consultants performing services for the
Company. Options and warrants granted under the 2005 Plan have an exercise price
equal to or greater than the fair market value of the underlying common stock at
the date of grant and become exercisable based on a vesting schedule determined
at the date of grant. The options expire 10 years from the date of grant
whereas warrants generally expire 5 years from the date of grant. Restricted
stock awards granted under the 2005 Plan are subject to a vesting period
determined at the date of grant.
On May 6,
2009, the Board of Directors adopted, subject to stockholder approval which was
obtained at the annual stockholders meeting held on June 19, 2009, an amendment
to the 2005 Plan that increased the number of shares subject to the Stock Plan
from 15,000,000 shares to 50,000,000 shares.
The
Company accounts for stock-based compensation awards in accordance with the
provisions of SFAS No. 123(R), Share-Based Payment, which
addresses the accounting for employee stock options. SFAS 123(R) requires that
the cost of all employee stock options, as well as other equity-based
compensation arrangements, be reflected in the financial statements over the
vesting period based on the estimated fair value of the awards. The Company
adopted SFAS 123(R) as of January 1, 2005. Prior to the adoption date,
there were no stock options or other equity-based compensation awards
outstanding.
A summary
of stock option and warrant activity under the amended 2005 Plan for the year
ended December 31, 2009 is presented below:
|
Outstanding Options
|
||||||||||||||||||||
|
Shares
Available for Grant |
Number of
Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Life (years) |
Aggregate
Intrinsic Value |
||||||||||||||||
|
December
31, 2007
|
7,856,667 | 7,143,333 | 0.73 | 7.95 | - | |||||||||||||||
|
Grants
|
- | - | ||||||||||||||||||
|
Cancellations
|
160,000 | (160,000 | ) | 0.14 | 8.91 | - | ||||||||||||||
|
December
31, 2008
|
8,016,667 | 6,983,333 | 0.74 | 6.91 | - | |||||||||||||||
|
Stock
Plan Amendment
|
35,000,000 | |||||||||||||||||||
|
Grants
|
(39,950,000 | ) | 39,950,000 | 0.13 | 9.36 | - | ||||||||||||||
|
Cancellations
|
5,975,000 | (5,975,000 | ) | 0.84 | 6.55 | - | ||||||||||||||
|
December
31, 2009
|
9,041,667 | 40,958,333 | 0.13 | 8.96 | - | |||||||||||||||
|
Options
exercisable at:
|
||||||||||||||||||||
|
December
31, 2007
|
3,941,667 | 0.78 | 8.10 | - | ||||||||||||||||
|
December
31, 2008
|
6,383,333 | 0.80 | 6.80 | - | ||||||||||||||||
|
December
31, 2009
|
6,200,000 | 0.14 | 9.37 | - | ||||||||||||||||
59
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (i.e., the difference between our closing stock price on
September 30, 2009 and the exercise price, times the number of shares) that
would have been received by the option holders had all option holders exercised
their options on September 30, 2009. There have not been any options exercised
during the nine months ended September 30, 2009 or 2008.
During
the year ended December 31, 2009, the Company granted 39,950,000 stock-based
compensation awards. All outstanding stock-based compensation awards that
the Company granted in 2009 were granted at the per share fair market value on
the grant date. Vesting of options differs based on the terms of each option.
The Company utilized the Black-Scholes options pricing model.
Recent
Grants of Stock-based Compensation Awards.
On May
11, 2009, with the consent of Jay Rifkin, the Company’s President and Chief
Executive Officer, the Company canceled options held by him to purchase
4,400,000 shares of common stock, exercisable at $0.85 per share. Further,
on May 11, 2009, the Company granted Mr. Rifkin options to purchase 3,750,000
shares of common stock with an exercise price of $0.13 per share, which equals
the closing price of the Company’s common stock on the date of grant, which
stock options vest fully on the date of grant. In addition, on May 11,
2009, the Company granted Mr. Rifkin options to purchase 20,000,000 shares of
the Company's common stock with an exercise price of $0.13 per share, which
stock options shall vest annually over a period of four years from the date of
grant.
On May
11, 2009, with the consent of each of the Company’s four non-employee directors,
the Company cancelled options held by such directors to purchase an aggregate of
1,450,000 shares of common stock, exercisable at prices ranging from $0.25 to
$1.50 per share. On the same date, the Company granted options to such four
directors to purchase an aggregate of 1,200,000 shares of common stock, with an
exercise price of $0.13 per share, which stock options vest fully on the date of
grant. In addition, on May 11, 2009, the Company granted each of the four
directors options to purchase 2,000,000 shares each with an exercise price of
$0.13 per share, which stock options shall vest annually over a period of four
years from the date of grant.
On May
11, 2009, the Company granted to three employees options to purchase an
aggregate of 7,000,000 shares of common stock with an exercise price of $0.13
per share. These stock options vest annually over four years from the date of
grant.
During
the years ended December 31, 2009 and 2008, stock-based compensation totaling
$2.24 million and $163,000, respectively, was recorded by the Company. During
the year ended December 31, 2009 and 2008, total unrecognized compensation cost
related to unvested stock options was $2.46 million and $93,000,
respectively. The cost is expected to be recognized over a weighted average
period of 1.64 years.
A summary
of the changes in the Company's nonvested options during the year ended December
31, 2009 is as follows:
|
Nonvested
Shares
|
Shares
|
Weighted Average
Grant Date Fair Value |
||||||
|
Nonvested
at December 31, 2007
|
2,522,500 | $ | 0.64 | |||||
|
Granted
|
- | - | ||||||
|
Vested
|
(1,968,750 | ) | 0.77 | |||||
|
Forfeited
|
(160,000 | ) | 0.13 | |||||
|
Nonvested at December 31, 2008
|
393,750 | $ | 0.15 | |||||
|
Granted
|
39,950,000 | 0.11 | ||||||
|
Vested
|
6,200,000 | 0.12 | ||||||
|
Forfeited
|
5,850,000 | 0.78 | ||||||
|
Nonvested
at December 31, 2009
|
34,700,000 | $ | 0.12 | |||||
All
outstanding stock-based compensation awards that the Company granted in 2009 and
2008 were granted at the per share fair market value on the grant date. Vesting
of options differs based on the terms of each option. The Company utilized the
Black-Scholes option pricing model and the assumptions used for each period are
as follows:
|
Black-Scholes
Pricing Model Assumptions
|
Year ended December 31,
|
|||||
|
2009
|
2008
|
|||||
|
Weighted
average risk free interest rate
|
3.77%
|
3.92%
|
||||
|
Weighted
average life (in years)
|
5.00
|
4.44
|
||||
|
Volatility
|
138
– 142%
|
138
– 155%
|
||||
|
Expected
dividend yield
|
-
|
-
|
||||
|
Weighted
average grant-date fair value per share of options granted
|
0.13
|
0.65
|
||||
60
19.
Equity Transactions
Capitalization
Amendment
Pursuant
to a Certificate of Amendment to our Certificate of Incorporation filed with the
State of Delaware which took effect as of October 16, 2008, the number of our
authorized shares of Common Stock, par value $.001 per share, of the Company has
been increased from 60,000,000 to 500,000,000 and the number of our authorized
shares of Preferred Stock, par value $.001 per share, has been increased from
1,000,000 to 2,000,000 (the "Capitalization Amendment").
Recent
Sales of Unregistered Securities
We sold
the following equity securities during the fiscal years ended December 31, 2009
and December 31, 2008 that were not registered under the Securities Act of 1933,
as amended (the "Securities
Act").
Preferred
Stock - Series A
On May
23, 2008, the Company filed with the State of Delaware a Certificate of
Designation authorizing its Series A Convertible Preferred Stock consisting of
500,000 shares, each of $0.001 par value and convertible into shares of Common
Stock at a rate of one thousand (1,000) shares of Common Stock for every one
share of Series A Convertible Preferred Stock at the option of the holder at any
time subsequent to the filing of an amendment to the Company’s certificate of
incorporation with the Secretary of State of the State of Delaware whereby the
authorized Common Stock is increased to a minimum of 200,000,000 shares. In
addition, the Series A Convertible Preferred Stock (i) has no voting rights
prior to conversion except as otherwise provided under Delaware law, (ii) has no
mandatory or optional redemption rights, (iii) has no preemptive rights, and
(iv) shall pay cash dividends only in the event cash dividends have been
declared on the Company’s Common Stock.
On June
2, 2008, the Company entered into a Content License Agreement (the "Content
License Agreement") with New China Media, LLC (“New China Media”), YGP, LLC
(“YGP”) and TWK Holdings, LLC (“TWK”) (New China Media, YGP and TWK collectively
referred to as “Content Providers”) providing for (i) the assignment by Content
Providers and the assumption by the Company of certain rights of Content
Providers for the territory of the People’s Republic of China to use, transmit
and publicly display via the Internet certain content; and (ii) the purchase by
YGP, New China Media and TWK of 16,200 shares, 3,000 shares and 12,000 shares of
Series A Convertible Preferred Stock of the Company for $16,200, $3,000 and
$12,000, respectively. On May 14, 2009 the Company issued 12,000,000 shares of
common stock to TWK, pursuant to a notice of conversion, in which TWK agreed to
convert the entire amount of their shares of Series A Convertible Preferred
Stock of the Company into 12,000,000 shares of common stock. The securities were
issued in reliance upon the exemption from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
On June
10, 2008, the Company’s subsidiary, Youth Media (Hong Kong) Limited (“YMHK”),
entered into a Cooperation Agreement with China Youth Net Technology (Beijing)
Co., Ltd. (“CYN”), China Youth Interactive Cultural Media (Beijing) Co., Ltd.
(“CYI”) and China Youth Net Advertising Co. Ltd. (“CYN Ads”). In conjunction
with the Cooperation Agreement, on June 10, 2008, the Company agreed to issue an
aggregate of 71,020 shares of its Series A Convertible Preferred Stock to
designees of CYN. On November 3, 2009, the Company agreed to issue an aggregate
of 19,000,000 shares of its common stock, in conjunction with, a new Cooperation
Agreement (the “2009 Cooperation Agreement”) entered into by YMHK, on July 3,
2009, with China Youth Interactive Cultural Media (Beijing) Co., Ltd. (“CYI”)
and China Youth Net Advertising Co. Ltd. (“CYN Ads”) which replaced the
Cooperation Agreement entered into on June 10, 2008 among YMHK, China Youth Net
Technology (Beijing) Co., Ltd. (“CYN”), CYI and CYN Ads pursuant to which the
parties agreed to cooperate with each other to develop, build and operate a
fully managed video and audio distribution network based on, including but not
limited to, the China Education and Research Network, the broadband network
infrastructure built in schools, universities and other education institutions
in China (the “Campus Network”). In consideration of the rights granted to
YMHK under the 2009 Cooperation Agreement, YMHK agreed to pay CYI an amount
equal to 20% of YMBJ's annual after-tax profits and dividends, if any, as
audited by YMBJ's independent auditor and which YMHK will obtain from YMBJ for
each financial year of YMBJ during the term of the 2009 Cooperation
Agreement.
The
19,000,000 shares of common stock agreed to be issued under the 2009 Cooperation
Agreement replace and are in lieu of the 71,020 shares of the Company's Series A
Convertible Preferred Stock (convertible into 71,020,000 shares of common stock)
which were agreed to be issued to designees of CYN under the Cooperation
Agreement entered into on June 10, 2008. At December 31, 2009, 3,000 of the
71,020 shares of the Company's Series A Convertible Preferred Stock (convertible
in 3,000,000 share of common stock) remained outstanding. At December 31, 2009,
the 19,000,000 shares of common stock agreed to be issued under the 2009
Cooperation Agreement had not yet been issued.
61
Common
Stock
During
March 2008, the Company sold 10,000,000 shares of its common stock to an
unaffiliated accredited investor at a price of $0.03 per share, resulting in
gross proceeds of $300,000.
During
June 2008, the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended. The Company
issued and sold to the accredited investors an aggregate of 1,583,335 shares of
its common stock. These issuances resulted in aggregate gross
proceeds to the Company of $47,500.
On August
29, 2008, the Company entered into a subscription agreement with Year of the
Golden Pig, LLC ("YGP, LLC"), pursuant to which the Company sold 2.5 Units, with
each Unit consisting of a $100,000 principal amount of a 12% Convertible
Promissory Note (the "YGP, LLC Note") due three years from its issuance and
350,000 Common Stock Purchase Warrants, with each Warrant entitling the holder
thereof to purchase at any time beginning from the date of issuance through five
years thereafter one share of Common Stock at a price of $0.09 per share subject
to the Company's filing of a certificate of amendment to its certificate of
incorporation increasing the number of its available shares for
issuance. The subscription agreement with YGP, LLC provided the
Company with $250,000 in gross proceeds. Pursuant to the subscription
agreement with YGP, LLC, the Company issued 875,000 Purchase
Warrants.
On
September 30, 2008, the Company entered into a subscription agreement with Mojo
Music, Inc. ("Mojo Music"), of which Jay Rifkin, the Company's President and
Chief Executive Officer, is the sole managing member, in which the Company sold
1.5 Units, with each Unit consisting of a $100,000 principal amount of a 12%
Convertible Promissory Note due three years from its issuance and 350,000 Common
Stock Purchase Warrants, with each Warrant entitling the holder thereof to
purchase at any time beginning from the date of issuance through five years
thereafter one share of Common Stock at a price of $0.09 per
share. The subscription agreement with Mojo Music provided the
Company with $150,000 in gross proceeds. Pursuant to the subscription
agreement with Mojo Music, the Company issued 525,000 Purchase
Warrants.
See Note 3 Other Current
Assets for information on the Consulting Agreement between the
Company and American Capital Ventures, Inc. (“ACV”) and the issuance of shares
thereunder. On February 6, 2009, pursuant to a letter of agreement with
ACV, notwithstanding anything to the contrary to the Consulting Agreement
between ACV and the Company, the Company agreed to issue in advance of the
thirteenth month of the Consulting Agreement 250,000 shares of the Company's
common stock that will be deducted from the 1,000,000 (one million) shares of
the Company's common stock that were scheduled to be issued on the thirteenth
month of the Consulting Agreement so that the remaining shares of the Company's
common stock to be issued to ACV on such date are 750,000, unless the Consulting
Agreement is earlier terminated pursuant to the terms thereof. On September 29,
2009, pursuant to the Consulting Agreement between the Company and ACV, the
remaining 750,000 shares of the Company's common stock were issued. The
securities were issued in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
On
January 8, 2009, the Content License Agreement was extended by an additional
eight (8) years for a total of ten (10) years. In consideration for the
increase in the term of the agreement, New China Media received 4,000,000 shares
of the Company's common stock. The Content License Agreement extension was
valued at $600,000 based on the fair value of the associated underlying shares
of the Company’s common stock on the date of the extension agreement. See Note 5 Intangible
Assets.
On
October 22, 2009, the Company issued 234,789 shares of the Company's common
stock pursuant to a Conversion and Note Termination Agreement dated July 1, 2008
pursuant to which the entire principal amount outstanding and all interest
accrued from inception of a certain promissory note through the date of the
Conversion Note would be converted into 234,789 shares of the Company's common
stock. See Note 10 Note
Payable - Related Party.
On
October 22, 2009, the Company issued 200,000 shares of the Company's common
stock pursuant to a Reimbursement Termination Agreement pursuant to which
amounts owed to a director of the Company, as fees for services as the Audit
Committee Chairwoman, totaling $6,000, with a conversion price of $0.03 per
share, would be converted into 200,000 shares of the Company's common
stock.
On
December 31, 2009, the Company issued 100,000 shares of the Company's common
stock pursuant to a Consulting Agreement ("Consulting Agreement") with ROAR, LLC
("ROAR") pursuant to the terms of which, ROAR will receive 300,000 shares of the
Company's common stock. The Consulting Agreement was valued at $30,000 based on
the value of the underlying shares of the company's common stock on the
effective date of the Consulting Agreement. At December 31, 2009, 200,000 shares
of the Company's common stock remained to be issued.
See Note
11 Convertible Note Payable – Related Party for information on the conversion of
the Rebel Holdings Convertible Note into shares of the Company's common
stock.
62
20.
Warrants
During
2005, the Company issued a total of 550,000 warrants, outside of its 2005 Plan,
to purchase shares of common stock at prices ranging from $0.145 to $0.65 per
share to consultants.
During
September 2008, the Company entered into subscription agreements with Year of
the Golden Pig, LLC ("YGP, LLC") and with Mojo Music, Inc. ("Mojo Music"), in
which the Company issued an aggregate of 4 Units, with each Unit consisting of a
$100,000 principal amount of a 12% Convertible Promissory Note due three years
from its issuance and 350,000 Common Stock Purchase Warrants outside of its 2005
Plan, with each Warrant entitling the holder thereof to purchase at any time
beginning from the date of issuance through five years thereafter one share of
Common Stock at a price of $0.09 per share.
On May
11, 2009, the Company granted a consultant, as consideration for services on
behalf of the Company, a vested warrant with a term of 7 seven years to purchase
1,250,000 shares of common stock with an exercise price of $0.03 per share. The
issuance of this warrant was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
The
following table summarizes information about common stock warrants outstanding
at December 31, 2009:
|
Outstanding
|
Exercisable
|
|||||||||||||||||||
|
Exercise Price
|
Number
Outstanding |
Weighted
Average Remaining Contractual Life (years) |
Weighted
Average Exercise Price |
Number
Exercisable |
Weighted
Average Exercise Price |
|||||||||||||||
|
$0.15
|
250,000 | 0.08 | $ | 0.01 | 250,000 | $ | 0.01 | |||||||||||||
|
$0.65
|
300,000 | 0.07 | $ | 0.06 | 300,000 | $ | 0.06 | |||||||||||||
|
$0.09
|
875,000 | 1.00 | $ | 0.02 | 875,000 | $ | 0.02 | |||||||||||||
|
$0.09
|
525,000 | 0.62 | $ | 0.01 | 525,000 | $ | 0.01 | |||||||||||||
|
$0.03
|
1,250,000 | 2.49 | $ | 0.01 | 1,250,000 | $ | 0.01 | |||||||||||||
|
$0.03
- $0.65
|
3,200,000 | 4.25 | $ | 0.12 | 3,200,000 | $ | 0.12 | |||||||||||||
21.
Subsequent Events
The
Company has performed an evaluation of the subsequent events review through
March 30, 2010, which is the date the audited consolidated financial statements
were issued.
On
January 20, 2010 and on January 29, 2010, pursuant to the Joint Venture
agreement (see Note 13 Note Payable), XSEL provided the Company with working
capital of $50,000 and $40,000, respectively. The Company recognized the amounts
as $50,000 and $40,000 principal amounts of 7% Promissory Notes (the "Xinhua
Notes") due January 1, 2011.
On March
23, 2010, the Company issued a press release in which it had executed a
syndication agreement with a key content aggregator for China Telecom and China
Unicom in Hunan Province, China. Pursuant to the terms of the syndication
agreement, the Company will provide its youth focused content to China Telecom
and Unicom subscribers in Hunan Province through two options: on an à la carte
channel subscription basis, and as part of a bundled broadband service. The
contract provides for payment to China Youth Media on a per subscriber per month
basis. When ordered à la carte, the new subscription channels will be retail
priced from 3 to 15 RMB ($.45 to $2.25) per channel per subscriber per month,
depending on the content delivered.
63