IDEANOMICS, INC. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: December 31,
2009
¨ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____________ to _____________
Commission
File No. 000-19644
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CHINA
BROADBAND, INC.
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(Exact
name of registrant as specified in its
charter)
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Nevada
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20-1778374
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(State
or other jurisdiction of incorporation or
organization) |
(I.R.S.
Employer Identification
No.)
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1900
Ninth Street, 3rd Floor
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Boulder,
Colorado 80302
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(Address
of principal executive
offices)
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(303)
449-7733
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per
share
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 Section 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 Website, 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
x
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
Accelerated Filer ¨
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Accelerated
Filer ¨
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Non-Accelerated
Filer ¨ (Do not
check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes ¨ No
x
As of
June 30, 2009 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the shares of the
registrant’s common stock held by non-affiliates (based upon the closing price
of such shares as reported on the Over-the-Counter Bulletin Board) was
approximately $5,169,425. Shares of the registrant’s common stock held by each
executive officer and director and each by each person who owns 10% or more of
the outstanding common stock have been excluded from the calculation in that
such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There
were a total of 65,086,152 shares of the registrant’s common stock outstanding
as of April 15, 2010.
None.
CHINA
BROADBAND, INC.
Annual
Report on FORM 10-K
For
the Fiscal Year Ended December 31, 2009
TABLE
OF CONTENTS
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PART
I
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Item
1.
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Business
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1
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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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20
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Item
2.
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Properties
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20
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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20
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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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20
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Item
6.
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Selected
Financial Data
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21
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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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22
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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33
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Item
8.
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Financial
Statements and Supplementary Data
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33
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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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33
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Item
9A(T).
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Controls
and Procedures
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34
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Item
9B.
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Other
Information
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35
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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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35
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Item
11.
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Executive
Compensation
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38
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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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40
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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Item
14.
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Principal
Accounting Fees and Services
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43
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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43
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Special
Note Regarding Forward Looking Statements
In addition to historical
information, this report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We use words such as “believe,”
“expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify
forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new
and existing products or services; any projections of sales, earnings, revenue,
margins or other financial items; any statements of the plans, strategies and
objectives of management for future operations; any statements regarding future
economic conditions or performance; uncertainties related to conducting business
in China, as well as all assumptions, expectations, predictions, intentions or
beliefs about future events. You are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, including, and without limitation those identified in Item 1A,
“Risk Factors” included herein, as well as assumptions, which, if they were to
ever materialize or prove incorrect, could cause the results of the Company to
differ materially from those expressed or implied by such forward-looking
statements.
Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance,
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements as predictions
of future events. We are under no duty to update any of these forward-looking
statements after the date of this report to conform our prior statements to
actual results or revised expectations.
Use
of Terms
Except as
otherwise indicated by the context, references in this report to (i) the
“Company,” “we,” “us,” and “our” are to the combined business of China
Broadband, Inc., a Nevada corporation, and its consolidated subsidiaries; (ii)
“Broadband Cayman” are to our wholly-owned subsidiary China Broadband, Ltd., a
Cayman Islands company; (iii) “WFOE” are to our wholly-owned subsidiary Beijing
China Broadband Network Technology Co., Ltd., a PRC company; (iv) “Jinan
Broadband” are to our 51% owned subsidiary Jinan Guangdian Jia He Broadband Co.
Ltd, a PRC company; (v) “Shandong Publishing” are to our 50% joint venture
Shandong Lushi Media Co., Ltd., a PRC company; (vi) “AdNet” are to our
wholly-owned subsidiary Wanshi Wangjing Media Technologies (Beijing) Co., Ltd.
(a/k/a AdNet Media Technologies (Beijing) Co., Ltd.), a PRC company; (vii) “SEC”
are to the United States Securities and Exchange Commission; (viii) “Securities
Act” are to Securities Act of 1933, as amended; (ix) “Exchange Act” are to the
Securities Exchange Act of 1934, as amended; (x) “PRC” and “China” are to
People’s Republic of China; (xii) “Renminbi” and “RMB” are to the legal currency
of China; and (xiii) “U.S. dollar,” “$” and “US$” are to United States
dollars.
PART
I
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ITEM 1.
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BUSINESS.
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Business
Overview
Through
our Chinese operating subsidiaries, we operate in the media segment (1) a cable
broadband business based in the Jinan region of China and (2) a
television program guide, newspaper and magazine publishing business based in
the Shandong region of China. We have also recently acquired and are
developing to a limited extent, an internet café advertising and content
provider business in China.
Through
our subsidiary Jinan Broadband, we provide cable and wireless broadband
services, principally internet services, Internet Protocol Point wholesale
services, related network equipment rental and sales, and fiber network
construction and maintenance. This broadband business constitutes our
flagship operations and accounted for 59% of our revenues in 2009.
We
operate our publishing business, which includes the distribution of periodicals,
the publication of advertising, the organization of public relations events, the
provision of information related services, copyright transactions, the
production of audio and video products, and the provision of audio value added
communication services, through Shandong Publishing, our joint venture company.
Our publishing business accounted for 41% of our revenues in 2009.
Our
subsidiary AdNet, which was acquired during the first half of 2009, holds an
Internet Content Provider (“ICP”), license with rights to provide delivery of
multimedia advertising content to internet cafés in the PRC. AdNet is
licensed to operate in 28 provinces in the PRC with servers in five data centers
including Wuhan, Wenzhou, Yantai, Yunan and with a master distribution server in
Tongshan.
1
As
previously reported, management has opted to limit its expenses in respect with
ANet’s business and has reduced AdNet’s full and part time staff, all of which
were based in the PRC, from 20 persons to 2 full time
employees. Nonetheless, we are maintaining AdNet’s ICP and other
licenses, servers and infrastructures, as well as all of its intellectual
property, all of which we intend on using for both AdNet and, in connection with
other businesses that we are contemplating acquiring or entering into, which
would require similar technology and infrastructure.
Corporate History and
Structure
General
China
Broadband, Inc., a Nevada corporation and our parent holding company, was formed
on October 22, 2004, pursuant to a reorganization of a California entity formed
in 1988. Prior to January 2007, we were a blank check shell
company. On January 23, 2007, we acquired Broadband Cayman which
at the time was a party to the cooperation agreement with our PRC based
WFOE, in a reverse acquisition transaction, resulting in a change of
control of the Company, and simultaneously completed the first closing of an
equity financing of common stock and warrants.
The
Company maintains its US corporate office at 1900 Ninth Street, 3rd Floor,
Boulder, Colorado 80302. The Company’s website is www.chinabroadband.tv
and phone number is: (303) 449-7733. Our stock symbol is
CBBD.OB.
Jinan
Broadband Cooperation Agreement
In
December 2006, through our WFOE, we entered into to a cooperation agreement,
referred to herein as the Jinan Broadband Cooperation Agreement, with Jinan
Guangdian Jiahe Digital Television Co., Ltd., or Jinan Parent, pursuant to which
we acquired and currently own a 51% controlling interest in Jinan
Broadband. The Jinan Broadband Cooperation Agreement provides that
Jinan Broadband’s operations and pre-tax revenues would be assigned to our WFOE
for 20 years, effectively providing for an acquisition of the
business. In consideration for this 20 year business and management
rights license, we paid approximately $2,572,000, including expenses in March
2007 and the remaining approximate $3.2 million (based on 23 million RMB) in
March of 2008. While this acquisition was completed in late March of
2007 with an effective transfer of assets date of April 1, 2007, we commenced
certain operational oversight of this entity prior to such time.
Jinan
Broadband also entered into an exclusive service agreement, referred to herein
as the Exclusive Service Agreement, with Jinan Radio and Television
Network, the primary cable TV network in China, and Jinan Parent, pursuant to
which the parties cooperate and provide each other with technical services
related to their respective broadband, cable and Internet content-based
businesses.
Shandong
Publishing Cooperation Agreement
On March
7, 2008, we entered into a cooperation agreement, or the Shandong Publishing
Cooperation Agreement, with Shandong Broadcast & TV Weekly Press and Modern
Movie & TV Biweekly Press. The Shandong Publishing Cooperation
Agreement provides for, among other terms, the creation of a joint venture
entity in the PRC, Shandong Publishing, that would own and operate the
television program guide, newspaper and magazine publishing businesses
previously owned and operated by Shandong Broadcast & TV Weekly Press and
Modern Movie & TV Biweekly Press pursuant to exclusive
licenses.
Under the
terms of the Shandong Publishing Cooperation Agreement and related pledge and
trust documents, Shandong Broadcast & TV Weekly Press and Modern Movie &
TV Biweekly Press contributed their entire businesses and transferred certain
employees to Shandong Publishing in exchange for a 50% stake in Shandong
Publishing, with the other 50% of Shandong Publishing to be owned by our WFOE in
the PRC. In exchange, we paid approximately $1.5 million
(approximately 10 million RMB), which was contributed to Shandong Publishing as
working and acquisition capital. The results of the Shandong
Publishing have been consolidated with the Company’s consolidated financial
statements as of July 1, 2008.
Based on
certain financial performance thresholds being satisfied we were required to
make an additional payment of 5 million RMB (approximately
$730,000). In 2008 we recorded the additional payment due as an
increase to our Shandong noncontrolling interest
account. The due date of the additional payment has been extended to
May 31, 2010.
As part
of the transaction, and to facilitate our ownership and control over Shandong
Publishing under PRC law, we loaned Shandong Publishing said funds pursuant to a
loan agreement and equity option agreement, and a majority of the shares of
Shandong Publishing are held on our behalf by Pu Yue, our CFO, as trustee on
behalf of the Company pursuant to a pledge agreement and trustee
agreement.
2
In
addition, Shandong Broadcast & TV Weekly Press and Modern Movie & TV
Biweekly Press entered into an exclusive advertising agency agreement and an
exclusive consulting services agreement with Shandong Publishing which requires
that Shandong Broadcast & TV Weekly Press and Modern Movie & TV Biweekly
Press shall appoint Shandong Publishing as their exclusive advertising agent and
provider of technical and management support for a fee.
Acquisition
of AdNet
On April
7, 2009, we acquired AdNet, a development stage company, whose primary business
was, until December 2009 as discussed above, the delivery of multimedia
advertising content to internet cafés in the
PRC. Pursuant to the terms of this acquisition, we issued
11,254,898 shares of our Common Stock to AdNet’s shareholders in exchange for
100% of AdNet’s equity ownership and $100,000 paid to us. As part of
the terms of this acquisition, and to facilitate our ownership and control over
AdNet under PRC law, we loaned AdNet $100,000 pursuant to a loan agreement and
equity option agreement, and all of the shares of AdNet are held by a trustee
appointed by the Company to act as directed by the Company. We have
since reduced expenditures and staff in the AdNet business but maintain and
intend on utilizing and commercializing AdNet’s IP, servers and various licenses
it owns in the PRC that authorize it to operate in over 28 provinces and over
2,000 internet cafés.
Corporate
Structure
The
following chart depicts our corporate structure as of the date of this
report:
Pursuant
to the Jinan Broadband Cooperation Agreement and Shandong Publishing Cooperation
Agreement, respectively, our WFOE owns 51% of Jinan Broadband and 50% of
Shandong Publishing and controls both entities. Jinan Broadband’s
other 49% owners are Jinan Parent and certain of its
affiliates. Shandong Publishing’s
other 50% owners are Shandong Broadcast & TV Weekly Press and
Modern Movie & TV Biweekly Press.
The
shares of Shandong Publishing issued to our WFOE and of AdNet issued to
Broadband Cayman are held in trust pursuant to loan and pledge agreements
securing loans made to facilitate such acquisitions, and transferring full
control over such entities.
Our
Broadband Business
Jinan
Parent, the entity that sold its cable broadband business to us, is an emerging
cable consolidator and operator in China’s cable broadband market.
Jinan Broadband, which is 49% owned by Jinan Parent and 51% owned by our WFOE,
is operated in accordance with the Jinan Broadband Cooperation Agreement and one
or more operating agreements, including the Exclusive Service
Agreement. Jinan Broadband operates out of its base in Shandong where
it has an exclusive cable broadband deployment partnership and Exclusive Service
Agreement with Jinan Radio & Television Network, the only cable TV operator
in Jinan. Pursuant to the Exclusive Service Agreement, the parties
cooperate and provide each other with technical services related to their
respective broadband, cable and Internet content-based businesses.
Currently,
the only broadband services available in the Jinan region are through cable and
high speed internet lines, as satellite internet cable connections are not
currently available in Jinan, China. We believe that we compete on
the basis of more favorable rates and our ability to provide a variety of
interactive media services through a partnership with Jinan Radio and Television
Network Centers, or Jinan Center. Finally, cable enjoys a high
household penetration rate in urban areas and our internet service is
competitively fast and reliable. (See www.jinan.gov.cn). The
broadband internet business in China has limited competition, since we were
granted an exclusive license and right to do so via cable in the Jinan
region.
Our
Publishing Business
Our
publishing business includes the distribution of periodicals, the publication of
advertising, the organization of public relations events, the provision of
information related services, copyright transactions, the production of audio
and video products, and the provision of audio value added communication
services. The Shandong Publishing Cooperation Agreement also provides
that these businesses will be operated primarily by employees contracted to
Shandong Publishing through secondment by Shandong Broadcast & TV Weekly
Press and Modern Movie & TV Biweekly Press.
3
In
addition to being the exclusive provincial television programming guide
publishing group in the Shandong province, Shandong Publishing has:
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a
combined subscription basis of approximately 250,000
subscribers;
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five
publishing assets focused on different readership
segments;
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retail
and subscription incomes accounting for more than 75% of total revenue,
indicating great growth potential for advertising revenue;
and
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unique
publishing titles and exclusive
copyrights.
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Following
is a description of some of our publications:
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Shandong
Broadcast and TV Weekly (Newspaper). Established in 1954, Shandong
Broadcast & TV Weekly is a provincial TV programming guide &
general entertainment newspaper. Published on weekly basis, it
has maintained 90,000 average copies in circulation per
week. Target readership of Shandong Broadcast & TV
Weekly consists primarily of middle-age to senior readers in the Shandong
region.
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TV Weekly
Magazine. TV Weekly
Magazine is a national PRC magazine title, ranked among China’s top 5 TV
Guide & general entertainment magazines. Published on a
weekly basis, this magazine’s average circulation is 40,000 copies in the
Shandong region. The unique national publishing title
encourages TV Weekly to expand it’s target market to neighboring regions
in northern China.
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Modern
Movie Times Magazine (Bi-Weekly). Modern
Movie Time Magazine is published jointly by Shandong TV Drama and Movie
Production Center and Shandong TV Station. Ranked among the top
100 magazine for 5 consecutive years in China, it’s among the most popular
magazine in northern China. Modern Movie Times Magazine reached
125,000 copies in circulation on bi-weekly basis in year
2009.
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Music
Review and Korea Drama (monthly). These are
two smaller publications that were acquired in
2009. Circulation in each of these magazines is
small. They are currently distributed in larger
cities. We feel that there is good growth potential for both
publications as we integrate them into our distribution and content
channels.
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Our
Advertising Business
Our
subsidiary AdNet, which was acquired during the first half of 2009, holds an
Internet Content Provider (“ICP”) license with rights to provide delivery of
multimedia advertising content to internet cafés in the PRC. AdNet is
licensed to operate in 28 provinces in the PRC with servers in five data centers
including Wuhan, Wenzhou, Yantai, Yunan and with a master distribution server in
Tongshan.
As
previously reported and as we have seen limited growth in this business,
management has opted to limit its expenses in respect of AdNet’s business and
has reduced AdNet’s full and part time staff, all of which were based in the
PRC, from 20 persons to 2 full time employees. Nonetheless, we will continue to
maintain AdNet’s ICP and other licenses, servers and infrastructure, as well as
all of its intellectual property, all of which we intend on using both for AdNet
and, in connection with other businesses that we contemplate acquiring or
entering into, which would require similar technology and
infrastructure. Management believes that, by partnering with a local
advertising agency, AdNet could potentially provide a network for tens of
thousands of daily video advertisement insertions to entertainment content
traffic (movies, music, video, and games) which the various divisions of the
Company could tap into.
Our
Industry
Until
2005, there were over 2,000 independent cable operators in the
PRC. While PRC’s State Administration of Radio, Film, and Television,
or SARFT, has advocated for national consolidation of cable networks, the
consolidation has primarily occurred at the provincial level. The 30
provinces are highly variable in their consolidation efforts and
processes. Many cable operators in China, on a stand-alone basis, may
lack the economies of scale to systematically introduce value-added services
that can significantly upgrade ARPU.
4
SARFT has
taken various steps to implement a separation scheme to achieve economies of
scale in the value-added service and cable operation sector. First,
SARFT has been separating cable network assets from broadcasting assets and
currently allows state-owned-enterprises to hold up to 49% in the cable network
infrastructure assets. Second, SARFT is separating the value-added
services segment from the network infrastructure which tends to increase private
investments.
Due to
its highly-regulated nature, we believe that the radio and broadcasting industry
does not have the same financial resources as the deregulated telecom industry
in China, and that the priorities and goals of this industry are different from
the telecom industry.
We
believe that SARFT and its broadcasters are currently focusing on increasing
subscription revenues by converting Chinese television viewers from “analog”
service to “digital” (pay TV) service. The digitalization efforts
include providing set-top-boxes free of charge as part of a digital television
service bundling initiative. Due to the lack of financial
resources, the rollout of cable broadband services and other value-added
services is moved lower on the SARFT priority list.
Our
Competition
Jinan
Broadband
We
believe that local telecom carriers that offer non-cable internet services, such
as DSL, represent our primary broadband internet segment competition in the
PRC. An example is China Netcom, a telecom carrier in the Shandong
province of China. Many of our competitors also have resources and
capital resources that exceed our own.
Local
telecom carriers are actively marketing broadband services on national,
provincial, as well as local levels in China. Telecom carriers own
“last mile access” to urban households in the form of fixed phone
lines. We believe, however, that cable operators have a
competitive advantage by owning last mile connections in the form of cable lines
that have a larger bandwidth relative to phone lines. In urban areas
that we target, a large number of households have both fixed phone line and
cable television access. Many of these homes currently have telecom
based internet access.
Cable
operators in China must purchase internet connection bandwidth from the local
telecom carriers. Since the local telecom carriers are not required
to pay for internet connection bandwidth, which increases their profit margins
relative to cable broadband service providers. This affords them a
potential price advantage, but to date their prices remain in line with our
prices.
We
believe, however, that the ability for cable operators to bundle cable broadband
with digital Set-top boxes combined with the quality and versatility of cable
based broadband services, provides a competitive advantage. For
example, voice over internet protocol telephony service (known as “VOIP”) can be
provided over cable lines with limited added costs to us or the end
user. We do not have plans to provide value added services such as
VOIP to our customers in the near future. Instead, we plan to pursue expansion
opportunities by increasing the number of geographical regions in which we are
licensed to operate.
Shandong
Publishing
There are
approximately 17 entertainment newspapers and numerous entertainment magazines
in Shandong province and throughout China. Competition in this sector
is very strong. Management hopes to gain a competitive advantage and
additional revenue by focusing on advertising by leveraging our advertising
business. We will also attempt to deliver publication content
electronically through our broadband division.
Our
Growth Strategy
We intend
to implement the following strategic plans to take advantage of industry
opportunities and our competitive strengths:
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Focus on
Shandong Region. The Shandong province has a population of
approximately 92 million people with the second highest gross domestic
product, or GDP, ranking in China. The Shandong province is served by 17
municipal cable television operators, including Jinan Parent, the cable
operator and affiliate of Jinan Broadband. Jinan, with a
population of 5.9 million, is the capital city of the Shandong
Province. The Shandong Newspaper division is also located in
Jinan in the Shandong Province. Currently, its primary
distribution is in the Shandong province with approximately 250,000
subscribers. We continue to believe that the Shandong regional
market provides a potential opportunity for expanding our current and
future media services. We intend to develop and evolve our market
strategy on an ongoing basis based on our results in the Shandong
region.
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5
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Bundle with
Direct TV Rollout. We believe that Chinese cable companies are
exerting efforts to digitalize cable networks which we believe will
increase the use and availability of digital set-top-boxes, STBs, in the
Shandong province. By 2015, SARFT intends for the entire
country to deploy digital cable television and cease providing analog
television transmission services. This will require the
conversion of current “analog” cable customers into “digital” or pay
television cable subscribers. Analog cable customers currently
pay on average $1.50 per month for cable television
service. Digital cable customers with STBs are projected to pay
$3.50 per month, as a basic fee. We hope to capitalize on
the digitalization campaign initiated by SARFT by bundling cable broadband
services in the digital STB rollout
campaign. One marketing strategy that we intend to
employ is to bundle cable broadband service offerings within the
digitalization campaign in the Jinan area. The terms of our
exclusive service agreement with Jinan Parent and Jinan Center provide
that they will provide us the first right to market and sell STB bundled
services when it is rolled out by them in the Jinan region. In
order to push for digitalization, the cable operators in Shandong are
subsidizing STBs to offer them for free to selected high-end cable
television customers. In new territories that do not already
have cable, we may also be required to subsidize STBs. Jinan
Parent provides subsidies to plug-in cable broadband features on to the
current STB platform. Our success will be dependent, in part,
on our ability to work with Jinan Parent and Jinan Center to distribute
such STBs to selected cable television customers located in more affluent
communities. While the cable broadband feature is offered as
optional to digital STBs users, with careful choice of deployment targets,
we plan to attempt to convert digital cable television subscribers to
cable broadband customers.
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Deployment
of Value-added Services. To augment our product offerings and
create other revenue sources, we work with strategic partners to deploy
value-added services to our cable broadband
customers. Value-added services will become a focus
of revenue generation for our company. No assurance can be made that we
will add other value-added services, or if added, that they will
succeed.
|
Our Customers
As of
December 31, 2009, Jinan Broadband had approximately 58,000 cable internet
subscribers. Shandong Publishing had, in aggregate amongst its
various titles, a reader base of approximately 250,000
persons.
All of
our customers are in the PRC.
Intellectual
Property
We are
not a party to any royalty agreements, labor contracts or franchise agreements,
and other than our right to own and operate Jinan Broadband, we do not currently
own any trademarks. We intend to apply for trademarks for the
regions in which we operate, such as with respect to Jinan
Broadband.
Our
Employees
As of
December 31, 2009, we employed a total of 199 full-time employees, with 191
employees after our reduction of AdNet staff through February of 2010. The
following table sets forth the number of our employees by function at December
31, 2009.
|
Function
|
Number of Employees
|
|
|
Sales
and Marketing
|
50
|
|
|
Technical
|
84
|
|
|
Research
and Development
|
15
|
|
|
Financial
|
15
|
|
|
Administrative
|
35
|
|
|
TOTAL
|
199
|
Our
employees are not represented by a labor organization or covered by a collective
bargaining agreement. We have not experienced any work stoppages.
6
We are
required under PRC law to make contributions to the employee benefit plans at
specified percentages of the after-tax profit. In addition, we are
required by the PRC law to cover employees in China with various types of social
insurance. We believe that we are in material compliance with the
relevant PRC laws.
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.
Regulation
General
Regulation of Businesses
Our PRC
based operating subsidiaries are regulated by the national and local laws of the
PRC. The radio and television broadcasting industries and news print media are
highly regulated in China. Local broadcasters including national,
provincial and municipal radio and television broadcasters are 100% state-owned
assets. SARFT regulates the radio and television broadcasting
industry. In China, the radio and television broadcasting industries
are designed to serve the needs of government programming first, and to make
profits next. The SARFT interest group controls broadcasting assets
and broadcasting contents in China.
The
Ministry of Information Industry, or MII, plays a similar role to SARFT in the
telecom industry. As China’s telecom industry is much more
deregulated than the broadcasting industry. While China’s telecom
industry has substantial financial backing, SARFT, and its regulator, the
Propaganda Ministry under China’s Communist Party Central Committee, never
relinquished ultimate regulatory control over content and broadcasting
control.
The major
internet regulatory barrier for cable operators to migrate into multiple-system
operators and to be able to offer telecom services is the license
barrier. Few independent cable operators in China acquired full and
proper broadband connection licenses from MII. The licenses, while
awarded by MII, are given on very-fragmented regional market
levels. With cable operators holding the last mile to access end
users, SARFT cable operators pose a competitive threat to local telecom
carriers. While internet connection licenses are deregulated to even
the local private sector, MII still tries to utilize the license barrier to
fence off threats from cable operators that falls under the SARFT interest
group.
We are
required to obtain government approval from the Ministry of Commerce of the
People’s Republic of China, or MOFCOM, and other government agencies in China
that approve transactions such as our acquisition of Jinan
Broadband. Additionally, foreign ownership of business and assets in
China is not permitted without specific government approval. For this
reason, we acquired only 51% of Jinan Broadband, with the remaining 49% owned by
Jinan Parent and its affiliates. Similarly, Shandong Publishing was
acquired through WFOE which owns 50% of the joint venture with the remaining 50%
owned by Shandong Broadcast & TV Weekly Press and Modern Movie & TV
Biweekly Press. AdNet was acquired under a trustee
relationship. We use revenue sharing and voting control agreements
among the parties so as to obtain equitable and legal ownership of our
subsidiaries.
Licenses
and Permits
Jinan
Broadband
Through
Jinan Broadband’s Cooperation Agreement with Jinan Parent and Jinan Center, we
enjoy the benefits of licenses that Jinan Parent holds that allow us to roll out
cable broadband services as well as to provide value-added services of radio and
TV content in Shandong province, including:
|
Description
|
License/Permit
|
|
|
Internet
Multi-media Content Transmission
|
License
No. 1502005
|
|
|
Radio
& Television Program Transmission & Operation
Business
|
Permit
Shandong No. 1552013
|
|
|
Radio
& TV Program Production & Operation License
|
Shandong
No. 46
|
|
|
PR
China Value-added Telecom Service License
|
Shandong
No. B2-20050002
|
|
|
PR
China Value-added Telecom Service License
|
Shandong
B2-20051013
|
7
Shandong
Publishing
Shandong
Publishing holds the following licenses:
|
Description
|
License/Permit
|
|
|
PRC
Newspaper Publication License for Shandong Broadcast & TV
Weekly
|
National
Unified Publication No: CN 37-0014
|
|
|
PRC
Magazine Publication License for View Weekly
|
Ruqichu
Nor:1384
|
|
|
PRC
Magazine Publication License for Modern Movie & TV
Biweekly
|
Ruqichu
No:1318
|
|
|
Advertising
License for Shandong Broadcast & TV Weekly
|
3700004000093
|
|
|
Advertising
License for View Weekly
|
3700004000186
|
|
|
Advertising
License for Modern Movie & TV Biweekly
|
3700004000124
|
AdNet
AdNet,
holds an ICP license issued by the Ministry of Commerce of the
PRC. AdNet, among other things, is authorized to operate and provide
content and advertising throughout the PRC in internet Cafés.
Taxation
For
detailed discussion of PRC tax regulations, see Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Taxation –
China.”
Foreign
Currency Exchange
Under the
PRC foreign currency exchange regulations applicable to us, RMB is convertible
for current account items, including the distribution of dividends, interest
payments, trade and service-related foreign exchange transactions. Conversion of
RMB for capital account items, such as direct investment, loan, security
investment and repatriation of investment, however, is still subject to the
approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign
invested enterprises, or FIEs, established in the PRC may only buy, sell and/or
remit foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital
account item transactions, obtaining approval from the SAFE. Capital investments
by FIEs outside of China are also subject to limitations, which include
approvals by MOFCOM, the SAFE and the State Reform and Development
Commission.
Dividend
Distributions
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.
The
Company intends on reinvesting profits, if any, and does not intend on making
cash distributions of dividends in the near future.
|
RISK
FACTORS.
|
An
investment in any of the company’s securities is necessarily highly speculative
in nature, involves a high degree of risk and illiquidity and should be
purchased only by persons who can afford to lose the entire amount invested in
the common stock. Before purchasing any securities of the Company, you should
carefully consider the following factors relating to our business and prospects.
You should pay particular attention to the fact that we conduct all of our
operations in China and are governed by a legal and regulatory environment that
in some respects differs significantly from the environment that may prevail in
the U.S. and other countries. If any of the following risks actually
occurs, our business, financial condition or operating results will suffer, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
8
RISKS
RELATED TO OUR BUSINESS
We
are in need of financing and dependent upon our ability to raise additional
capital to complete our acquisition strategy. Any new financing is
likely to be highly dilutive to existing shareholders.
We are
dependent upon our ability to raise capital to complete our business plan.
We do not have any financial commitments and, given the recent trading
history of our stock price, any offering will necessarily be extremely dilutive
to our shareholders. Our ability to raise capital would be greatly
hindered if we are not able to remain current with our SEC reporting
obligations. Remaining current will depend in part, on our ability to
prepare and consolidate our financial statements with those of our Chinese
subsidiaries. If we do not raise capital, or if we are delisted from the
OTC Bulletin Board, our business will be adversely affected.
In
addition, our existing notes and warrants have anti-dilution provisions which,
if triggered, would result in substantial additional shares issuable thereunder,
thereby diluting further the existing shareholders.
Finally,
as we were once a shell company, if we become delinquent in our filings, in
addition to other liabilities, our existing restricted shareholders or
noteholders will not be able to re-sell securities, subjecting the company to
liabilities and making it unlikely that noteholders will convert their notes or
that warrant holders will exercise their warrants.
Our
auditors have expressed substantial doubt in their report on our financial
statements about our ability to continue as a going concern.
Our
auditors have included an explanatory paragraph in their report dated as of
April 15, 2010 on our consolidated financial statements for the year ended
December 31, 2009, indicating that there is substantial doubt regarding our
ability to continue as a going concern. The financial statements
included elsewhere in this Report do not include any adjustments to asset values
or recorded liability amounts that might be necessary in the event we are unable
to continue as a going concern. If we are in fact unable to continue as a going
concern, our shareholders may lose their entire investment in our company. We
will therefore need immediate additional substantial capital in order to
continue to operate.
The
recent financial crisis could negatively affect our business, results of
operations, and financial condition.
The
recent credit crisis and turmoil in the global financial system may have an
impact on our business and our financial condition, and we may face challenges
if conditions in the financial markets do not improve. Our ability to
access the capital markets may be restricted at a time when we would like, or
need, to raise capital, which could have an impact on our flexibility to react
to changing economic and business conditions. In addition, these
economic conditions also impact levels of consumer spending, which have recently
deteriorated significantly and may remain depressed for the foreseeable
future. Consumer purchases of discretionary items generally decline
during recessionary periods and other periods where disposable income is
adversely affected. If demand for our products fluctuates as a result of
economic conditions or otherwise, our revenue and gross margin could be
harmed.
Expansion
of our business may put added pressure on our management and operational
infrastructure impeding our ability to meet any potential increased demand for
our services and possibly hurting our future operating results.
Our
business plan is to significantly grow our operations to meet anticipated growth
in demand for the services that we offer, and by the introduction of new goods
or services. Growth in our businesses may place a significant strain on
our personnel, management, financial systems and other resources. The
evolution of our business also presents numerous risks and challenges,
including:
|
|
·
|
our
ability to successfully and rapidly expand sales to potential new
distributors in response to potentially increasing
demand;
|
|
|
·
|
the
costs associated with such growth, which are difficult to quantify, but
could be significant; and
|
|
|
·
|
rapid
technological change.
|
To
accommodate any such growth and compete effectively, we may need to obtain
additional funding to improve information systems, procedures and controls and
expand, train, motivate and manage our employees, and such funding may not be
available in sufficient quantities, if at all. If we are not able to
manage these activities and implement these strategies successfully to expand to
meet any increased demand, our operating results could suffer.
9
We do not own Jinan Parent or Jinan
Center which are the minority co-owners of our broadband business, or Shandong
Broadcast & TV Weekly Press, which is the co-owner of our publishing
business, and, if
they or their ultimate shareholders or control persons violate our contractual
arrangements with them, our business could be disrupted, our reputation may be
harmed and we will have only limited rights and ability to enforce our rights
against these parties.
The vast
bulk of our operations are currently dependent upon our contractual
relationships with Jinan Center and Jinan Parent with respect to our broadband
business and Shandong Broadcast & TV Weekly Press with respect to our
publishing business, as described in our Business section above. The
terms of these agreements are often statements of general intent and do not
detail the rights and obligations of the parties. Some of these contracts
provide that the parties will enter into further agreements on the details of
the services to be provided. Others contain price and payment terms that
are subject to monthly adjustment. These provisions may be subject to
differing interpretations, particularly on the details of the services to be
provided and on price and payment terms. It may be difficult for us to
obtain remedies or damages from these companies or their ultimate shareholders
in the PRC for breaching our agreements. Because we rely significantly on these
companies for our business, the realization of any of these risks may disrupt
our operations or cause degradation in the quality and service provided by, or a
temporary or permanent shutdown of, the company. The Jinan Broadband
Cooperation Agreement that enables us to own and operate our broadband business,
and the exclusive service agreement in which the parties will cooperate and
provide each other with technical services related to their respective
broadband, cable and Internet content-based businesses, is for a term of 10
years and 20 years, respectively. The contracts commenced December
2006. Our ownership interests in Shandong Publishing is subject to
similar limitations. If we are unable to renew these agreements on
favorable terms, or to enter into similar agreements with other parties, our
business may not expand, and our operating expenses may increase.
The
success of our business is dependent on our ability to retain our existing key
employees and to add and retain senior officers to our management.
We depend
on the services of our existing key employees, in particular, Marc Urbach, Clive
Ng and Pu Yue. Our success will largely depend on our ability to retain
these key employees and to attract and retain qualified senior and middle level
managers to our management team. While we have retained an accounting
firm to assist us on consolidation of financial statements for our PRC
businesses, we do not have a full time internal Chief Financial Officer for the
consolidated companies. We have recruited executives and management in China to
assist in our ability to manage the business and to recruit and oversee
employees. While we believe we offer compensation packages that are
consistent with market practice, we cannot be certain that we will be able to
hire and retain sufficient personnel to support our cable broadband
business. In addition, severe capital constraints have limited our
ability to attract specialized personnel. Moreover, our budget
limitations will restrict our ability to hire qualified
personnel. The loss of any of our key employees would significantly
harm our business. We do not maintain key person life insurance on any of our
employees.
Our
officers and directors may allocate their time to other businesses, and are or
may be affiliated with entities that may cause conflicts of interest. In
particular, our principal shareholder and Chairman is subject to potentially
conflicting duties to another company he established to pursue business
opportunities in the PRC.
Messrs.
Ng and Yue and Dr. Lu, and certain of our other officers (and all of our
directors) have the ability to allocate their time to other businesses and
activities, thereby causing possible conflicts of interest in their
determination as to how much time to devote to the affairs of our
Company.
These
individuals are engaged in several other business endeavors and will continue to
be so involved from time to time, and are not obligated to devote any specific
number of hours to our affairs. If other business affairs require
them to devote more substantial amounts of time to such affairs, it could limit
their ability to devote time to our affairs and could have a negative impact on
our ongoing business. Certain of our officers and directors are now,
and all of them may in the future become, affiliated with entities engaged in
business activities similar to those intended to be conducted by us or
otherwise, and accordingly, may have conflicts of interest in allocating their
time and determining to which entity a particular investment or business
opportunity should be presented. Moreover, in light of our officers’ and
directors’ existing affiliations with other entities, they may have fiduciary
obligations to present potential investment and business opportunities to those
entities in addition to presenting them to us, which could cause additional
conflicts of interest. While we do not believe that any of our
officers or directors has a conflict of interest in terms of presenting to
entities other than our investment and business opportunities that may be
suitable for it, conflicts of interest may arise in the future in determining to
which entity a particular business opportunity should be presented.
10
We can
not assure you that any conflicts will be resolved in our
favor. These possible conflicts may inhibit the activities of such
officers and directors in seeking acquisition candidates to expand the
geographic reach of the Company or broaden its service offerings. For
a complete description of our management’s other affiliations, see Item 10,
“Directors, Executive Officers and Corporate Governance.’’ In any event, it
cannot be predicted with any degree of certainty as to whether or not Mr. Ng,
Mr. Pu or Dr. Lu or our other officers or directors will have a conflict of
interest with respect to a particular transaction as such determination would be
dependent upon the specific facts and circumstances surrounding such transaction
at the time.
In 2008,
Mr. Ng, our Chairman, entered into a settlement agreement with us and China
Cablecom Holdings, Ltd., or China Cablecom, another company which he organized
to pursue cable opportunities in the PRC, and certain of its affiliated
entities, to avoid possible claims that might be brought by us against him for
activities in forming China Cablecom. Mr. Yue has entered into a
similar agreement with us and China Cablecom.
In
particular, notwithstanding the terms of the settlement and the amendment to Mr.
Ng’s employment agreement with us, Mr. Ng’s continuing relationship with China
Cablecom or other entities could lead to future claims of violation of his
duties in the event future acquisitions in the PRC are offered to China Cablecom
rather than to us, notwithstanding the express terms of the revised employment
agreement and provisions of the settlement agreement. Accordingly,
Mr. Ng’s revised employment agreement with us contains an express provision
permitting Mr. Ng to resign from all positions with the Company in the event an
acquisition arises that involves our business, which is how Mr. Ng currently
intends to handle opportunities in the future that could create a situation
similar to that which led to the settlement agreement.
The
settlement agreement contains a provision recognizing that the provision of
integrated cable television services in the PRC and related activities of China
Cablecom do not conflict with our business. However, notwithstanding
the terms of the settlement agreement and the amendment to Mr. Ng’s employment
agreement with us, Mr. Ng’s or Mr. Yue’s continuing relationship with China
Cablecom could lead to future claims of violation of his duties either entity in
the event future acquisitions in the PRC are offered to us rather than to China
Cablecom, notwithstanding his current intention to resign in such
circumstances.
We
may be unable to compete successfully against new entrants and established
industry competitors.
The
Chinese market for Internet content and services is intensely competitive and
rapidly changing. Barriers to entry are relatively minimal, and current and new
competitors can launch new websites at a relatively low cost. Many
companies offer competitive products or services including Chinese
language-based Web search, retrieval and navigation services, wireless
value-added services, online games and extensive Chinese language content,
informational and community features and e-mail. In addition, as a
consequence of China joining the World Trade Organization, the Chinese
government has partially lifted restrictions on foreign-invested enterprises so
that foreign investors may hold in the aggregate up to approximately 51% of the
total equity ownership in any value-added telecommunications business, including
an Internet business, in China.
Currently,
our competition comes from standard “telephone” internet providers. Any of our
present or future competitors may offer products and services that provide
significant performance, price, creativity or other advantages over those
offered by us and, therefore, achieve greater market acceptance than
ours.
Because
many of our existing competitors, as well as a number of potential competitors,
have longer operating histories in the Internet market, greater name and brand
recognition, better connections with the Chinese government, larger customer
bases and databases and significantly greater financial, technical and marketing
resources than we have, we cannot assure you that we will be able to compete
successfully against our current or future competitors. Any increased
competition could reduce page views, make it difficult for us to attract and
retain users, reduce or eliminate our market share, lower our profit margins and
reduce our revenues.
Unexpected
network interruption caused by system failures may reduce user base and harm our
reputation.
Both the
continual and foremost accessibility of internet service websites and the
performance and reliability of our technical infrastructure are critical to our
reputation and the ability of our internet services to attract and retain users
and advertisers. Any system failure or performance inadequacy that causes
interruptions or delays in the availability of our services or increases the
response time of our services could reduce user satisfaction and traffic, which
would reduce the internet service appeal to users of “high speed” internet
usage. As the number of users and traffic increase, we cannot assure you that we
will be able to scale our systems proportionately. In addition, any system
failures and electrical outages could materially and adversely impact our
business.
11
Computer
viruses may cause delays or other service interruptions on our systems. In
addition, the inadvertent transmission of computer viruses could expose us to a
material risk of loss or litigation and possible liability. We may be required
to expend significant capital and other resources to protect our internet
service against the threat of such computer viruses and to alleviate any
problems. Moreover, if a computer virus affecting our system is highly
publicized, our reputation could be materially damaged and customers may cancel
our service.
If
our providers of bandwidth and server custody service fail to provide these
services, our business could be materially curtailed.
We rely
on affiliates of Jinan Parent to provide us with bandwidth and server custody
service for Internet users. If Jinan Parent or their affiliates fail to
provide such services or raise prices for their services, we may not be able to
find a reliable and cost-effective substitute provider on a timely basis or at
all. If this happens, our business could be materially curtailed
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. In addition, the independent registered
public accounting firm auditing a company’s financial statements must also
attest to the operating effectiveness of the company’s internal
controls. Under current law, we are subject to these requirements
beginning with our annual report for the fiscal year ended December 31, 2007,
although the auditor attestation is not required until our annual report for the
fiscal year ending December 31, 2010, assuming our filing status remains as a
smaller reporting company. A report of our management is included
under Item 9A(T) of this Annual Report on Form 10-K.
Our
internal control over financial reporting and our disclosure controls and
procedures have been ineffective, and failure to improve them could lead to
future errors in our financial statements that could require a restatement or
untimely filings, which could cause investors to lose confidence in our reported
financial information, and a decline in our stock price.
We are
constantly striving to establish and improve our business management and
internal control over financial reporting to forecast, budget and allocate our
funds. However, as a PRC company that has recently become a US public
company , we face difficulties in hiring and retaining a sufficient number of
qualified employees to achieve and maintain an effective system of internal
control over financial reporting in a short period of time.
In
connection with the preparation and audit of our 2009 financial statements and
notes, we were informed by our auditor, UHY LLP (“UHY”) of certain deficiencies
in our internal controls that UHY considered to be material
weaknesses. These deficiencies related to our financial closing
procedures and errors in classification of warrants. After
discussions between management, our audit committee and UHY, we concluded that
the Company had not properly adopted FASB ASC Topic 815-40 (“Derivatives and
Hedging: Contracts in Entity’s Own Equity”) (“ASC 815”) and as a result had not
reclassified warrants from equity to liabilities as of January 1,
2009. As a result of the change in accounting, the Company recognized
a $512,000 charge for the year ended December 31, 2009.
As a
result of the material weakness in our internal controls and the ineffectiveness
of our disclosure controls and procedures described above, current and potential
stockholders could lose confidence in our financial reporting, which would harm
or business and the trading price of our stock.
Because
of the above-referenced deficiencies and weaknesses in our disclosure controls
and procedures and procedures and internal control over financial reporting, we
may be unable to comply with Sarbanes-Oxley Act’s internal controls
requirements, and therefore may not be able to obtain the independent auditor
certifications that the Sarbanes-Oxley Act requires publicly-traded companies to
obtain. As a result of any deficiencies and weaknesses, we may
experience difficulty in collecting financial data and preparing financial
statements, books of account and corporate records, and instituting business
practices that meet international standards, failure of which may prevent us
from accurately reporting our financial results or detecting and preventing
fraud.
12
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could have a
material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or the FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We
have operations, agreements with third parties and make sales in China, which
may experience corruption. Our activities in China create the risk of
unauthorized payments or offers of payments by one of the employees,
consultants, sales agents or distributors of our company, because these parties
are not always subject to our control. It is our policy to implement
safeguards to discourage these practices by our employees. Also, our
existing safeguards and any future improvements may prove to be less than
effective, and the employees, consultants, sales agents or distributors of our
Company may engage in conduct for which we might be held responsible.
Violations of the FCPA may result in severe criminal or civil sanctions,
and we may be subject to other liabilities, which could negatively affect our
business, operating results and financial condition. In addition, the government
may seek to hold our Company liable for successor liability FCPA violations
committed by companies in which we invest or that we acquire.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes in
China's political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
|
·
|
Level
of government involvement in the
economy;
|
|
|
·
|
Control
of foreign exchange;
|
|
|
·
|
Methods
of allocating resources;
|
|
|
·
|
Balance
of payments position;
|
|
|
·
|
International
trade restrictions; and
|
|
|
·
|
International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy and weak corporate governance and a lack of flexible currency
exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the
Chinese economy was similar to those of the OECD member countries.
Increased
government regulation of the telecommunications and Internet industries in China
may result in the Chinese government requiring us to obtain additional licenses
or other governmental approvals to conduct our business which, if unattainable,
may restrict our operations.
The
telecommunications industry is highly regulated by the Chinese government, the
main relevant government authority being the MII. Prior to China’s entry into
the World Trade Organization, the Chinese government generally prohibited
foreign investors from taking any equity ownership in or operating any
telecommunications business. ICP services are classified as
telecommunications value-added services and therefore fall within the scope of
this prohibition. This prohibition was partially lifted following China’s entry
into the World Trade Organization, allowing foreign investors to own interests
in Chinese businesses. In addition, foreign and foreign invested enterprises are
currently not able to apply for the required licenses for operating cable
broadband services in China.
We cannot
be certain that we will be granted any of the appropriate licenses, permits or
clearance that we may need in the future. Moreover, we cannot be certain that
any local or national ICP or telecommunications license requirements will not
conflict with one another or that any given license will be deemed sufficient by
the relevant governmental authorities for the provision of our
services.
13
We rely
exclusively on contractual arrangements with Jinan Parent and its approvals to
operate as an ICP. We believe that our present operations are structured to
comply with applicable Chinese law. However, many Chinese regulations are
subject to extensive interpretive powers of governmental agencies and
commissions. We cannot be certain that the Chinese government will not take
action to prohibit or restrict our business activities. We are uncertain as to
whether the Chinese government will reclassify our business as a media or retail
company, due to our acceptance of fees for Internet advertising, online games
and wireless value-added and other services as sources of revenues, or as a
result of our current corporate structure. Such reclassification could subject
us to penalties, fines or significant restrictions on our business. Future
changes in Chinese government policies affecting the provision of information
services, including the provision of online services, Internet access,
e-commerce services and online advertising, may impose additional regulatory
requirements on us or our service providers or otherwise harm our
business.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations
have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to evolve
rapidly, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to you and us. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention. In addition, all of
our executive officers and all of our directors are residents of China and not
of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for
investors to affect service of process in the United States or to enforce a
judgment obtained in the United States against our Chinese operations and
subsidiaries.
Most of
our assets are located outside of the United States and most of our current
operations are conducted in the PRC. In addition, most of our directors and
officers are nationals and residents of countries other than the United States.
A substantial portion of the assets of these persons is located outside the
United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons. It may also be difficult
for you to enforce in U.S. courts judgments on the civil liability provisions of
the U.S. federal securities laws against us and our officers and directors, most
of whom are not residents in the United States and the substantial majority of
whose assets are located outside of the United States. In addition, there is
uncertainty as to whether the courts of the PRC would recognize or enforce
judgments of U.S. courts. Our counsel as to PRC law, has advised us that the
recognition and enforcement of foreign judgments are provided for under the PRC
Civil Procedures Law. Courts in China may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law
based on treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions. China does not have any treaties or other
arrangements that provide for the reciprocal recognition and enforcement of
foreign judgments with the United States. In addition, according to the PRC
Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment
violates basic principles of PRC law or national sovereignty, security or the
public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered by a court in the United States.
The PRC
government exerts substantial influence over the manner in which we must conduct
our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
14
Future inflation
within China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2% . These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products and our company.
Restrictions on
currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although PBOC
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the RMB may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiaries' ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
All of
our revenues are earned by our PRC subsidiaries. However, PRC regulations
restrict the ability of our PRC subsidiaries to make dividends and other
payments to their offshore parent company. PRC legal restrictions permit
payments of dividend by our PRC subsidiaries only out of their accumulated
after-tax profits, if any, determined in accordance with PRC accounting
standards and regulations. Our PRC subsidiaries are also required under PRC laws
and regulations to allocate at least 10% of our annual after-tax profits
determined in accordance with PRC GAAP to a statutory general reserve fund until
the amounts in said fund reaches 50% of our registered capital. Allocations to
these statutory reserve funds can only be used for specific purposes and are not
transferable to us in the form of loans, advances or cash dividends. Any
limitations on the ability of our PRC subsidiaries to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
15
Failure to comply
with PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into
our PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits
to us or otherwise materially adversely affect us.
In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire "control" over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident's funds used to establish or acquire the offshore entity; (3)
covering the use of existing offshore entities for offshore financings; (4)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (5) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31,
2006. This date was subsequently extended indefinitely by Notice 106,
which also required that the registrant establish that all foreign exchange
transactions undertaken by the SPV and its affiliates were in compliance with
applicable laws and regulations. Failure to comply with the requirements of
Circular 75, as applied by SAFE in accordance with Notice 106, may result in
fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the SPV's
affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
SPV, or from engaging in other transfers of funds into or out of
China.
In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by Circular 75 and Notice 106. We also have
little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75 and Notice 106, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas
or cross-border investment activities, limit our subsidiaries' ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
The
M&A Rule establishes more complex procedures for some acquisitions of
Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
The
M&A Rule establishes additional procedures and requirements that could make
some acquisitions of Chinese companies by foreign investors more time-consuming
and complex, including requirements in some instances that MOFCOM be notified in
advance of any change-of-control transaction and in some situations, require
approval of the MOFCOM when a foreign investor takes control of a Chinese
domestic enterprise. In the future, we may grow our business in part by
acquiring complementary businesses, although we do not have any plans to do so
at this time. The M&A Rule also requires MOFCOM anti-trust review of any
change-of-control transactions involving certain types of foreign acquirers.
Complying with the requirements of the M&A Rule to complete such
transactions could be time-consuming, and any required approval processes,
including obtaining approval from MOFCOM, may delay or inhibit our ability to
complete such transactions, which could affect our ability to expand our
business or maintain our market share.
16
The
implementation of the new PRC employment contract law and increases in the labor
costs in China may hurt our business and profitability.
We are
primarily a service provider. A new employment contract law became effective on
January 1, 2008 in China. It imposes more stringent requirements on employers in
relation to entry into fixed-term employment contracts, recruitment of temporary
employees and dismissal of employees. In addition, under the newly promulgated
Regulations on Paid Annual Leave for Employees, which also became effective on
January 1, 2008, employees who have worked continuously for more than one year
are entitled to paid vacation ranging from 5 to 15 days, depending on the length
of the employee’s service. Employees who waive such vacation entitlements at the
request of the employer will be compensated for three times their normal daily
salaries for each vacation day so waived. As a result of the new law and
regulations, our labor costs may increase. There is no assurance that disputes,
work stoppages or strikes will not arise in the future. Increases in the labor
costs or future disputes with our employees could damage our business, financial
condition or operating results.
Under the Enterprise Income Tax Law,
we may be classified as a “resident enterprise” of China. Such classification
will likely result in unfavorable tax consequences to us and our non-PRC
stockholders.
China
passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing
rules, both of which became effective on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a “resident enterprise,” meaning that it can be treated in a
manner similar to a Chinese enterprise for enterprise income tax purposes. The
implementing rules of the EIT Law define de facto management as “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
stockholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We may be
deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the EIT Law and
its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2010 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
17
RISKS
RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin
Board is a significantly more limited market than the New York Stock Exchange or
Nasdaq system. The quotation of our shares on the OTC Bulletin Board
may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading
price of our common stock and could have a long-term adverse impact on our
ability to raise capital in the future.
We
have a significant amount of convertible debt and warrants outstanding, all of
which have anti dilution provisions. If the notes are converted or
warrants exercised, or if the conversion prices are adjusted downward as a
result of a stock issuance at our current market rates, you will suffer
immediate and substantial dilution to your common stock.
Currently
the following securities with anti-dilution provisions are
outstanding:
|
|
·
|
$5,276,103
principle amount of convertible debt, convertible at $.20 and $.25 per
share into 25,980,515 shares of common
stock,
|
|
|
·
|
6,628,333
Common Stock Purchase Warrants exercisable at $0.60 per
share,
|
|
|
·
|
1,131,667
Common Stock Purchase Warrants execrable at $0.50 per share, issued to
Chardan Capital.
|
In
addition, it is not likely that we will be able to raise convertible debt or
equity financing without issuing shares at or below market rates, which, in
addition to obvious dilution to existing shareholders, would reduce the
conversion and exercise prices of the above securities causing further dilution
to shareholders. While our existing noteholders and warrant holders
have waived certain portions of their anti dilution provisions for this past
years’ financing of notes and warrants, no assurance can be made that they will
do so in the future.
Moreover,
anti-dilution provisions in warrants have an additional adverse effect on the
Company in that we would be required to reflect the value of such warrants as a
potential liability to the Company. No assurance can be made,
therefore, that we will be able to raise capital, or, if we do, that the same
will not have a material adverse effect on our capitalization or to our balance
sheet.
The
market price of our common stock is volatile, leading to the possibility of its
value being depressed at a time when you may want to sell your
holdings.
The
market price of our common stock is volatile, and this volatility may
continue. Numerous factors, many of which are beyond our control, may
cause the market price of our common stock to fluctuate
significantly. In addition to market and industry factors, the price
and trading volume for our common stock may be highly volatile for specific
business reasons. Factors such as variations in our revenues,
earnings and cash flow, announcements of new investments, cooperation
arrangements or acquisitions, and fluctuations in market prices for our products
could cause the market price for our shares to change
substantially.
Securities
class action litigation is often instituted against companies following periods
of volatility in their stock price. This type of litigation could
result in substantial costs to us and divert our management’s attention and
resources.
Moreover,
the trading market for our common stock will be influenced by research or
reports that industry or securities analysts publish about us or our
business. If one or more analysts who cover us downgrade our common
stock, the market price for our common stock would likely decline. If
one or more of these analysts cease coverage of us or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which, in
turn, could cause the market price for our common stock or trading volume to
decline.
Furthermore,
securities markets may from time to time experience significant price and volume
fluctuations for reasons unrelated to operating performance of particular
companies. These market fluctuations may adversely affect the price
of our common stock and other interests in our company at a time when you want
to sell your interest in us.
18
We
may be subject to penny stock regulations and restrictions and you may have
difficulty selling shares of our common stock.
The SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. If our
common stock becomes a “penny stock”, we may become subject to Rule 15g-9 under
the Exchange Act, or the Penny Stock Rule. This rule imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and “accredited investors” (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions
covered by Rule 15g-9, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary
market.
For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to
be made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stock.
There can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the
Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the SEC the authority to restrict any person from participating
in a distribution of penny stock, if the SEC finds that such a restriction would
be in the public interest.
Certain
of our stockholders hold a significant percentage of our outstanding voting
securities.
Mr. Clive
Ng, our Chairman, is the beneficial owner of approximately 38% of our
outstanding voting securities. As a result, he possesses significant influence
and can elect a majority of our board of directors and authorize or prevent
proposed significant corporate transactions. His ownership and control may also
have the effect of delaying or preventing a future change in control, impeding a
merger, consolidation, takeover or other business combination or discourage a
potential acquirer from making a tender offer.
Provisions
in our articles of incorporation and bylaws or Nevada law might discourage,
delay or prevent a change of control of us or changes in our management and,
therefore depress the trading price of the common stock.
Our
articles of incorporation authorizes our board of directors to issue up to
5,000,000 shares of preferred stock. The preferred stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
board of directors without further action by the stockholders. These terms may
include preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
In
addition, Nevada corporate law and our articles of incorporation and bylaws
contain certain other provisions that could discourage, delay or prevent a
change in control of our Company or changes in its management that our
stockholders may deem advantageous. These provisions:
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·
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deny
holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our
directors;
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·
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require
any stockholder wishing to properly bring a matter before a meeting of
stockholders to comply with specified procedural and advance notice
requirements; and
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·
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allow
any vacancy on the board of directors, however the vacancy occurs, to be
filled by the directors.
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19
We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
Applicable.
|
ITEM
2.
|
PROPERTIES.
|
Since the
completion of our reverse acquisition of Broadband Cayman, our principal
executive offices in the United States has been and continues to be located at
1900 Ninth Street, 3rd Floor Boulder, Colorado 80302, under a lease with Maxim
Financial Corporation, a consultant to the Company. This space was occupied
previously by Broadband Cayman since its inception in mid 2006. This lease is
for 1,000 square feet of office space and shared administrative services. The
monthly lease rate is $2,000 per month. This lease may be terminated for any
reason by Maxim Financial Corporation on 30 days notice.
Pursuant
to our consulting agreement with it, Maxim Financial Corporation has waived its
past fees owed by Broadband Cayman since July of 2006 and all future rental fees
of the Company through December 31, 2007. In addition, Maxim Financial
Corporation has agreed to defer all monthly rental payments beginning January
2008 until our next capital raise subsequent to January
2008. We did not pay any rent to Maxim Financial Corporation in
2008 or 2009, but have accrued $48,000 related to this agreement.
The
principal address of Jinan Broadband is c/o Jinan Guangdian Jiahe Digital TV Co.
Ltd., No. 32, Jing Shi Yi Road, Jinan Shandong 250014, Tel:
(86531)-85652255. We paid approximately $81,000 for rent at its
facilities in Jinan in 2009.
The
principal address of Shandong Publishing is Qing Nian Dong Lu No. 26, Lixia
District, Jinan City. We paid approximately $66,000 for rent in
2009.
The
principal address of AdNet Media was Room 280, Suyuan Office Building,
Friendship Hotel, No.1 South Street, Zhongguancum, Beijing, China. We paid
approximately $32,000 for rent in 2009.
We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business.
|
ITEM
3.
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LEGAL
PROCEEDINGS.
|
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We
are currently not aware of any such legal proceedings or claims that we believe
will have a material adverse affect on our business, financial condition or
operating results.
|
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART
II
|
ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market
Information
Our
common stock is quoted under the symbol “CBBD” on the OTC Bulletin
Board. Trading of our common stock is sometimes limited and
sporadic. The following table sets forth, for the periods indicated,
the high and low closing prices of our common stock. These prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions.
20
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Closing Bid Prices(1)
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|||||||
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High
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Low
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||||||
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Year Ended
December 31, 2009
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||||||||
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1st
Quarter
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$ | 0.24 | $ | 0.02 | ||||
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2nd
Quarter
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0.25 | 0.10 | ||||||
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3rd
Quarter
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0.20 | 0.15 | ||||||
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4th
Quarter
|
0.25 | 0.05 | ||||||
|
Year
Ended December 31, 2008
|
||||||||
|
1st
Quarter
|
$ | 0.02 | $ | 0.02 | ||||
|
2nd
Quarter
|
0.10 | 0.10 | ||||||
|
3rd
Quarter
|
0.50 | 0.50 | ||||||
|
4th
Quarter
|
1.15 | 0.51 | ||||||
(1) The
above table sets forth the range of high and low closing bid prices per share of
our common stock as reported by www.quotemedia.com
for the periods indicated.
Approximate
Number of Holders of Our Common Stock
As of
April 15, 2010, there were approximately 313 holders of record of our common
stock. This number excludes the shares of our common stock
beneficially owned by stockholders holding stock in securities trading accounts
through DTC, or under nominee security position listings.
Dividends
We have
never declared or paid a cash dividend. Any future decisions regarding
dividends will be made by our board of directors. We currently intend
to retain and use any future earnings for the development and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future. Our board of directors has complete discretion on whether to
pay dividends, subject to the approval of our stockholders. Even if
our board of directors decides to pay dividends, the form, frequency and amount
will depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other factors
that the board of directors may deem relevant. In addition, our ability to
declare and pay dividends is dependant on our ability to declare dividends and
profits in our PRC subsidiaries. PRC rules greatly restrict and limit
the ability of our subsidiaries to declare dividends to our parent which, in
addition to restricting our cash flow, limits our ability to pay
dividends.
Securities
Authorized for Issuance Under Equity Compensation Plans
See Item
12, “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters — Securities Authorized for Issuance Under Equity
Compensation Plans.”
Recent
Sales of Unregistered Securities
We have
not sold any equity securities during the fiscal year ended December 31, 2009
that were not previously disclosed in a quarterly report on Form 10-Q or a
current report on Form 8-K that was filed during the 2009 fiscal
year.
Purchases
of Equity Securities
No
repurchases of our common stock were made during the fourth quarter of
2009.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Not
Applicable.
21
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements.
Overview
We
operate in the media segment through our Chinese VIE operating subsidiaries, (1)
a cable broadband business based in the Jinan region of China and
(2) a television program guide, newspaper and magazine publishing business
based in the Shandong region of China. In addition, AdNet holds a
business license to operate in 28 provinces and provide internet content
advertising in cafés in the PRC.
Through
our subsidiary Jinan Broadband, we provide cable and wireless broadband
services, principally internet services, Internet Protocol Point wholesale
services, related network equipment rental and sales, and fiber network
construction and maintenance. Jinan Broadband’s revenue consists
primarily of sales to our PRC based Internet consumers, cable modem consumers,
business customers and other internet and cable services.
We
operate our publishing business, which includes the distribution of periodicals,
the publication of advertising, the organization of public relations events, the
provision of information related services, copyright transactions, the
production of audio and video products, and the provision of audio value added
communication services, through Shandong Publishing, our joint venture company.
Shandong Media’s revenue consists primarily of sales of publications and
advertising revenues.
Our
subsidiary AdNet, which was acquired during the first half of 2009, holds an
Internet Content Provider (“ICP”) license with rights to provide delivery of
multimedia advertising content to internet cafés in the PRC. AdNet is
licensed to operate in 28 provinces in the PRC with servers in five data centers
including Wuhan, Wenzhou, Yantai, Yunan and with a master distribution server in
Tongshan.
As
previously reported, management has opted to limit its expenses in respect of
AdNet’s business and has reduced AdNet’s full and part time staff,
all of which were based in the PRC, were reduced from 20 persons to 2 full time
employees. Nonetheless, we are maintaining AdNet’s ICP and other licenses,
servers and infrastructure, as well as all of its intellectual property, all of
which we intend on using both for AdNet and, in connection with other businesses
that we contemplate acquiring or entering into, which would require similar
technology and infrastructure.
Recent
Developments
On March
9, 2010, China Broadband Cayman entered into a note purchase agreement and a
non-binding Letter of Intent, or the LOI with Sinotop Group Ltd., a Hong Kong
corporation, or Sinotop Hong Kong. Through a series of contractual
arrangements referred to herein as “VIE Contracts”, Sinotop Hong Kong
controls Beijing Sino Top Scope Technology Co., Ltd., or Sinotop
Beijing. Sinotop Beijing, a corporation established in the PRC is, in
turn, a party to a joint venture with two other PRC companies to
provide integrated value-added service solutions for the delivery of
pay-per-view (“PPV”), video-on-demand (“VOD”), and enhanced premium content for
cable providers.
The LOI
summarizes the proposed terms of the acquisition by CB Cayman of 100% of the
outstanding capital stock of Sinotop Hong Kong from its sole stockholder in
consideration for a percentage of China Broadband to be determined in the
definitive agreement. Among other customary closing conditions, the
acquisition is contingent upon the (1) the drafting and negotiation of
definitive agreements that cover the matters discussed in the LOI, (2) the
funding of the Note (as defined below), which has already occurred, (3) the
contribution by CB Cayman of at least US$5,000,000 to the capital of Sinotop
Hong Kong (or the purchase by CB Cayman of newly issued shares of Sinotop Hong
Kong in consideration for the same amount), and (4) the absence of any debts,
obligations or encumbrances on the equity or assets of Sinotop Hong Kong and the
WFOE other than the Note and the VIE Contracts. The LOI contains a
binding exclusivity provision that prohibits Sinotop Hong Kong and Sinotop Hong
Kong’s sole stockholder from soliciting, initiating, entertaining, participating
in any discussions or negotiations concerning, or making or accepting any offer
or proposed transaction with any third party with regard to, any of the
transactions contemplated by the LOI or any similar
transaction. This transaction has not been consummated
yet and we are dependent on our ability to raise capital in order to complete
this transaction.
22
Pursuant
to the Note Purchase Agreement, on March 9, 2010, CB Cayman acquired a
Convertible Promissory Note, or Note from Sinotop Hong Kong in consideration of
CB Cayman’s loan to Sinotop Hong Kong under the Note in the amount of US$580,000
as contemplated by the LOI.
The Note
accrues interest at a simple annual rate of 5% and is due on the date, or the
Maturity Date that is the earlier of the fifth anniversary of the
date of issuance of the Note or the day following a change of control (as
described in the Note). The outstanding principal amount of the Note
along with all accrued interest is convertible into common shares of Sinotop
Hong Kong upon the occurrence of (1) Sinotop Hong Kong consummating a financing
transaction, or Financing, resulting in aggregate gross proceeds of at least $1
million, in which case the Note would automatically be converted into ordinary
shares of Sinotop Hong Kong at a price equal to 70% of the price per share paid
by investors in such Financing, or (2) a change of control of Sinotop Hong Kong
(as described in the Note), in which case the Note would automatically be
converted into ordinary shares that represent 50% of the issued and outstanding
capital stock of Sinotop Hong Kong. The outstanding principal amount
of the Note and all accrued interest thereon may also be converted at the option
of CB Cayman at any time after the Maturity Date or an event of default into
ordinary shares of Sinotop Hong Kong representing 50% of the issued and
outstanding voting capital stock of Sinotop Hong Kong. The Note may
not be prepaid prior to the Maturity Date without the consent of the holder of
the Note. The Note contains customary events of default.
2009
Financial Performance Highlights
The
following are some financial highlights for the 2009 fiscal year:
|
|
·
|
Revenue:
Revenue increased $2,081,000 or 33%, to $8,443,000 for the year ended
December 31, 2009 from $6,362,000 last
year.
|
|
|
·
|
Gross
Margin: Gross margin was 33% for the year ended December 31, 2009,
as compared to 41% last year.
|
|
|
·
|
Net
Loss: Net loss attributable to shareholders increased $2,086,000,
or 62%, to $5,440,000 for the year ended December 31, 2009, from
$3,354,000 last year.
|
|
|
·
|
Fully
diluted loss per share: Fully diluted loss per share was $(.09) for
the year ended December 31, 2009, as compared to $(.07) last
year.
|
Principal
Factors Affecting Our Financial Performance
Our
operating results are primarily affected by the following factors:
|
|
·
|
Growth in
the Chinese Economy. We operate in China and derive almost all of
our revenues from sales to customers in China. Economic conditions in
China, therefore, affect virtually all aspects of our operations,
including the demand for our products, the availability and prices of our
raw materials and our other expenses. China has experienced significant
economic growth, achieving a compound annual growth rate of over 10% in
gross domestic product from 1996 through 2008. China is expected to
experience continued growth in all areas of investment and consumption,
even in the face of a global economic recession. However, China has not
been entirely immune to the global economic slowdown and is experiencing a
slowing of its growth rate.
|
|
|
·
|
PRC
Economic Stimulus Plans. The PRC government
has issued a policy entitled “Central Government
Policy On
Stimulating Domestic Consumption To Counter The Damage Result From Export
Business Of The Country,” pursuant to which the PRC Central
Government is dedicating approximately $580 billion to stimulate domestic
consumption. Companies that are either directly or indirectly related to
construction, and to the manufacture and sale of building materials,
electrical household appliances and telecommunication equipment, are
expected to benefit.
|
|
|
·
|
Deployment
of Value-added Services. To augment our product offerings and
create other revenue sources, we work with strategic partners to deploy
value-added services to our cable broadband
customers. Value-added services, including but not limited to
the synergies created by the additions of our new assets, will become a
focus of revenue generation for our company. AdNet’s management team has
experience with value added services for media companies and will focus on
this area for both existing broadband assets. No assurance can be made
that we will add other value-added services, or if added, that they will
succeed.
|
23
Taxation
United
States
China
Broadband, Inc. is subject to United States tax at a tax rate of 34%. No
provision for income taxes in the United States has been made as China
Broadband, Inc. had no income taxable in the United States.
Cayman
Islands
Broadband
Cayman was incorporated in the Cayman Islands. Under the current law of the
Cayman Islands, Broadband Cayman is not subject to income or capital gains tax.
In addition, dividend payments are not subject to withholding tax in the Cayman
Islands.
China
Before
the implementation of the EIT Law, FIEs established in the PRC, unless granted
preferential tax treatments by the PRC government, were generally subject to an
earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax. On March 16, 2007, the National People’s
Congress of China passed the EIT Law, and on November 28, 2007, the State
Council of China passed the EIT Law Implementing Rules which took effect on
January 1, 2008. The EIT Law and its implementing rules impose a unified EIT of
25.0% on all domestic-invested enterprises and FIEs, unless they qualify under
certain limited exceptions. Despite these changes, the EIT Law gives FIEs
established before March 16, 2007, or Old FIEs, a five-year grandfather period
during which they can continue to enjoy their existing preferential tax
treatments. During this five-year grandfather period, the Old FIEs which enjoyed
tax rates lower than 25% under the original EIT law will be subject to gradually
increased EIT rates over a 5-year period until their tax rate reaches 25%. In
addition, the Old FIEs that are eligible for other preferential tax treatments
by the PRC government under the original EIT law are allowed to continue
enjoying their preference until these preferential treatment periods
expire.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of
25%. For detailed discussion of PRC tax issues related to resident
enterprise status, see Item 1A, “Risk Factors – Risks Related to Our Business –
Under the Enterprise Income Tax Law, we may be classified as a “resident
enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.”
In
addition, the EIT Law and its implementing rules generally provide that a 10%
withholding tax applies to China-sourced income derived by non-resident
enterprises for PRC enterprise income tax purposes unless the jurisdiction of
incorporation of such enterprises’ shareholder has a tax treaty with China that
provides for a different withholding arrangement. We expect that such 10%
withholding tax will apply to dividends paid to us by our PRC subsidiaries, but
this treatment will depend on our status as a non-resident
enterprise.
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Results
of Operations
Year Ended December 31, 2009
Compared to Year Ended December 31, 2008
The
following table sets forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
|
Year Ended
|
Amount
|
%
|
||||||||||||||
|
December 31,
|
December 31,
|
Increase /
|
Increase /
|
|||||||||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Revenue
|
$ | 8,443,000 | $ | 6,362,000 | $ | 2,081,000 | 33 | % | ||||||||
|
Cost
of revenue
|
5,661,000 | 3,741,000 | 1,920,000 | 51 | % | |||||||||||
|
Gross
profit
|
2,782,000 | 2,621,000 | 161,000 | 6 | % | |||||||||||
|
Selling,
general and adminstrative expenses
|
3,228,000 | 1,923,000 | 1,305,000 | 68 | % | |||||||||||
|
Professional
fees
|
641,000 | 619,000 | 22,000 | 4 | % | |||||||||||
|
Depreciation
and amortization
|
3,564,000 | 3,037,000 | 527,000 | 17 | % | |||||||||||
|
Loss
from operations
|
(4,651,000 | ) | (2,958,000 | ) | (1,693,000 | ) | 57 | % | ||||||||
|
Interest
& other income / (expense)
|
||||||||||||||||
|
Settlement
gain
|
- | 1,301,000 | (1,301,000 | ) | -100 | % | ||||||||||
|
Interest
income
|
8,000 | 43,000 | (35,000 | ) | -81 | % | ||||||||||
|
Interest
expense
|
(363,000 | ) | (346,000 | ) | (17,000 | ) | 5 | % | ||||||||
|
Change
in fair value of derivative liabilities
|
(512,000 | ) | - | (512,000 | ) | - | ||||||||||
|
Loss
on sale and write-down of securities
|
(15,000 | ) | (1,900,000 | ) | 1,885,000 | -99 | % | |||||||||
|
Goodwill
impairment
|
(1,239,000 | ) | - | (1,239,000 | ) | - | ||||||||||
|
Other
|
(13,000 | ) | (10,000 | ) | (3,000 | ) | -34 | % | ||||||||
|
Loss
before income taxes and non-controlling interests
|
(6,785,000 | ) | (3,870,000 | ) | (2,915,000 | ) | 75 | % | ||||||||
|
Income
tax benefit (expense)
|
243,000 | (94,000 | ) | 337,000 | -359 | % | ||||||||||
|
Net
loss, net of tax
|
(6,542,000 | ) | (3,964,000 | ) | (2,578,000 | ) | 65 | % | ||||||||
|
Plus: Net
loss attributable to noncontrolling interests
|
1,102,000 | 610,000 | 492,000 | 81 | % | |||||||||||
|
Net
loss attributable to China Broadband shareholders
|
$ | (5,440,000 | ) | $ | (3,354,000 | ) | $ | (2,086,000 | ) | 62 | % | |||||
24
Revenues
Our
revenues are generated by our operating companies in the PRC. Our
revenues in the year ended December 31, 2009 include revenues primarily from our
Jinan Broadband and Shandong Media companies for a full year while the revenues
for the year ended 2008 include revenues for a full year from Jinan Broadband,
but only 6 months revenue from Shandong Media.
Revenues
for the year ended 2009 totaled $8,443,000, as compared to $6,362,000 for
2008. The increase in revenue of approximately $2,081,000, or 33%, is
primarily attributable to including a full year of revenues from our Shandong
Media joint venture while the 2008 period includes only 6 months of operating
results.
For the
year ended 2009, Jinan Broadband’s revenue consisted primarily of
sales to our PRC based Internet consumers, cable modem consumers, business
customers and other internet and cable services of $4,993,000, an increase of
$275,000, or 5%, as compared to revenues of $4,718,000 for 2008. The increase is
attributable to increases in our internet income and network
leasing.
Shandong
Media’s revenue consists primarily of sales of publications and advertising
revenues. For the year ended 2009, revenues from the Shandong Media
joint venture totaled $3,443,000. By comparison, Shandong Media’s revenues of
$1,644,000 for the year ended 2008 only include six months operating
results.
AdNet
Media’s revenue totaled $7,000 for the year ended 2009 and accounted for
sales since acquisition in April 2009.
Gross
Profit
Our gross
profit in the year ended December 31, 2009 was $2,782,000, as compared to
$2,621,000 for 2008. The increase in gross profit of approximately
$161,000, or 6%, is primarily due to $473,000 decrease from our Jinan Broadband
operations offset by $655,000 increase from a 12 month inclusion for 2009
compared to 6 months for 2008 of our Shandong Media joint
venture. The decrease in gross profit attributable to Jinan Broadband
was primarily due to charges associated with the write down of obsolete and
damagedswitches and other consumer related parts held in inventory.
Gross
profit as a percentage of revenue was 33% for the year ended 2009, as compared
to 41% for 2008. The
increase is mainly due to the inventory write-down from our Jinan Broadband
company as well as increases in printing and supply costs at our Shandong Media
company.
Selling,
General and Administrative Expenses
Our
selling, general and administrative expenses for the year ended December 31,
2009 increased approximately $1,305,000 to $3,228,000, as compared to $1,923,000
for the year ended 2008. The increase is primarily attributable to a
12 month inclusion for 2009 compared to 6 months for 2008 of our Shandong Media
joint venture acquired in July 2008 and the inclusion of our AdNet Media
acquisition in April 2009.
Salaries
and personnel costs are the major component of selling, general and
administrative expenses. For the year ended 2009, salaries and
personnel costs accounted for 58% of our selling, general and administrative
expenses. During 2009, salaries and personnel costs totaled
$1,821,000, an increase of $614,000, or 51%, as compared to $1,207,000 for
2008. The increase in salaries and personnel costs is primarily
attributable to the inclusion of our Shandong Media joint venture in July 2008
and the inclusion of our AdNet Media acquisition in April 2009.
We expect
our selling, general and administrative expenses will increase as we continue to
grow our business.
Professional
Fees
Professional
fees are generally related to public company reporting and governance expenses
as well as costs related to our acquisitions. Our costs for
professional fees increased $22,000, or 4%, to $641,000 in the year ended
December 31, 2009 from $619,000 in 2008. We expect our costs for
professional services for public company reporting and corporate governance
expenses to remain significant, but to decrease as a percentage of our overall
revenues if we continue to acquire new entities and enter into strategic
partnerships.
25
Depreciation
and Amortization
Our
depreciation expense increased $268,000, or 10%, to $3,068,000 in the year ended
December 31, 2009 from $2,800,000 in 2008. The increase is mainly due
to the acquisition of new equipment by our Jinan Broadband
subsidiary.
Our
amortization expense increased $259,000, or 109%, to $496,000 in the year ended
December 31, 2009 from $237,000 in 2008. The increase is mainly due
to the amortization expense related to the software technology acquired from our
AdNet Media acquisition. The increase is also due to our Shandong Media
intangible assets acquired in 2008
Goodwill
Impairment
The
Company initially recorded a $1,900,000 intangible asset related to the AdNet
Acquisition. After completion of our purchase accounting for the
AdNet acquisition, we recorded $1,239,000 to goodwill and $757,000 to software
technology. Due to the shift of our business model to the Pay Per
View and Video on Demand business, as of December 31, 2009 we temporarily
suspended day to day operations of AdNet. We have maintained our
licenses, contracts, technology and other assets for future
use. Consequently, we recorded an impairment charge to goodwill of
$1,239,000 as of December 31, 2009
Warrant
Liability
Under new
authoritative guidance, effective January 1, 2009, the Company was required to
reclassify warrants from equity to warrant liabilities. Warrants are
fair valued quarterly using the Black-Scholes Merton Model and changes in fair
value are recorded to the statement of operations. We recorded a
charge of $512,000 classified as change in fair value of warrants on our
statement of operations for the year ended December 31, 2009.
Interest
and Other Income (Expense), net
Settlement
Agreement
On
January 11, 2008, the Company entered into a Settlement Agreement (the
“Settlement Agreement”) by and among the Company and its subsidiaries, Stephen
P. Cherner, Maxim Financial Corporation, Mark L. Baum, BCGU, LLC, Mark I. Lev,
Wellfleet Partners, Inc., Pu Yue, Clive Ng, Chardan Capital Markets, LLC, Jaguar
Acquisition Corporation, and China Cablecom Holdings, Ltd, pursuant to which the
parties released certain potential claims against one another.
The
following table provides the details on the net gain the Company recognized in
2008 as a result of the Settlement Agreement which is recorded in the
accompanying Statement of Operations:
|
Fair
value of Cablecom Holding Shares
|
$ | 2,515,500 | ||
|
Waiver
of accrued compensation
|
212,054 | |||
|
Warrant
extension
|
(1,426,862 | ) | ||
|
Net
Gain
|
$ | 1,300,692 |
Interest
income
Interest
income decreased $35,000, or 81%, to $8,000 in the year ended December 31, 2009
from $43,000 in 2008, primarily due to decreases in our cash and cash equivalent
balances.
Interest
expense
Interest
expense is related to our 5% Convertible Notes issued in January 2008
and June 2009. Interest expense increased $16,000, or 5%, to $362,000
in the year ended December 31, 2009 from $346,000 in 2008, primarily due to
additional convertible notes issued in 2009 in the amount of approximately
$305,000. Interest expense includes amortization of the original
issue discount on the notes resulting from the allocation of fair value to the
warrants issued in the financing.
We expect
our interest expense to increase due to the convertible notes issued in
2009. Interest on the Notes compounds monthly at the annual rate of
five percent (5%). The January 2008 Notes mature on January 11,
2013. The outstanding principal amount of the January 2008 Notes as
of December 31, 2009 was $4,971,250, net of original issue discount of
$504,661. The June 2009 Notes mature on May 27, 2010. The
outstanding principal amount on the June 2009 Notes as of December 31, 2009 was
approximately $305,000.
26
Loss
on sale and write-down of marketable equity securities
The loss
on the sale and write-down of marketable equity securities decreased $1,885,000
primarily due to the recognition of an other-than-temporary impairment of
$1,797,000 in 2008 related to our Cablecom Holding shares.
Net
Loss Attributable to Noncontrolling Interest
49% of
the operating loss of our Jinan Broadband subsidiary is allocated to Jinan
Parent, the 49% co-owner of this business. In the year ended December
31, 2009, $1,056,000 of our operating loss from Jinan Broadband was allocated to
Jinan Parent, as compared to $588,000 in 2008.
50% of
the operating loss of our Shandong Media joint venture is allocated to our 50%
Shandong Newspaper joint venture partner. In the year ended December
31, 2009, $46,000 of our operating loss from Shandong Media was allocated to
Shandong Newspaper as compared to $22,000 in 2008. We consolidated
the results of Shandong Media effective July 1, 2008.
Net
Loss Attributable to Shareholders
Net loss
attributable to shareholders increased $2,086,000, or 62%, to $5,440,000 in the
year ended December 31, 2009 from $3,354,000 in 2008.
The following table breaks down the
results of operations for the years ended 2009 and 2008 between our operating
companies and our non-operating companies.
|
|
Ø
|
The
operating companies include Jinan Broadband, Shandong Media and AdNet
Media.
|
|
|
Ø
|
Year
2009 includes operations for 12 months, 12 months and 9 months from Jinan
Broadband, Shandong Media and AdNet Media compared to 2008 which includes
12 months, 6 months and 0 months, respectively
|
|
Ø
|
||
|
Year Ended
|
Year Ended
|
|||||||||||||||||||||||||||||||
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||||||||||||||||||
|
% of
|
% of
|
|||||||||||||||||||||||||||||||
|
Total
|
Non-
|
Total
|
Non-
|
|||||||||||||||||||||||||||||
|
Operating
|
Revenue
|
Operating
|
Total
|
Operating
|
Revenue
|
Operating
|
Total
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 8,443,000 | $ | - | $ | 8,443,000 | $ | 6,362,000 | $ | - | $ | 6,362,000 | ||||||||||||||||||||
|
Cost
of revenue
|
5,661,000 | - | 5,661,000 | 3,741,000 | - | 3,741,000 | ||||||||||||||||||||||||||
|
Gross
profit
|
2,782,000 | 33 | % | - | 2,782,000 | 2,621,000 | 41 | % | - | 2,621,000 | ||||||||||||||||||||||
|
Selling,
general and adminstrative expenses
|
2,402,000 | 28 | % | 826,000 | 3,228,000 | 1,100,000 | 17 | % | 823,000 | 1,923,000 | ||||||||||||||||||||||
|
Professional
fees
|
45,000 | 1 | % | 596,000 | 641,000 | 25,000 | 0 | % | 594,000 | 619,000 | ||||||||||||||||||||||
|
Depreciation
and amortization
|
3,071,000 | 36 | % | 493,000 | 3,564,000 | 2,801,000 | 44 | % | 236,000 | 3,037,000 | ||||||||||||||||||||||
|
Loss
from operations
|
(2,736,000 | ) | -32 | % | (1,915,000 | ) | (4,651,000 | ) | (1,305,000 | ) | -21 | % | (1,653,000 | ) | (2,958,000 | ) | ||||||||||||||||
|
Interest
& other income / (expense)
|
||||||||||||||||||||||||||||||||
|
Settlement
gain
|
- | - | - | - | 1,301,000 | 1,301,000 | ||||||||||||||||||||||||||
|
Interest
income
|
8,000 | - | 8,000 | 25,000 | 18,000 | 43,000 | ||||||||||||||||||||||||||
|
Interest
expense
|
(1,000 | ) | (362,000 | ) | (363,000 | ) | (1,000 | ) | (345,000 | ) | (346,000 | ) | ||||||||||||||||||||
|
Change
in fair value of derivative liabilities
|
- | (512,000 | ) | (512,000 | ) | - | - | - | ||||||||||||||||||||||||
|
Loss
on sale and write-down of securities
|
- | (15,000 | ) | (15,000 | ) | - | (1,900,000 | ) | (1,900,000 | ) | ||||||||||||||||||||||
|
Impairment
loss
|
- | (1,239,000 | ) | (1,239,000 | ) | - | - | - | ||||||||||||||||||||||||
|
Other
|
(14,000 | ) | - | (14,000 | ) | - | (10,000 | ) | (10,000 | ) | ||||||||||||||||||||||
|
Loss
before income taxes and non-controlling interests
|
(2,743,000 | ) | (4,043,000 | ) | (6,786,000 | ) | (1,281,000 | ) | (2,589,000 | ) | (3,870,000 | ) | ||||||||||||||||||||
|
Income
tax benefit (expense)
|
- | 244,000 | 244,000 | - | (94,000 | ) | (94,000 | ) | ||||||||||||||||||||||||
|
Net
loss, net of tax
|
(2,743,000 | ) | (3,799,000 | ) | (6,542,000 | ) | (1,281,000 | ) | (2,683,000 | ) | (3,964,000 | ) | ||||||||||||||||||||
|
Plus: Net
loss attributable to noncontrolling interest
|
1,102,000 | - | 1,102,000 | 610,000 | - | 610,000 | ||||||||||||||||||||||||||
|
Net
loss attributable to China Broadband shareholders
|
$ | (1,641,000 | ) | $ | (3,799,000 | ) | $ | (5,440,000 | ) | $ | (671,000 | ) | $ | (2,683,000 | ) | $ | (3,354,000 | ) | ||||||||||||||
Liquidity
and Capital Resources
As of
December 31, 2009, we had cash and cash equivalents of approximately
$2,190,000. Given our current commitments and working capital, we
cannot support our operations for the next 12 months without additional capital
(See “Need for Additional Capital” below).
The
following table provides detailed information about our net cash flow for all
financial statement periods presented in this report.
Cash
Flows
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by operating activities
|
$ | 852,000 | $ | 1,674,000 | ||||
|
Net
cash used in investing activities
|
(1,069,000 | ) | (1,942,000 | ) | ||||
|
Net
cash (used in) provided by financing activities
|
(2,046,000 | ) | 4,233,000 | |||||
|
Effects
of exchange rate change in cash
|
28,000 | (11,000 | ) | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,235,000 | ) | 3,953,000 | |||||
|
Cash
and cash equivalent at beginning of the year
|
4,426,000 | 473,000 | ||||||
|
Cash
and cash equivalent at end of the year
|
2,190,000 | 4,426,000 | ||||||
Operating
activities
Cash
provided by operating activities for the years ended 2009 and 2008 was $852,000
and $1,674,000, respectively.
27
Investing
activities
Investing
activities for the years ended 2009 and 2008 used cash of $1,069,000 and
$1,942,000, respectively. For 2009, this amount consisted of (i) cash
acquired in our AdNet acquisition of $18,000 and (ii) proceeds of $174,000 from
the sale of our Cablecom Holding Shares, offset by (i) $1,135,000 for additions
to property and equipment and (ii) $126,000 loans to our Shandong Media
shareholder and related party. For 2008, this amount consisted of
additions to property and equipment in the amount of $2,061,000 and $242,000
loan to our Shandong Media shareholder partially offset by the proceeds from the
sale of Cablecom Holding Shares in the amount of $361,000.
Financing
activities
Financing
activities for the years ended 2009 and 2008 (used) provided cash of
$(2,046,000) and $4,233,000, respectively. For 2009, the amount
consisted of proceeds from the sale of our common stock of $300,000 and proceeds
from the issuance of convertible notes of $305,000 offset by payment to Jinan
Parent of $2,643,000. For 2008, this amount consisted of proceeds
from the issuance of convertible notes of $4,850,000, offset by $104,000 of
payments related to issuance costs associated with the convertible notes and a
decrease in the payable to Jinan Parent in the amount of $513,000.
On June
30, 2009, we completed a private placement transaction and sold 5% Convertible
Promissory Notes, or the 2009 Notes, for gross proceeds of approximately
$305,000 and an aggregate of 2,000,000 shares of our common stock at a purchase
price of $.15 per share, for aggregate proceeds of $300,000. The Notes accrue
interest at 5% per year payable quarterly in cash or stock, are initially
convertible at $.20 per share, and become due and payable in full on May 27,
2010. The Company did not pay any placement agent or similar fees in
connection with the Note Offering.
On
January 11, 2008, we completed a private placement transaction and sold an
aggregate of $4,971,250 principal amount of notes due January 11, 2013, or the
January 2008 Notes, and Class A Warrants to purchase an aggregate of 6,628,333
shares of our common stock, at a purchase price of $.60 per share and expiring
on June 11, 2013.
In
connection with the 2009 private placement, we entered into a waiver letter
regarding contractual anti-dilutive provisions with all the holders of January
2008 Notes, pursuant to which, among other things, the conversion price of the
January 2008 Notes were reduced from $.75 per share to (i) $.20 per share for
existing note holders that invested in the 2009 private placement and (ii) $.25
per share for those that did not participate. All of the existing
note holders waived certain anti dilution adjustments contained in the January
2008 Notes and the Class A Warrants in exchange for this
anti-dilution.
During
the year ended December 31, 2009, we incurred $361,000 in interest expense
related to these private placements. Based on conversion values, we
issued 921,040 shares to the note holders in lieu of cash interest payments of
approximately $260,000 for interest accrued.
In April
2008 and in connection with a settlement agreement, we received 390,000 shares
of China Cablecom from Mr. Clive Ng, our Chairman, pursuant to a settlement
agreement by and among the Company and its subsidiaries, Stephen P. Cherner,
Maxim Financial Corporation, Mark L. Baum, BCGU, LLC, Mark I. Lev, Wellfleet
Partners, Inc., Pu Yue, Clive Ng, Chardan Capital Markets, LLC, Jaguar
Acquisition Corporation, and China Cablecom. The value of the shares
declined substantially, and may continue to fluctuate and decline
further. During the year ended December 31, 2009, we sold 236,665
shares for total net proceeds of $175,000 and recorded a net loss on the sales
of approximately $15,000. As of December 31, 2009, we hold 81,455
shares of China Cablecom and the fair value of the remaining shares at December
31, 2009 is approximately $47,000.
Obligations
Under Material Contracts
On March
7, 2008, we entered into the Shandong Publishing Cooperation Agreement with
Shandong Broadcast & TV Weekly Press and Modern Movie & TV Biweekly
Press, pursuant to which Shandong Broadcast & TV Weekly Press and Modern
Movie & TV Biweekly Press contributed their entire businesses and
transferred certain employees to Shandong Publishing in exchange for a 50% stake
in Shandong Publishing, with the other 50% of Shandong Publishing to be owned by
our WFOE in the PRC. In exchange, we were required to pay
approximately $1.5 million (approximately 10 million RMB), which was contributed
to Shandong Publishing as working and acquisition capital. The
results of the Shandong Newspaper Business have been consolidated with the
Company’s consolidated financial statements as of July 1, 2008.
Based on
certain financial performance we were required to make an additional payment of
5 million RMB (approximately US $730,000). In 2008 we recorded the
additional payment due as an increase to our Shandong noncontrolling interest
account. The due date of the additional payment has been extended to
May 31, 2010.
28
Need
for Additional Capital
As
indicated above, management does not believe that the Company has sufficient
capital to sustain its operations beyond 12 months nor fund the required
contribution to Shandong Publishing without raising additional
capital. We presently do not have any available credit, bank
financing or other external sources of liquidity. Accordingly, we
will require additional funding through additional equity and/or debt
financings. However, there can be no assurance that any
additional financing will become available to us, and if available, on terms
acceptable to us.
The
conversion of our outstanding notes and exercise of our outstanding warrants
into shares of common stock would have a dilutive effect on our common stock,
which would in turn reduce our ability to raise additional funds on favorable
terms. In addition, the subsequent sale on the open market of any
shares of common stock issued upon conversion of our outstanding notes and
exercise of our outstanding warrants could impact our stock price which would in
turn reduce our ability to raise additional funds on favorable
terms.
Any
financing, if available, may involve restrictive covenants that may impact our
ability to conduct our business or raise additional funds on acceptable
terms. If we are unable to raise additional capital when required or
on acceptable terms, we may have to delay, scale back or discontinue our
expansion plans. In the event we are unable to raise additional
capital we will not be able to sustain any growth or continue to
operate.
Effects
of Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
Our
operating results and operating cash flows historically have not been subject to
seasonal variations. This pattern may change, however, as a result of new market
opportunities or new product introductions.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States
of America requires our management to make judgments, assumptions and estimates
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Our management evaluates its estimates on an
on-going basis based on historical experience and on various other assumptions
it believes are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Through
WFOE, we acquired a 51% interest in Jinan Broadband effective April 1,
2007, a 50% interest in the Shandong Media joint venture effective July 1,
2008 and a 100% interest in AdNet Media effective April 7,
2009. Accordingly, our historical experience with operations in China
is limited and may change in the future as we continue to operate the
companies. Actual results may differ from these estimates under
different assumptions or conditions.
We
believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of its financial
statements.
Variable
Interest Entities
The
Company accounts for entities qualifying as variable interest entities (“VIEs”)
in accordance with ASC 810, Consolidation. VIEs are
required to be consolidated by the primary beneficiary. The primary beneficiary
is the entity that holds the majority of the beneficial interests in the
variable interest entity. A VIE is an entity for which the primary beneficiary’s
interest in the entity can change with changes in factors other than the amount
of investment in the entity.
29
Revenue
Recognition
Revenue
is recorded as services are provided to customers. The Company
generally recognizes all revenue in the period in which the service is rendered,
provided that persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collection is reasonably
assured. The Company records deferred revenue for payments received
from customers for the performance of future services and recognizes the
associated revenue in the period that the services are
performed. Provision for discounts and rebates to customers and other
adjustments, if any, are provided for in the same period the related sales are
recorded.
Inventories
Inventories,
consisting of cables, fiber, connecting material, power supplies and spare parts
are stated at the lower of cost or market value. Cost is determined
using the first-in, first-out (FIFO) method.
Intangible
Assets
The
Company follows FASB ASC 350, Intangibles-Goodwill and
Other, (ASC 350). ASC 350 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. ASC 350 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment whenever
events indicate the carrying amount may not be recoverable.
In
accordance with ASC 350, goodwill is allocated to reporting units, which are
either the operating segment or one reporting level below the operating
segment.
On an
annual basis, we must test goodwill and other indefinite life intangible assets
for impairment. To determine the fair value of these intangible
assets, there are many assumptions and estimates used that directly impact the
results of the testing. In making these assumptions and estimates, we
will use set criteria that are reviewed and approved by various levels of
management, and we will estimate the fair value of our reporting units by using
discounted cash flow analyses and other valuation methods. At
December 31, 2009 we recorded a goodwill impairment charge of $1,239,291 related
to goodwill from our AdNet Acquisition.
Income
Taxes
Deferred
taxes are recognized for the future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and income tax purposes using enacted rates expected to be in
effect when such amounts are realized or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Warrant
Liabilities
We
account for derivative instruments and embedded derivative instruments in
accordance with the accounting standard forAccounting for Derivative Instruments
and Hedging Activities, as amended. The amended standard requires an
entity to recognize all derivatives as either assets or liabilities in the
statemet of financial position and measure these instruments at fair
value. Fair value is estimated using the Black-Scholes Pricing
model. We also follow accounting standards for the Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock, which requires freestanding conracts that are settled in a
company’s own stock, including common stock warrants, to be designated as an
equity instrument, asset or a liability. Under these provisions a
contract designated as an asset or a liability must be carried at fair value,
with any changes in fair value recorded in the results of
operations. A contract designated as an equity instruments can be
included in equity, with no fair value adjustments required.
The
asset/liability derivatives are valued on a quarterly basis using the
Black-Scholes Pricing model. Significant assumptions used in the
valuation included exercise dates, fair value for our common stock, volatility
of our common stock and a proxy-free interest rate. Gains (losses) on
warrants are included in “Changes in fair value of warrant liabilities in our
consolidated statement of operations”.
Foreign
Currency Translation
The
businesses of the Company’s operating subsidiaries are currently conducted in
and from China in Renminbi. In this report, all references to
“Renminbi” and “RMB” are to the legal currency of China and all references to
U.S. dollars, dollars, $ and US$ are to the legal currency of the United
States. The Company makes no representation that any Renminbi or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or
Renminbi, as the case may be, at any particular rate, the rates stated below, or
at all. The Chinese government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of
Renminbi into foreign exchange and through restrictions on foreign
trade. The Company uses the U.S. dollar as its reporting and
functional currency.
30
Translation
adjustments are reported as other comprehensive income or expenses and
accumulated as other comprehensive income in the equity section of the balance
sheet. Financial information is translated into U.S. dollars at
prevailing or current rates respectively, except for revenues and expenses which
are translated at average current rates during the reporting
period. Exchange gains and losses resulting from retained profits are
reported as a separate component of stockholders’ equity.
Recent
Accounting Pronouncements
ASC 105. In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
No. 168, The FASB
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”,
(“SFAS No. 168”) “— a replacement of FASB Statement
No. 162. SFAS No. 168 is the new source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. This
statement was incorporated into ASC 105, Generally Accepted Accounting
Principles under the new FASB codification which became effective on
July 1, 2009. The new Codification supersedes all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Company has included the references to the Codification,
as appropriate, in these consolidated financial statements. Adoption of this
statement did not have an impact on the Company’s consolidated results of
operations, cash flows or financial condition.
ASC 805. FASB
Statement No. 141(R)
Business
Combinations was issued in December
2007. This statement was incorporated into ASC 805, Business Combinations, under the new FASB
codification. ASC 805 requires that upon initially obtaining control, an
acquirer should recognize 100% of the fair values of acquired assets, including
goodwill and assumed liabilities, with only limited exceptions, even if the
acquirer has not acquired 100% of its target. Additionally, contingent
consideration arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration and transaction costs
will be expensed as incurred. This statement also modifies the recognition for
pre-acquisition contingencies, such as environmental or legal issues,
restructuring plans and acquired research and development value in purchase
accounting. This statement amends ASC 740-10, Income Taxes (“ASC 740”) to
require the acquirer to recognize changes in the amount of its deferred tax
benefits that are recognizable because of a business combination either in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the circumstances. ASC 805 is effective for
fiscal years beginning after December 15, 2008. The Company adopted this
statement on January 1, 2009 and accounted for its acquisition in 2009 in
accordance with the provisions of ASC 805.
ASC 805 Update. In
February 2009, the FASB issued SFAS No. 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies,
which allows an exception to the recognition and fair value measurement
principles of ASC 805. This exception requires that acquired contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably
estimated during the allocation period. This statement update was effective for
the Company as of January 1, 2009 for all business combinations that
close on or after January 1, 2009 and it did not have an impact on the
Company’s consolidated results of operations, cash flows or financial
condition.
ASC 810. In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51,
which is effective for fiscal years beginning after December 15,
2008. Early adoption is prohibited. SFAS No. 160 was incorporated into
ASC 810, Consolidation
(“ASC 810”) and requires companies to present minority interest
separately within the equity section of the balance sheet. The Company adopted
this statement as of January 1, 2009 and it did not have an impact on the
Company’s consolidated results of operations, cash flows or financial
condition.
ASC 855. In May
2009, the FASB issued FASB Statement No. 165, Subsequent
Events (“SFAS No. 165”).
The statement establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but prior to the issuance of
financial statements. This statement was incorporated into ASC 855, Subsequent Events (“ASC
855”). This statement was effective for interim or annual reporting periods
after June 15, 2009. ASC 855 sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements as well as the circumstances under which the entity would
recognize them and the related disclosures an entity should make. This statement
became effective for the Company’s financial statements as of June 30,
2009.
31
ASC 810. In June
2009, the FASB issued FASB Statement No. 167, Amendments to FASB
Interpretation No. 46 (R) (“SFAS No. 167”),
which amended the consolidation guidance for variable-interest entities. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
Statement is effective for financial statements issued for fiscal years periods
beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company will adopt these provisions on
January 1, 2010 and the adoption is not expected to not have an impact
on the Company’s financial statements.
ASC 275 and ASC
350. In April 2008, the FASB issued FASB Staff Position
(“FSP”) No. 142-3, Determination of
the Useful Lives of Intangible Assets, which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of an intangible asset. Under the new codification
this FSP was incorporated into two different ASC’s, ASC 275, Risks and Uncertainties (“ACS
275”) and ASC 350, Intangibles — Goodwill and Other (“ASC
350”). This interpretation was effective for financial statements issued for
fiscal years beginning after December 15, 2008 and interim periods within
those years. The Company adopted this FSP on January 1, 2009, and it did
not have a material impact on the Company’s consolidated results of operations,
cash flows or financial condition, and did not require additional disclosures
related to existing intangible assets.
ASC 820. On
February 12, 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”), which delayed the effective date of
SFAS No. 157 Fair Value
Measurements,
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008. Under
the new codification the FSP was incorporated into ASC 820, Fair Value Measurements and
Disclosures (“ASC 820”). The Company adopted this ASC update on
January 1, 2009 and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures.
ASC 820. FSP 157-4,
FSP FAS 115-2 and FAS 124-2, and FSP
FAS 107-1 and APB 28-1. On April 2, 2009, the FASB issued
three FSPs to address concerns about measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, recording impairment charges on investments in debt
instruments, and requiring the disclosure of fair value of certain financial
instruments in interim financial statements. These FSP’s were incorporated into
ASC 820 under the new codification.
The first
ASC update Staff Position, FSP FAS 157-4, “Determining
Whether a Market is Not Active and a Transaction is Not Distressed”, provides additional
guidance to highlight and expand on the factors that should be considered in
estimating fair value when there has been a significant decrease in market
activity for a financial asset. This update became effective for the Company’s
financial statements as of June 30, 2009 and it did not have a material
impact on the Company’s consolidated results of operations, cash flows or
financial condition and did not require additional
disclosures.
The
second ASC update Staff Position, FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (“FSP 115-2 and
FSP 124-2”), changes the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of an impairment charge to be recorded in earnings.
The Company adopted this update during the second quarter of 2009 and it did not
have a material impact on the Company’s consolidated results of operations, cash
flows or financial condition, and did not require additional
disclosures.
The third
ASC update, Staff Position, FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments
(“FSP FAS 107-1 and APB 28-1”) increases the frequency of
fair value disclosures from annual only to quarterly. All three updates are
effective for interim periods ending after June 15, 2009, with the option
to early adopt for interim periods ending after March 15, 2009. ASC update
FSP FAS 107-1 and APB 28-1 became effective for the Company’s financial
statements as of June 30, 2009.
ASC 260. In June
2008, the FASB issued FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). Under the new
FASB codification this FSP was incorporated into ASC 260, Earnings Per Share (“ASC
260”). ASC 260 clarifies that unvested share-based payment awards that entitle
holders to receive non-forfeitable dividends or dividend equivalents (whether
paid or unpaid) are considered participating securities and should be included
in the computation of earnings per share (“EPS”) pursuant to the two-class
method. The Company does not currently have any share-based awards that would
qualify as participating securities. Therefore, application of this FSP will not
have an effect on the Company's financial reporting.
32
ASU 2009-05. The
FASB issued Accounting Standards Update (“ASU”) No. 2009-05 which provides
additional guidance on how companies should measure liabilities at fair value
and confirmed practices that have evolved when measuring fair value such as the
use of quoted prices for a liability when traded as an asset. While reaffirming
the existing definition of fair value, the ASU reintroduces the concept of entry
value into the determination of fair value. Entry value is the amount an entity
would receive to enter into an identical liability. Under the new guidance, the
fair value of a liability is not adjusted to reflect the impact of
contractual restrictions that prevent its transfer. The effective date of this
ASU is the first reporting period (including interim periods) after
August 26, 2009. Early application is permitted for financial statements
for earlier periods that have not yet been issued.
ASU 2010-06. The
FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required
for significant transfers in and out of Level 1 and Level 2 fair value
measurements, disaggregation regarding classes of assets and liabilities,
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements for Level 2 or Level 3.
These disclosures are effective for the interim and annual reporting periods
beginning after December 15, 2009. Additional new disclosures regarding the
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The
adoption of these provisions is not expected to have an effect on the Company’s
financial reporting.
ASU 2010-09. The
FASB issued ASU No. 2010-09 which provides amendments to certain
recognition and disclosure requirements. Previous guidance required that an
entity that is an SEC filer be required to disclose the date through which
subsequent events have been evaluated. This update amends the requirement of the
date disclosure to alleviate potential conflicts between ASC 855-10 and the
SEC’s requirements. The adoption of these provisions did not have an effect on
the Company’s financial reporting.
In May
2008, the FASB issued ASC 470-20, Debt with Conversion and Other
Options (ASC 470-20). ASC 470-20 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The FSP includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods. Adoption of this statement
did not have an impact on the Company’s consolidated results of operations, cash
flows or financial condition.
Management
does not believe that any recently issued, but not yet effective, accounting
standards, if currently adopted, would have a material effect on the
accompanying financial statements.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
Applicable.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The full
text of our audited consolidated financial statements as of December 31, 2009
and 2008 begins on page F-1 of this annual report.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
33
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) that are designed to ensure that information that would be
required to be disclosed in Exchange Act reports is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
required by Rule 13a-15 under the Exchange Act, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2009. Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of December 31, 2009, and as of the date that the
evaluation of the effectiveness of our disclosure controls and procedures was
completed, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Exchange Act defines internal control over financial
reporting as a process designed by, or under the supervision of, our principal
executive and principal financial officers 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 accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:
|
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors;
and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial
statements.
|
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the framework
set forth in the report entitled Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment, (ii) risk
assessment, (iii) control activities, (iv) information and communication, and
(v) monitoring.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness,
yet important enough to merit attention by those responsible for oversight of
our financial reporting.
Our
internal control over financial reporting was not effective as a result of the
following identified material weaknesses:
34
A) In
connection with the preparation and audit of our 2009 financial statements and
notes, we were informed by our auditor, UHY LLP (“UHY”) of certain deficiencies
in our internal controls that UHY considered to be material
weaknesses. These deficiencies related to our financial closing
procedures and errors in classification of warrants. After
discussions between management, our audit committee and UHY, we concluded that
the Company had not properly adopted FASB ASC Topic 815-40 “Derivatives and
Hedging”: Contracts in Entity’s Own Equity”) (“ASC 815”) and as a result
had not reclassified warrants from equity to liabilities as of January 1,
2009. As a result of the change in accounting, the Company recognized
a $512,000 charge for the year ended December 31, 2009.
B) The
Company does not maintain personnel with a sufficient level of accounting
knowledge, experience and training in the selection and application of US GAAP
and related SEC disclosure requirements.
C)
The
Company does not have an accounting policy manual based on US
GAAP.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit the Company
to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
fourth quarter of fiscal year 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
|
ITEM
9B.
|
OTHER
INFORMATION.
|
We have
no information to disclose that was required to be disclosed in a report on Form
8-K during fourth quarter of fiscal year 2009, but was not
reported.
PART
III
|
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
Directors
and Executive Officers
The
following sets forth information about our directors and executive officers as
of the date of this report:
|
NAME
|
AGE
|
POSITION
|
||
|
Marc
Urbach
|
37
|
President
|
||
|
Clive
Ng
|
47
|
Chairman,
Director
|
||
|
Pu
Yue
|
37
|
Vice
Chairman and Principal Financial and Accounting Officer
|
||
|
James
Cassano
|
63
|
Director
|
||
|
David
Zale
|
56
|
Director
|
||
|
Jonas
Grossman
|
35
|
Director
|
||
|
Priscilla
Lu
|
56
|
Director
|
Marc Urbach. Mr. Urbach has
over twelve years of accounting, finance, and operations experience in both
large and small companies. He was the Executive Vice President and
Chief Financial Officer of Profile Home Inc., a privately held importer and
distributor of home furnishings from September 2004 until February 2008. He
additionally served on the board and was part owner of Tri-state Trading LLC, a
related import company during that same time period. Mr. Urbach was a Director
of Finance at Mercer Inc., a Marsh & McLennan Company from 2002 to 2004. He
was a Finance Manger at Small World Media from 2000 until 2002 and held a
similar position at The Walt Disney Company from 1998 to 2000. He started his
career at Arthur Andersen LLP as a senior auditor from 1995 to 1998. Mr. Urbach
received his Bachelor of Science in Accounting from Babson College in
1995.
Clive Ng. Mr. Ng currently a
non-executive Chairman and Director of the Company and China Broadband, Ltd.,
has been a director and officer of the Company since January of 2007 and of
China Broadband, Ltd. since August of 2006. Mr. Ng also currently
serves as a Senior Advisor to Warner Music Group Inc.
(NYSE: WMG). Mr. Ng has served as executive chairman of the
board and President of China Cablecom Ltd. since its inception on
October 6, 2006 and as a director, Executive Chairman and President of
China Cablecom Holdings since October 2007. From 2000 to 2003,
he was the Chief Executive Officer of Pacific Media PMC, a home shopping
company. Mr. Ng co-founded TVB Superchannel Europe in 1992,
which has grown to become Europe’s leading Chinese language
broadcaster. He also owned a 50% stake in HongKong SuperNet, the
first Hong Kong based ISP which was then sold to Pacific Internet
(NASDAQ:PCNTF). Mr. Ng was Chairman and founder of Asiacontent
(NASDAQ:IASIA), one of the first Asian internet companies to list in the United
States, that has been a joint venture partner with NBCi, MTVi, C-NET, CBS
Sportsline and DoubleClick in Asia. Mr. Ng was also one of the
initial investors and founder of E*TRADE Asia, a partnership with E*TRADE
Financial Corp (NYSE: ET). Mr. Ng was a founding shareholder of
MTV Japan, with H&Q Asia Pacific and MTV Networks (a division of Viacom
Inc).
35
Pu Yue. Mr. Pu is and has been
an executive officer of the Company and its operating subsidiary since January
of 2007. Mr. Pu also serves as general manager and Chief Executive
Officer of China Cablecom since its inception in 2006 and Chief Executive
Officer and Acting Chief Financial Officer of China Cablecom Holdings since
October 2007 a cable company that operates in the Jinan region of the Shandong
province of China. Mr. Pu carries with him more than a decade of PRC
based media industry experience spanning across publishing, Internet and TV
sectors. From 2005 to 2006, Mr. Pu was with China Media Networks, the TV media
arm of HC International, as BD director, before starting up Jinan Broadband in
2006. From 2003 to 2005, Mr. Pu was with Outlook Weekly of
Xinhua News Agency as a strategic advisor and BD director. From 1999 to 2000, he
was a director and a member of the founding team for Macau 5-Star Satellite TV,
a mainland China satellite TV channel venture. From 1997 to 1999, he joined
Economic Daily, and was head of the Internet arm of one of China's most popular
business and entrepreneur magazines. From 1993 to 1997, Mr. Pu was an intelligence
officer with China's National Security Service and a logistics specialist with a
joint venture between Crown Cork & Seal and John Swire & Sons in
Beijing. Mr. Pu received an MBA from Jones Graduate School of
Business of Rice University in 2002 and Bachelor in Law from University of
International Relations in China in 1993.
James S. Cassano. Mr. Cassano
was appointed as director of the Company effective as of January 11,
2008. Mr. Cassano has served as executive vice president, chief
financial officer, secretary and director of Jaguar Acquisition Corporation a
Delaware corporation (OTCBB:JGAC), a blank check company, since its formation in
June 2005. Mr. Cassano has served as a managing director of Katalyst
LLC, a company which provides certain administrative services to Jaguar
Acquisition Corporation, since January 2005. From February 2004 to
December 2004, Mr. Cassano was an independent consultant engaged by a number of
corporate clients in the area of corporate organization, corporate development
and mergers and acquisitions. In June 1998, Mr. Cassano founded New Forum
Publishers, an electronic publisher of educational material for secondary
schools, and served as its chairman of the board and chief executive officer
until it was sold to Apex Learning, Inc., a company controlled by Warburg
Pincus, in August 2003. He remained with Apex until November 2003 in transition
as vice president business development and served as a consultant to the company
through February 2004. In June 1995, Mr. Cassano co-founded Advantix,
Inc., a high volume electronic ticketing software and transaction services
company which handled event related client and customer payments, that was
re-named Tickets.com and went public through an IPO in 1999. Mr. Cassano served
as its chairman of the board and chief executive officer until December 1997.
From March 1987 to June 1995, Mr. Cassano served as senior vice president and
chief financial officer of the Hill Group, Inc., a privately-held engineering
and consulting organization, where he was responsible for corporate finance,
acquisitions and divestitures as well as all corporate information technology
functions. From February 1986 to March 1987, Mr. Cassano served as vice
president of investments and acquisitions for Safeguard Scientifics, Inc., a
public venture development company, where he was responsible for analyzing and
closing investments in ventures, and providing management support of companies
in which Safeguard had investments. From May 1973 to February 1986, Mr. Cassano
served as partner and director of strategic management services (Europe) for the
strategic management group of Hay Associates, where among other
responsibilities, he lead or held management responsibility for the majority of
the firm’s strategic and large scale organization projects in financial
services. Mr. Cassano received a B.S. in Aeronautics and Astronautics from
Purdue University and an M.B.A. from Wharton Graduate School at the University
of Pennsylvania.
David Zale. Mr. Zale was
appointed as a director of the Company effective as of January 11,
2008. Mr. Zale founded Zale Capital Management, L.P. in January 2006.
Mr. Zale advises clients on investments in hedge funds and customizes hedge
fund-of-funds for high net worth individuals and institutions. In addition, Mr.
Zale advises clients on their total portfolio, assisting clients in developing
Investment Policy Statements and executing portfolio allocations. Mr. Zale holds
the Chartered Financial Analyst designation and holds a FINRA Series 7 license
through USF Securities, L.P. and his Series 63 and 65 licenses through USF
Advisors, LLC, a registered Investment Advisor and conducts securities
transactions through these entities, both of which are otherwise unaffiliated
with Zale Capital Management, L.P. Mr. Zale has had ten years of
financial services experience. From July, 2003 until December, 2005, Mr. Zale
served as the Managing Director for Inaltra Capital Management, Inc., an
Investment Advisor specializing in hedge fund-of-funds, which he helped to
launch. Prior to that, Mr. Zale held positions with hedge fund-of-funds related
investment advisors. In addition, he has had additional experience on the sell
side, ultimately leading to a position as director of research. Prior to
entering the financial services industry, Mr. Zale spent over eighteen years in
the jewelry industry. He is the chairman of the Investment Committee of the M.B.
and Edna Zale Foundation of Dallas, and a past chairman of the Investment
Committee of Central Synagogue of New York. Mr. Zale is a graduate of the
University of Colorado with a degree in Political Science.
36
Jonas Grossman. Mr. Grossman
was appointed as a director of the Company effective as of January 11,
2008. Mr. Grossman has over nine years of experience in the financial
services industry. Mr. Grossman is and has been a Partner and Head of
Capital Markets of Chardan Capital, a FINRA member firm which he joined in
January, 2004. In addition, Mr. Grossman founded Cornix Management
LLC, a multi-strategy hedge fund in December, 2006. From April, 2001 until
December, 2003, Mr. Grossman was a Vice-President at Ramius Capital Group, LLC,
an international, multi-strategy hedge fund and FINRA member firm, where he also
worked as Head Trader. He was a Senior Trader at Windsor Capital
Advisors, LLC from June, 2000 until March, 2001 and worked as a trader making
markets at Aegis Capital Corp., from February, 1999 until June,
2000. Mr. Grossman received his Bachelor of Arts in Economics from
Cornell University in 1997. He has also studied at the London School
of Economics and the Leonard N. Stern School of Business at New York
University.
Dr. Priscilla Lu
. Ms. Lu age 56, is a Managing Partner of Cathaya Funds, a
private equity fund which she co founded in December 2008, focused on investing
in mature PRC businesses where she acts as independent consultant in assisting
in leveraging cross border alliances. Dr. Lu was PRC advisor to
Mayfield since November 2003 for more than 5 years and helped found GSR Fund in
China. Between February 2004 and May 2008, Dr Lu served as CEO of
ViDeOnline , Inc., a
company which delivers digital media content over secured broadband and mobile
networks to broadband service providers in PRC. Dr. Lu founded ViDeOnline,
Inc. in February 2004. In 1994, Dr. Lu was founder of interWAVE
Communications Inc. (Nasdaq “IWAV”), a company for which she served
as Chairman and CEO between June 1994 to November 2003, and for which she was an
executive during its public offering and NASDAQ Between 1976 and 1993, Dr. Lu
served in various capacities at AT&T Bell Laboratories, where she led
efforts in digital switching and networking and assisted in pioneering early
technologies in CMOS VLSI in microprocessors. Dr. Lu has B.S. and M.S.
degrees in Computer Science and Mathematics, University of Wisconsin, Madison
and holds a Ph.D. in Electrical Engineering and Computer Science from
Northwestern University.
Dr. Lu
holds and/or has developed over 50 patents in telecommunications and
networking. Ms. Lu serves on several Boards and as Council Advisor on
Northwestern University’s School of Engineering, and is a founding member of
Cleantech Group in China, and a board member of Silicon Valley Wireless
Group.
There are
no agreements or understandings for any of our executive officers or director to
resign at the request of another person and no officer or director is acting on
behalf of nor will any of them act at the direction of any other
person.
Directors
are elected until their successors are duly elected and qualified.
Family
Relationships
There is
no family relationship among any of our officers or directors.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement. Except as set forth in our discussion below
in Item 13, “Certain Relationships and Related Transactions, and Director
Independence,” none of our directors, director nominees or executive officers
has been involved in any transactions with us or any of our directors, executive
officers, affiliates or associates which are required to be disclosed pursuant
to the rules and regulations of the SEC.
Board
Composition and Committees
Our board
of directors is currently composed of six members: Clive Ng, Pu Yue, James
Cassano, David Zale Jonas Grossman and Priscilla Lu. Our board of
directors has determined that James Cassano, David Zale and Jonas Grossman
are independent directors under the rules of the American Stock Exchange
Company Guide, or the AMEX Company Guide, because they do not currently own a
significant percentage our shares, are not currently employed by the Company,
have not been actively involved in the management of the Company and do not fall
into any of the enumerated categories of people who cannot be considered
independent directors under the AMEX Company Guide.
37
We
currently have standing audit, nominating and corporate governance, and
compensation committees, with James Cassano, David Zale and Jonas Grossman
serving on each committee. James Cassano serves as the chair of the
audit committee, David Zale serves as the chair of the nominating and committee
and Jonas Grossman serves as the chair of the compensation
committee. Mr. Cassano serves as our audit committee financial expert
as that term is defined by the applicable SEC rules.
The audit
committee is primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The nominating and corporate governance committee is
primarily responsible for nominating directors and setting policies and
procedures for the nomination of directors. It is also responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The compensation committee is primarily responsible for
reviewing and approving our compensation and benefit policies, including
compensation of executive officers.
Section
16(A) Beneficial Ownership Reporting Compliance
Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC. The SEC has
designated specific due dates for these reports. Based solely on our review of
copies of such reports filed with the SEC by and written representations of our
directors and executive offers, we believe that our directors and executive
offers filed the required reports on time during 2009.
Code of Ethics
To date,
we have not adopted a Code of Ethics as described in Item 406 of Regulation S-K.
However, we intend to adopt a code of ethics as soon as
practicable.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
Summary Compensation Table
– 2009 and 2008
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods.
|
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($) (4)
|
Total
($)
|
|||||||||||||||||||
|
Marc
Urbach,
|
2009
|
120,000 |
-
|
-
|
-
|
14,419 | 134,419 | |||||||||||||||||||
|
President (1)
|
2008
|
102,759 | - | - | - | 12,016 | 114,775 | |||||||||||||||||||
|
Clive
Ng,
|
2009
|
250,000 | - | - | - | - | 250,000 | |||||||||||||||||||
|
Chairman (2)
|
2008
|
242,607 | - | - | - | - | 242,607 | |||||||||||||||||||
|
Pu
Yue,
|
2009
|
120,000 | - | - | - | - | 120,000 | |||||||||||||||||||
|
Vice
Chairman (3)
|
2008
|
120,000 | - | - | - | - | 120,000 | |||||||||||||||||||
|
(1)
|
Mr.
Urbach became our President in connection with our reverse acquisition of
Broadband Cayman in January 2007.
|
|
(2)
|
Mr.
Ng became our Chairman in connection with our reverse acquisition of
Broadband Cayman in January 2007. Pursuant to a settlement
agreement in January 2008, Mr. Ng discharged and waived all accrued salary
of $212,054 owed to him by the Company and agreed to accrue future salary
until a financing is completed. We did not pay any
salary to Mr. Ng in 2008 or 2009, but accrued $250,000 for each
year.
|
|
(3)
|
Mr.
Yue became our Vice Chairman in connection with our reverse acquisition of
Broadband Cayman in January 2007. Pursuant to Mr. Yue’s
employment agreement, his salary was accrued and was to be paid upon a
subsequent financing. Mr. Yue was paid $60,000 in 2008 for
partial payment of his employment in 2007. We accrued $120,000
per year for 2008 and 2009. We did not pay any salary to
Mr. Yue in 2009.
|
|
(4)
|
All
other compensation includes reimbursement for health insurance premiums
and vehicle allowance.
|
38
Employment
Agreements
On March
13, 2008, we entered into a formal employment agreement with Mr. Urbach,
pursuant to which we agreed to compensate Mr. Urbach $120,000 per year, for a
four year term, with bonuses and increases reviewed annually. In addition,
we granted Mr. Urbach options to purchase 100,000 shares of our common stock,
exercisable in four equal annual installments commencing on the date of hire and
on each of the first 3 anniversaries thereafter, at an exercise price equal to
market value at the time of issuance. The employment agreement also provides for
discretionary bonuses and a vehicle and travel allowance and similar benefits as
an executive.
On
February 24, 2007, we entered into a formal employment agreement with Mr. Ng,
pursuant to which we agreed to compensate Mr. Ng $250,000 per year with bonuses
and increases reviewed annually. The terms also provided that such
salary would be paid upon subsequent financing. On January 11, 2008,
we entered into an Amendment to the Employment Agreement which provided Mr. Ng
would discharge and waive all accrued salary owed to him by the Company prior to
the date of said amendment and agreed to accrue future salary until a financing
pursuant to the Settlement Agreement.
On
February 24, 2007, we entered into a formal employment agreement with Mr. Yue
pursuant to which we agreed to compensate Mr. Yu $120,000 per year with bonuses
and increases reviewed annually. The terms also provided that such
salary would be paid upon subsequent financing.
We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officer.
Outstanding
Equity Awards at Year End
No equity
awards were made during the year ended December 31, 2009.
The
following table sets forth the equity awards outstanding at December 31,
2009.
|
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||
|
Name
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
|
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
Number of
shares or
units of
stock that
have not
vested
(#)
|
Market
value of
shares of
units of
stock that
have not
vested
($)
|
Equity
incentive
plan awards:
Number of
unearned
shares, units or
other rights
that have not
vested
(#)
|
Equity
incentive
plan awards:
Market or
payout value of
unearned
shares, units or
other rights that
have not vested
($)
|
||||||||||||||||||||||||
|
Marc
Urbach
|
50,000 | 50,000 | 0 | $ | 1.00 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
Mr.
Urbach holds options to exercise 25,000 shares on March 13, 2010 and 25,000
shares on March 13, 2011.
Compensation
of Directors
The table
below sets forth the compensation of our directors for the fiscal year ended
December 31, 2009.
|
Name
|
Fees earned
or paid in
cash ($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive plan
compensation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All other
compensation
($)
|
Total
($)
|
||||||||||
|
David
Zale
|
-
|
-
|
5,625 |
-
|
-
|
-
|
5,625 | ||||||||||
|
James
Cassano
|
-
|
-
|
5,625 |
-
|
-
|
-
|
5,625 | ||||||||||
|
Jonas
Grossman
|
-
|
-
|
5,625 |
-
|
-
|
-
|
5,625 | ||||||||||
39
We did
not compensate our directors in 2009. Our three independent directors
were each granted options in 2008 to acquire 50,000 shares at $.45 per share,
becoming exercisable 50% at grant and 25% per year thereafter.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding beneficial ownership of our
common stock as of March 31, 2010 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our officers
and directors; and (iii) by all of our officers and directors as a
group.
|
Name & Address of Beneficial
Owner
|
Office, if Any
|
Title of Class
|
Amount & Nature of
Beneficial
Ownership(1)
|
Percent of
Class(2)
|
||||||||
|
Officers and Directors
|
||||||||||||
|
Marc
Urbach
79
Green Hill Rd
Springfield,
NJ 07081
|
President
|
Common
Stock, $0.001 par value
|
75,000 |
(3)
|
* | |||||||
|
Clive
Ng
1900
Ninth Street, 3rd Floor
Boulder,
CO 80302
|
Chairman
|
Common
Stock $0.001 par value
|
24,336,248 |
(4)
|
37.39 | % | ||||||
|
Pu
Yue
Apartment
2001, Bld. 2
No.
1 Xiangheyman Road
Dongcheng
District
Beijing,
China 100028
|
Vice
Chairman and Chief Financial Officer
|
Common
Stock $0.001 par value
|
0 | * | ||||||||
|
James
Cassano
117
Graham Way
Devon,
PA 19333
|
Director
|
Common
Stock $0.001 par value
|
37,500 |
(5)
|
* | |||||||
|
David
Zale
825
Third Avenue, Suite 244
New
York, NY 10022
|
Director
|
Common
Stock $0.001 par value
|
112,500 |
(6)
|
* | |||||||
|
Jonas
Grossman
17
State Street, Suite 1600
New
York, NY 10004
|
Director
|
Common
Stock $0.001 par value
|
364,875 |
(7)
|
* | |||||||
|
All
officers and directors as a
group
(6 persons named above)
|
Common
Stock $0.001 par value
|
24,926,123 | 38.30 | % | ||||||||
|
5%
Security Holders
|
||||||||||||
|
Clive
Ng
1900
Ninth Street, 3rd Floor
Boulder,
CO 80302
|
Chairman
|
Common
Stock $0.001 par value
|
24,336,248 |
(4)
|
37.39 | % | ||||||
|
China
Broadband Partners, Ltd.
1900
Ninth Street, 3rd Floor
Boulder,
CO 80302
|
|
Common
Stock $0.001 par value
|
17,503,495 |
(4)
|
26.89 | % | ||||||
|
88
Holdings, Inc.
1900
Ninth Street, 3rd Floor
Boulder,
CO 80302
|
|
Common
Stock $0.001 par value
|
3,582,753 |
(4)
|
5.50 | % | ||||||
|
BeeteeBee,
Ltd.
1900
Ninth Street, 3rd Floor
Boulder,
CO 80302
|
|
Common
Stock $0.001 par value
|
3,250,000 |
(4)
|
4.99 | % | ||||||
|
Oliveira
Capital, LLC
18
Fieldstone Ct.
New
City, NY 10956
|
|
Common
Stock $0.001 par value
|
3,537,034 |
(8)
|
5.43 | % | ||||||
|
Pasquale
& Diane Croce
1005
Ridgehaven Rd.
West Chester, PA 19382-2372
|
|
Common
Stock $0.001 par value
|
3,333,334 | 5.12 | % | |||||||
|
Total
Shares Owned by Persons Named above:
|
|
Common
Stock $0.001 par value
|
31,206,616 | 47.95 | % | |||||||
* Less
than 1%.
40
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
includes voting or investment power with respect to the common
stock.
|
|
(2)
|
A
total of 64,761,396 shares of Common Stock as of March 31, 2010 are
considered to be outstanding pursuant to SEC Rule
13d-3(d)(1). For each beneficial owner above, any options
exercisable within 60 days have been included in the
denominator.
|
|
(3)
|
Includes
shares issuable upon options to exercise 75,000 shares which are
exercisable within 60 days at $1.00 per share. Does not include options to
purchase an additional 25,000 shares at $1.00 which are not yet
exercisable.
|
|
(4)
|
Includes
3,582,753 shares held by 88 Holdings, Inc., 3,250,000 held by BeeteeBee,
Ltd. and 17,503,495 shares held by China Broadband Partners, Ltd.
Mr. Ng controls and owns 100% beneficial ownership over these
entities.
|
|
(5)
|
Includes
shares issuable upon options to exercise 37,500 shares which are
exercisable at $.45. Does not include options to purchase an
additional 12,500 shares at $.45 which are not yet
exercisable.
|
|
(6)
|
Includes
50,000 shares of common stock and 25,000 warrants to purchase common stock
at $2.00 acquired in our January 2007 private offering. Also includes
shares issuable upon options to exercise 37,500 shares which are
exercisable at $.45. Does not include options to purchase an
additional 12,500 shares at $.45 which are not yet
exercisable.
|
|
(7)
|
Mr.
Grossman is an officer and part owner of Chardan Capital Markets, LLC, or
Chardan Capital, which received warrants in connection with its services
as placement agent in connection with our January 2008 private placement
and which also invested its fee into notes and warrants. Mr.
Grossman has shared voting and dispositive control over securities owned
by Chardan Capital but not over securities owned by other principals of
Chardan Capital. Chardan Capital or its principals own in
aggregate (i) $121,250 principal amount of convertible promissory notes,
convertible into an aggregate of 161,667 shares, of which, Mr.
Grossman disclaims beneficial ownership of $93,969 of principal
amount of note and 125,292 shares issuable upon all conversion thereof,
(ii) 1,131,666 shares underlying warrants, of which Mr. Grossman disclaims
beneficial ownership of 877,041 shares issuable upon conversion thereof
and, (iii) 161,667 shares underlying Class A Warrants, of which Mr.
Grossman disclaims beneficial ownership of 125,292 shares issuable upon
conversion thereof. Also includes shares issuable upon options
to exercise 37,500 shares which are exercisable at $.45. Does
not include options to purchase an additional 12,500 shares at $.45 which
are not yet exercisable.
|
|
(8)
|
Mr.
Steven Oliveira is the sole member of Oliveira Capital, LLC and has voting
and dispositive over securities owned by Oliveira Capital,
LLC
|
Changes
in Control
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table includes the information as of the end of 2009 for each category
of our equity compensation plan:
|
Plan category
|
Number of securities to
be issued upon exercise
of outstanding options,
restricted stock,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
restricted stock,
warrants and rights
(b)
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
- | - | - | |||||||||
|
Equity
compensation plans not approved by security holders (1)
|
317,500 | $ | .61 | 87,500 | ||||||||
|
Total
|
317,500 | $ | .61 | 87,500 | ||||||||
41
|
(1)
|
Effective
as of the March 13, 2008, our board of directors of the company approved
the China Broadband, Inc. 2008 Stock Incentive Plan, or the Plan, pursuant
to which options or other similar securities may be granted. The maximum
aggregate number of shares of our common stock that may be issued under
the Plan is 2,500,000 shares. Currently, only 317,500 options
were issued under the plan, of which 100,000 were granted to Mr. Urbach as
per his employment agreement with the company (as described above) with
the remaining 217,500 issued to certain directors and a consultant in
2008.
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of the 2009
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at year-end for the
last two completed years, and in which any related
person
had or will have a direct or indirect material interest (other than compensation
described under Item 11, “Executive Compensation”). We believe the terms
obtained or consideration that we paid or received, as applicable, in connection
with the transactions described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in arm’s-length
transactions.
|
|
·
|
The
Company has a loan receivable for $290,000 as of December 31, 2009 from a
related party, Music Magazine. The loan is unsecured, interest
free and has no fixed repayment terms. Music Magazine is related through
Modern Movie Times Magazine.
|
|
|
·
|
During
the year ended December 31, 2009, Jinan Broadband paid $2,643,204 to Jinan
Parent. At December 31, 2009, $152,000 remains due to Jinan
Parent. This amount represents the remaining balance due from
the initial acquisition which is unsecured, interest free and has no fixed
repayment terms.
|
|
|
·
|
As
of December 31, 2009, amounts due from shareholders include $109,000 from
Shandong Broadcast & TV Weekly Press and $60,000 from Modern Movie
& TV Biweekly Press. Both companies are our partners in our
Shandong Publishing joint venture company. The amount due from
Shandong Broadcast & TV Weekly Press is unsecured, interest free and
has no fixed repayment terms. The amount due from Modern Movie
& TV Biweekly Press is unsecured, interest free and is due on December
31, 2010. During the year ended December 31, 2009, we advanced
approximately $650,000 to these companies and also received repayments of
$481,000.
|
|
|
·
|
On
January 11, 2008, we entered into a settlement agreement, or the
Settlement Agreement, which was negotiated by the Company, its advisors
and management and certain shareholders, for purposes of facilitating our
business plan and expediting and facilitating our financing activities and
avoiding disputes between management and certain investors and consultants
concerning possible claims that such investors suggested might be brought
against these principals for their activities in forming and operating
China Cablecom and its entry into a merger agreement as being violative of
their employment agreements with the Company. The Settlement
Agreement provided, subject to the terms thereof, for general mutual
releases of all executives and management and their affiliated entities
and also provided for the modification of employment agreements of both,
Mr. Clive Ng, our Chairman and Mr. Yue Pu, our Vice Chairman and former
Chief Financial Officer. In connection with the Settlement
Agreement, we received 390,000 shares of China Cablecom from Mr. Clive Ng,
our Chairman. The value of the shares declined substantially,
and may continue to fluctuate and decline further. During
the year ended December 31, 2009, we sold 236,665 shares for
total net proceeds of $175,000 and recorded a net loss on the sales of
approximately $15,000. As of December 31, 2009, we hold 81,455
shares of China Cablecom. The fair value of the remaining
81,455 shares at December 31, 2009 is approximately
$47,000.
|
Except as
set forth in our discussion above, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.
42
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal
years.
Director
Independence
We
currently have two independent directors, Mr. Cassano and Mr. Zale as the term
“independent” is defined by the rules of the Nasdaq Stock Market.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
Independent
Auditors’ Fees
The
following is a summary of the fees billed to the Company by its principal
accountants for professional services rendered for the years ended December 31,
2009 and 2008:
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Audit
Fees
|
$ | 56,000 | $ | 99,300 | ||||
|
Audit-Related
Fees
|
0 | 0 | ||||||
|
Tax
Fees
|
0 | 0 | ||||||
|
All
Other Fees
|
0 | 0 | ||||||
|
TOTAL
|
$ | 56,000 | $ | 99,300 | ||||
“Audit
Fees” consisted of the aggregate fees billed for professional services rendered
for the audit of our annual financial statements and the reviews of the
financial statements included in our Forms 10-Q and for any other services that
were normally provided in connection with our statutory and regulatory filings
or engagements.
“Audit
Related Fees” consisted of the aggregate fees billed for professional services
rendered for assurance and related services that were reasonably related to the
performance of the audit or review of our financial statements and were not
otherwise included in Audit Fees.
“Tax
Fees” consisted of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.
“All
Other Fees” consisted of the aggregate fees billed for products and services
provided and not otherwise included in Audit Fees, Audit Related Fees or Tax
Fees.
Pre-Approval
Policies and Procedures
Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our board of directors to assure that
such services do not impair the auditors’ independence from us. In accordance
with its policies and procedures, our board of directors pre-approved the audit
and non-audit service performed by UHY LLP for our consolidated financial
statements as of and for the year ended December 31, 2009.
PART
IV
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
Financial
Statements and Schedules
The
financial statements are set forth under Item 8 of this annual report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise
included.
43
Exhibit
List
The
following exhibits are filed as part of this report or incorporated by
reference:
|
Exhibit No.
|
Description
|
|
|
2.1
|
Share
Exchange Agreement, dated as of January 23, 2007, by and among the
Company, China Broadband, Ltd. and its shareholders. [incorporated by
reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-KSB
filed May 25, 2007]
|
|
|
3.1
|
Articles
of Incorporation of the Company, as amended to date.*
|
|
|
3.2
|
Bylaws
of the Company, as amended to date.*
|
|
|
4.1
|
Form
of Note Purchase Agreement, dated June 30, 2009, among the Company and
certain investors. [Incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
4.2
|
Form
of 5% Convertible Promissory Note, issued as of June 30, 2009.
[Incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed on July 6, 2009]
|
|
|
4.3
|
Form
of 5% Convertible Promissory Note, issued as of January 11, 2008.
[Incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed on January 17, 2008]
|
|
|
4.4
|
Form
of Class A Warrant, issued as of January 11, 2008. [Incorporated by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
filed on January 17, 2008]
|
|
|
4.5
|
Form
of Broker’s Common Stock Warrant, issued as of January 11, 2008.
[Incorporated by reference to Exhibit 10.6 to the Company’s Current Report
on Form 8-K filed on January 17, 2008]
|
|
|
4.6
|
Form
of Warrant Amendment, dated March 2008 [Incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 8,
2008]
|
|
|
4.7
|
Form
of 7% Convertible Promissory Note issued by China Broadband, Ltd. and
assumed by the Company. [incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
4.8
|
Form
of Warrant, issued as of January 23, 2007. [incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
4.9
|
Form
of Warrant, issued as of January 23, 2007 to Maxim Financial Corporation.
[incorporated by reference to Exhibit 10.5 to the Company’s Current Report
on Form 8-K filed March 20, 2007]
|
|
|
4.10
|
Form
of Warrant, issued as of January 23, 2007 to BCGU, LLC. [incorporated by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-KSB
filed May 25, 2007]
|
|
|
4.11
|
Form
of Registration Rights Agreement, dated as of January 23, 2007
[incorporated by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed March 20, 2007]
|
|
|
10.1
|
Form
of Stock Purchase Agreement, dated as of June 30, 2009, among the Company
and certain investors [Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
10.2
|
Form
of Waiver Letter, dated as of June 30, 2009, between the Company and
certain existing note holders [Incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
10.3
|
Form
of Subscription Agreement, dated as of January 11, 2008, between the
Company and certain investors. [Incorporated by reference to Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.4
|
Form
of Funds Escrow Agreement, dated January 11, 2008, by and among the
Company, Grushko and Mittman, P.C., and
investors. [Incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.5
|
Settlement
Agreement, dated January 11, 2008, by and among the Company, China
Broadband Ltd., Stephen Cherner, Maxim Financial Corporation, Mark L.
Baum, BCGU, LLC, Mark I Lev, Wellfleet Partners, Inc., Pu Yue, Clive Ng,
Chardan Capital Markets, LLC, Jaguar Acquisition Corporation, and China
Cablecom Holdings, Ltd. [Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
44
|
Exhibit No.
|
Description
|
|
|
10.6
|
Form
of Subscription and Release Agreement, dated March 2008 [Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on May 8, 2008]
|
|
|
10.7
|
Form
of Release Agreement, dated March 2008 [Incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 8,
2008]
|
|
|
10.8
|
Form
of Subscription Agreement, dated January 23, 2007, by and among the
Company and certain investors. [incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
10.9
|
Cooperation
Agreement dated as of December 26, 2006 between China Broadband, Ltd. and
Jianan Guangdian Jiahe Digital Television Co., Ltd. [incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 20, 2007]
|
|
|
10.10
|
Exclusive
Service Agreement, dated December, 2006, by and among Beijing China
Broadband Network Technology Co., Ltd., Jinan Guangdian Jiahe Digital
Television Co., Ltd. and Jinan Broadcast &Televison Information
Network Center. [incorporated by reference to Exhibit 10.11 to the
Company’s Current Report on Form 8-K filed June 11,
2007]
|
|
|
10.11
|
Cooperation
Agreement, dated March 7, 2008, by and among Ji’Nan Zhongkuan Dian Guang
Information Technology Co., Shandong Broadcast & TV Weekly Press and
Modern Movie & TV Biweekly Press. [incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 13, 2008]
|
|
|
10.12
|
Share
Issuance Agreement, dated April 7, 2009 between the Company, China
Broadband, Ltd., Waanshi Wangjing Media Technologies (Beijing) Co., Ltd.
and its shareholders. [incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed April 14,
2009]
|
|
|
10.13
|
Loan
Agreement, dated as of April 7, 2009, between China Broadband, Ltd. and
Wangjing Media Technologies (Beijing) Co., Ltd..*
|
|
|
10.14
|
Equity
Option Agreement, dated as of April 7, 2009, between China Broadband, Ltd.
and Wangjing Media Technologies (Beijing) Co., Ltd.*
|
|
|
10.15
|
Pledge
Agreement, dated as of April 7, 2009, between China Broadband, Ltd. and
Wangjing Media Technologies (Beijing) Co., Ltd.*
|
|
|
10.16
|
Trustee
Appointment Letter, dated as of April 7, 2009, by China Broadband, Ltd.,
appointing Mr. Wang Yingqi as trustee on its behalf*
|
|
|
10.17
|
Employment
Agreement, dated January 24, 2007, between China Broadband, Ltd. and Clive
Ng. [incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K filed March 20, 2007]
|
|
|
10.18
|
Employment
Agreement Amendment, dated January 11, 2008, between China Broadband, Ltd.
and Clive Ng. [Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.19
|
Employment
Agreement, dated January 24, 2007, between China Broadband, Ltd. and Pu
Yue. [incorporated by reference to Exhibit 10.8 to the Company’s Current
Report on Form 8-K filed March 20, 2007]
|
|
|
10.20
|
Employment
Agreement Amendment, dated January 11, 2008, between China Broadband, Ltd.
and Pu Yue. [Incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed on January 17, 2008]
|
|
|
10.21
|
Employment
Agreement, dated March 13, 2008, between the Company and Marc
Urbach. [incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 13,
2008]
|
|
|
10.22
|
Consulting
Agreement, dated January 24, 2007, between the Company and Maxim Financial
Corporation. [incorporated by reference to Exhibit 10.9 to the Company’s
Amended Current Report on Form 8-K/A filed June 4,
2007]
|
45
|
Exhibit No.
|
Description
|
|
|
21
|
Subsidiaries
of the Company.*
|
|
|
31.1
|
Certifications
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
31.2
|
Certifications
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
99.1
|
China
Broadband, Inc. 2008 Stock Incentive Plan. [incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 13,
2008]
|
|
|
99.2
|
China
Broadband, Inc. Audit Committee Charter [incorporated by reference to
Exhibit 99.2 to the Company’s Annual Report on Form 10-K filed April 15,
2009]
|
|
|
99.3
|
China
Broadband, Inc. Nominating and Corporate Governance Committee Charter
[incorporated by reference to Exhibit 99.3 to the Company’s Annual Report
on Form 10-K filed April 15, 2009]
|
|
|
99.4
|
China
Broadband, Inc. Compensation Committee Charter [incorporated by reference
to Exhibit 99.4 to the Company’s Annual Report on Form 10-K filed April
15, 2009]
|
*Filed
herewith
SIGNATURES
In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereto duly authorized individual.
Date:
April 15, 2010
|
CHINA
BROADBAND, INC.
|
||
|
By:
|
/s/ Marc Urbach
|
|
|
Marc
Urbach
|
||
|
President
|
||
|
By:
|
/s/ Pu Yue
|
|
|
Pu
Yue
|
||
|
Vice
Chairman
|
||
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Each
person whose signature appears below hereby authorizes Marc Urbach and Pu Yue,
and each or any of them, as attorneys-in-fact to sign on his or her behalf,
individually, and in each capacity stated below, and to file all amendments
and/or supplements to this annual report on Form 10-K.
|
Signature
|
Title
|
Date
|
||
|
/s/ Marc Urbach
|
President
|
April
15, 2010
|
||
|
Marc
Urbach
|
(Principal
Executive Officer)
|
|||
|
/s/ Pu Yue
|
Vice
Chairman
|
April
15, 2010
|
||
|
Pu
Yue
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/ Clive Ng
|
Chairman
|
April
15, 2010
|
||
|
Clive
Ng
|
||||
|
/s/ James Cassano
|
Director
|
April
15, 2010
|
||
|
James
Cassano
|
||||
|
/s/ David Zale
|
Director
|
April
15, 2010
|
||
|
David
Zale
|
||||
|
/s/ Jonas Grossman
|
Director
|
April
15, 2010
|
||
|
Jonas
Grossman
|
46
CHINA
BROADBAND, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|||
|
Report
of Independent Registered Public Accounting Firms
|
F-1
|
||
|
Consolidated
Financial Statements:
|
|||
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-2
|
||
|
Statements
of Operations for the years ended December 31, 2009 and
2008
|
F-3
|
||
|
Statements
of Changes in Shareholders’ Equity and Comprehensive Loss for the years
ended December 31, 2009 and 2008
|
F-4
|
||
|
Statements
of Cash Flows for the years ended December 31, 2009 and
2008
|
F-5
|
||
|
Notes
to Consolidated Financial Statements
|
F-6
|
47
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Shareholders
China
Broadband, Inc. and subsidiaries
We have
audited the accompanying consolidated balance sheets of China Broadband, Inc.
and subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the
related consolidated statements of operations, changes in shareholders’ equity
and comprehensive loss and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits 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 financial statements are free of material misstatement. The
Company is not required to have, nor are we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal 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 financial statements, 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 financial position of China Broadband, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
As
discussed in Note 14 to the consolidated financial statements, the Company
adopted ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own
Equity” (effective January 1, 2009) as it relates to the Company’s
warrants.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has incurred significant losses
during 2009 and 2008, has a working capital deficit at December 31, 2009 and has
relied on debt and equity financings to fund their operations. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans regarding these matters are also described in Note
3. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
|
/s/ UHY LLP
|
April 15,
2010
Albany,
New York
F-1
China
Broadband, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
December
31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,190,494 | $ | 4,425,529 | ||||
|
Marketable
equity securities, available for sale
|
47,244 | 254,496 | ||||||
|
Accounts
receivable, net
|
213,713 | 136,709 | ||||||
|
Inventory
|
455,492 | 877,309 | ||||||
|
Prepaid
expense
|
237,704 | 46,380 | ||||||
|
Loan
receivable from related party
|
289,974 | 268,449 | ||||||
|
Amounts
due from shareholders
|
168,907 | 64,394 | ||||||
|
Other
current assets
|
78,478 | 88,883 | ||||||
|
Total
current assets
|
3,682,006 | 6,162,149 | ||||||
|
Property
and equipment, net
|
7,362,641 | 9,299,473 | ||||||
|
Intangible
assets, net
|
4,294,614 | 4,218,758 | ||||||
|
Other
assets
|
430,561 | 424,462 | ||||||
|
Total
assets
|
$ | 15,769,822 | $ | 20,104,842 | ||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,350,076 | $ | 1,237,251 | ||||
|
Accrued
expenses
|
1,839,272 | 936,134 | ||||||
|
Deferred
revenue
|
1,637,283 | 1,382,103 | ||||||
|
Deferred
tax liability
|
281,626 | - | ||||||
|
Convertible
notes payable
|
304,853 | - | ||||||
|
Warrant
liabilities
|
819,150 | - | ||||||
|
Loan
payable
|
398,960 | - | ||||||
|
Payable
to Shandong Media
|
145,679 | 145,679 | ||||||
|
Payable
to Jinan Parent
|
152,268 | 2,795,472 | ||||||
|
Other
current liabilities
|
378,847 | 72,013 | ||||||
|
Total
current liabilities
|
7,308,014 | 6,568,652 | ||||||
|
Convertible
notes payable
|
4,665,306 | 4,564,427 | ||||||
|
Deferred
tax liability and uncertain tax position liability
|
454,578 | 790,617 | ||||||
|
Total
liabilities
|
12,427,898 | 11,923,696 | ||||||
|
Committments
and Contingencies
|
||||||||
|
Shareholders'
equity
|
||||||||
|
Preferred
stock, $.001 par value; 5,000,000 shares authorized, no shares issued and
outstanding
|
- | - | ||||||
|
Common
stock, $.001 par value; 95,000,000 shares authorized, 64,761,396 and
50,585,455 issued and outstanding
|
64,762 | 50,586 | ||||||
|
Additional
paid-in capital
|
14,901,493 | 13,372,358 | ||||||
|
Accumulated
deficit
|
(17,215,041 | ) | (12,200,287 | ) | ||||
|
Accumulated
other comprehensive income
|
331,283 | 320,858 | ||||||
|
Total
China Broadband shareholders' (deficit) equity
|
(1,917,503 | ) | 1,543,515 | |||||
|
Noncontrolling
interests
|
5,259,427 | 6,637,631 | ||||||
|
Total
shareholders’
equity
|
3,341,924 | 8,181,146 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 15,769,822 | $ | 20,104,842 | ||||
See
notes to consolidated financial statements.
F-2
China
Broadband, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Revenue
|
$ | 8,443,088 | $ | 6,361,970 | ||||
|
Cost
of revenue
|
5,661,502 | 3,740,381 | ||||||
|
Gross
profit
|
2,781,586 | 2,621,589 | ||||||
|
Selling,
general and adminstrative expenses
|
3,227,625 | 1,923,386 | ||||||
|
Professional
fees
|
641,334 | 619,405 | ||||||
|
Depreciation
and amortization
|
3,564,334 | 3,037,199 | ||||||
|
Loss
from operations
|
(4,651,707 | ) | (2,958,401 | ) | ||||
|
Interest
& other income / (expense)
|
||||||||
|
Settlement
gain
|
- | 1,300,692 | ||||||
|
Interest
income
|
8,354 | 43,183 | ||||||
|
Interest
expense
|
(362,424 | ) | (345,953 | ) | ||||
|
Change
in fair value of warrant liabilities
|
(512,027 | ) | - | |||||
|
Loss
on sale and write-down of marketable equity securities
|
(14,828 | ) | (1,899,883 | ) | ||||
|
Goodwill
impairment
|
(1,239,291 | ) | - | |||||
|
Other
|
(13,613 | ) | (10,136 | ) | ||||
|
Loss
before income taxes and non-controlling interest
|
(6,785,536 | ) | (3,870,498 | ) | ||||
|
Income
tax benefit (expense)
|
243,655 | (93,997 | ) | |||||
|
Net
loss, net of tax
|
(6,541,881 | ) | (3,964,495 | ) | ||||
|
Plus:
Net loss attributable to noncontrolling interests
|
1,102,756 | 609,630 | ||||||
|
Net
loss attributable to China Broadband shareholders
|
$ | (5,439,125 | ) | $ | (3,354,865 | ) | ||
|
Net
loss per share
|
||||||||
|
Basic
|
$ | (0.09 | ) | $ | (0.07 | ) | ||
|
Diluted
|
$ | (0.09 | ) | $ | (0.07 | ) | ||
|
Weighted
average shares outstanding
|
||||||||
|
Basic
|
60,334,180 | 50,332,705 | ||||||
|
Diluted
|
60,334,180 | 50,332,705 | ||||||
See
notes to consolidated financial statements.
F-3
China
Broadband, Inc. and Subsidiaries
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Years
Ended December 31, 2009 and 2008
|
Accumulated
|
China
|
|||||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
Broadband
|
Total
|
|||||||||||||||||||||||||||||||||
|
Common
|
Par
|
Paid-in
|
Accumulated
|
Comprehensive
|
Shareholders'
|
Noncontrolling
|
Shareholders’
|
Comprehensive
|
||||||||||||||||||||||||||||
|
Shares
|
Value
|
Capital
|
Deficit
|
Income(loss)
|
(Deficit)/Equity
|
Interest
|
Equity
|
Loss
|
||||||||||||||||||||||||||||
|
Balance
December 31, 2007
|
50,048,000 | $ | 50,048 | $ | 10,485,874 | $ | (8,845,424 | ) | $ | 331,764 | $ | 2,022,262 | $ | 4,879,802 | $ | 6,902,064 | ||||||||||||||||||||
|
Warrant
valuation associated with convertible notes payable &
other
|
- | - | 745,694 | - | - | 745,694 | - | 745,694 | ||||||||||||||||||||||||||||
|
Option
valuation associated with employment agreeement
|
- | - | 44,898 | - | - | 44,898 | - | 44,898 | ||||||||||||||||||||||||||||
|
Shares
issued for penalty of non-registration
|
207,599 | 208 | 421,970 | - | - | 422,178 | - | 422,178 | ||||||||||||||||||||||||||||
|
Warrant
valuation associated with extension from settlement
agreement
|
- | - | 1,426,862 | - | - | 1,426,862 | - | 1,426,862 | ||||||||||||||||||||||||||||
|
Shares
issued as payment for convertible note interest
|
329,856 | 330 | 247,061 | - | - | 247,391 | - | 247,391 | ||||||||||||||||||||||||||||
|
Shandong
Media joint venture
|
- | - | - | - | - | - | 2,367,459 | 2,367,459 | ||||||||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | (3,354,865 | ) | - | (3,354,865 | ) | (609,630 | ) | (3,964,495 | ) | (3,354,865 | ) | ||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | (10,906 | ) | (10,906 | ) | - | (10,906 | ) | (10,906 | ) | |||||||||||||||||||||||
|
Balance
December 31, 2008
|
50,585,455 | $ | 50,586 | $ | 13,372,359 | $ | (12,200,289 | ) | $ | 320,858 | $ | 1,543,514 | $ | 6,637,631 | $ | 8,181,145 | $ | (3,365,771 | ) | |||||||||||||||||
|
Cumulative
effect of accounting change for warrants - Reclassification of warrants to
warrant liabilities
|
- | - | (731,496 | ) | 424,373 | - | (307,123 | ) | - | (307,123 | ) | |||||||||||||||||||||||||
|
Shandong
Media valuation adjustment
|
- | - | - | - | - | - | (275,448 | ) | (275,448 | ) | ||||||||||||||||||||||||||
|
Shares
issued as payment for convertible note interest
|
921,043 | 921 | 259,637 | - | - | 260,558 | - | 260,558 | ||||||||||||||||||||||||||||
|
Stock
option compensation expense
|
- | - | 33,656 | - | - | 33,656 | - | 33,656 | ||||||||||||||||||||||||||||
|
Shares
issued for AdNet acquisition
|
11,254,898 | 11,255 | 1,676,980 | - | - | 1,688,235 | - | 1,688,235 | ||||||||||||||||||||||||||||
|
Costs
related to stock issued for AdNet acquisition
|
- | - | (3,622 | ) | - | - | (3,622 | ) | (3,622 | ) | ||||||||||||||||||||||||||
|
Shares
issued for cash
|
2,000,000 | 2,000 | 298,000 | - | - | 300,000 | - | 300,000 | ||||||||||||||||||||||||||||
|
Costs
related to stock issued for cash
|
- | - | (4,021 | ) | (4,021 | ) | - | (4,021 | ) | |||||||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | (5,439,125 | ) | - | (5,439,125 | ) | (1,102,756 | ) | (6,541,881 | ) | $ | (5,439,125 | ) | |||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | 28,345 | 28,345 | - | 28,345 | 28,345 | |||||||||||||||||||||||||||
|
Unrealized
loss on marketable equity securities
|
- | - | - | - | (17,920 | ) | (17,920 | ) | - | (17,920 | ) | (17,920 | ) | |||||||||||||||||||||||
|
Balance
December 31, 2009
|
64,761,396 | $ | 64,762 | $ | 14,901,493 | $ | (17,215,041 | ) | $ | 331,283 | $ | (1,917,503 | ) | $ | 5,259,427 | $ | 3,341,924 | $ | (5,428,700 | ) | ||||||||||||||||
See
notes to consolidated financial statements.
F-4
China
Broadband, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Cash
flows from operating
|
||||||||
|
Net
loss
|
$ | (6,541,881 | ) | $ | (3,964,494 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
||||||||
|
Stock
compensation expense and shares issued as payment for
interest
|
294,213 | 318,818 | ||||||
|
Depreciation
and amortization
|
3,578,309 | 3,369,930 | ||||||
|
Noncash
interest expense - original issue discount
|
100,879 | 97,838 | ||||||
|
Deferred
income tax
|
(243,655 | ) | 423,945 | |||||
|
Loss
on sale and write-down of marketable equity securities
|
14,828 | 1,899,883 | ||||||
|
Goodwill
impairment
|
1,239,291 | - | ||||||
|
Change
in fair value of warrant liabilities
|
512,027 | - | ||||||
|
Settlement
gain
|
- | (1,300,692 | ) | |||||
|
Change
in assets and liabilities, net of amounts assumed in AdNet
acquisition:
|
||||||||
|
Accounts
receivable
|
(77,004 | ) | (54 | ) | ||||
|
Inventory
|
421,817 | (234,996 | ) | |||||
|
Prepaid
expenses and other assets
|
(161,984 | ) | 213,177 | |||||
|
Accounts
payable and accrued expenses
|
1,459,487 | 1,187,894 | ||||||
|
Deferred
revenue
|
255,180 | 129,790 | ||||||
|
Other
|
- | (467,331 | ) | |||||
|
Net
cash provided by operating activities
|
851,507 | 1,673,708 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Cash
acquired in AdNet acquisition
|
17,568 | - | ||||||
|
Proceeds
from sale of marketable equity securities
|
174,504 | 361,121 | ||||||
|
Acquisition
of property and equipment
|
(1,134,926 | ) | (2,061,401 | ) | ||||
|
Loan
to Shandong Media shareholder
|
(104,513 | ) | (242,155 | ) | ||||
|
Loan
to related party
|
(21,525 | ) | - | |||||
|
Net
cash used in investing activities
|
(1,068,892 | ) | (1,942,435 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Proceeds
from sale of equity securities
|
300,000 | - | ||||||
|
Proceeds
from issuance of convertible notes payable
|
304,853 | 4,850,000 | ||||||
|
Legal
fees associated with AdNet acquisition and share issuance
|
(7,643 | ) | - | |||||
|
Issuance
costs associated with private placement and convertible
notes
|
- | (104,500 | ) | |||||
|
Payments
to Jinan Parent
|
(2,643,204 | ) | (512,971 | ) | ||||
|
Net
cash (used in) provided by financing activities
|
(2,045,994 | ) | 4,232,529 | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
28,344 | (10,903 | ) | |||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,235,035 | ) | 3,952,899 | |||||
|
Cash
and cash equivalents at beginning of period
|
4,425,529 | 472,670 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 2,190,494 | $ | 4,425,569 | ||||
|
Supplemental Cash Flow
Information:
|
||||||||
|
Cash
paid for taxes
|
$ | - | $ | - | ||||
|
Cash
paid for interest
|
$ | 946 | $ | 724 | ||||
|
Value
assigned to shares issued as penalty for non-registration of 7%
convertible notes
|
$ | - | $ | 12,125 | ||||
|
Value
assigned to shares as payment for interest expense
|
$ | 260,558 | $ | 247,391 | ||||
|
Convertible
notes issued as payment for debt issuance costs
|
$ | - | $ | 121,250 | ||||
|
Cumulative
effect of change in accounting principle upon adoption of new accounting
pronouncement on January 1, 2009, reclassification of warrants from equity
to warrant liabilities
|
$ | 424,373 | $ | - | ||||
See
notes to consolidated financial statements.
F-5
CHINA
BROADBAND, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Basis of
Presentation
|
China
Broadband, Inc., a Nevada corporation (“China Broadband”, “we,” “us,” or “the
Company”), owns and operates in the media segment through its subsidiaries in
the People’s Republic of China (“PRC” or “China”) (1) a cable broadband
business, Beijing China Broadband Network Technology Co. Ltd (referred to as
Jinan Broadband) and (2) a print based media and television programming
guide publication, Shandong Lushi Media Co., Ltd. (referred to as Shandong
Media). We have also recently acquired and are developing to a
limited extent, an internet café advertising and content provider business in
China.
(1) We
provide cable and wireless broadband services, principally internet services,
Internet Protocol Point wholesale services, related network equipment rental and
sales, and fiber network construction and maintenance through its Jinan
Broadband subsidiary based in the Jinan region of China.
(2) We
operate a print based media and television programming guide publication
business through our Shandong Newspaper joint venture based in the Shandong
Province of China, effective as of July 1, 2008. The results of which
are included in our financial statements as of July 2008.
Our
subsidiary AdNet, which was acquired during the first half of 2009, holds an
Internet Content Provider (“ICP”), license with rights to provide delivery of
multimedia advertising content to internet cafés in the PRC. AdNet is
licensed to operate in 28 provinces in the PRC with servers in five data centers
including Wuhan, Wenzhou, Yantai, Yunan and with a master distribution server in
Tongshan.
|
2.
|
Summary of Significant
Accounting Policies
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of China Broadband, Inc.
and its wholly-owned subsidiaries, China Broadband Cayman, Beijing China
Broadband Network Technology Co, Ltd. (WFOE), Jinan Broadband and Shandong
Media. All material intercompany transactions and balances are
eliminated in consolidation.
Accounting
Method
The
Company's policy is to use the accrual method of accounting to prepare and
present financial statements, which conform to generally accepted accounting
principles (GAAP). The Company has elected a December 31, year-end.
Reportable
Segment
The
Company operates under one reportable business segment, media, for which segment
disclosure is consistent with the management decision-making process that
determines the allocation of resources and the measuring of
performance.
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Accounts
Receivable
Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for any uncollectible accounts. For 2009, the Company
estimated the amount of uncollectible accounts receivable to be $90,000 and
accordingly recorded a charge to bad debt expense.
Inventory
Inventories,
consisting of cables, fiber, connecting material, power supplies and spare parts
are stated at the lower of cost or market value. Cost is determined using the
weighted average method.
F-6
Marketable
Equity Securites
The
Company holds investments in certain “available-for-sale” marketable equity
securities all of which consist of the Cablecom Holdings Shares. The
Cablecom Holding Shares are classified as available-for-sale securities and are
carried at estimated fair value, based on available information. In
2008 the Company recognized an other than temporary loss of $1,797,000 in
interest and other income (expense).
During
2009 and 2008, the Company sold 236,665 and 71,880 Cablecom Holding Shares for
gross proceeds of approximately $174,000 and $361,000,
respectively. The Company recognized a net loss from the sale of
these securities of approximately $15,000 and $103,000,
respectively.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Expenditures for
major renewals and betterments, which extend the original estimated economic
useful lives or applicable assets, are capitalized. Expenditures for
normal repairs and maintenance are charged to expense as
incurred. The costs and related accumulated depreciation of assets
sold or retired are removed from the accounts, any gain or loss thereon is
reflected in operations. Depreciation is provided for on the
straight-line basis over the estimated useful lives of the respective assets
over a period of five years.
Impairment
of Long-Lived Assets
Long-lived
assets, including property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the assets.
Assets to
be disposed of are separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Intangible
Assets
The
Company follows FASB ASC 350, Intangibles-Goodwill and
Other, (ASC 350). ASC 350 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. ASC 350 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment whenever
events indicate the carrying amount may not be recoverable.
In
accordance with ASC 350, goodwill is allocated to reporting units, which are
either the operating segment or one reporting level below the operating
segment.
On an
annual basis, we must test goodwill and other indefinite life intangible assets
for impairment. To determine the fair value of these intangible
assets, there are many assumptions and estimates used that directly impact the
results of the testing. In making these assumptions and estimates, we
will use set criteria that are reviewed and approved by various levels of
management, and we will estimate the fair value of our reporting units by using
discounted cash flow analyses and other valuation methods. At
December 31, 2009 we recorded a goodwill impairment charge of $1,239,291 related
to goodwill from our AdNet Acquisition.
Income
Taxes
The
Company is subject to a 5% business tax on the business income of our Jinan
Broadband subsidiary. The Company accounts for income taxes in accordance with
the asset and liability method. Deferred taxes are recognized for the
future tax consequences attributable to temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
income tax purposes using enacted rates expected to be in effect when such
amounts are realized or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date. A tax valuation allowance is established, as needed to reduce
net deferred tax assets to the amount expected to be realized. The
Company also follows applicable guidance for accounting for uncertainty in
income taxes.
F-7
The
evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement.
Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in the provision for income taxes in our consolidated statements of
operation. The Company’s policy for recording interest and penalties associated
with audits is to record such items as a component of income tax
expense.
Revenue
Recognition
Revenue
is recorded as services are provided to customers. The Company generally
recognizes all revenues in the period in which the service is rendered, provided
that persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collection is reasonably assured. The
Company records deferred revenue for payments received from customers for the
performance of future services and recognizes the associated revenue in the
period that the services are performed. Provision for discounts and rebates to
customers and other adjustments, if any, are provided for in the same period the
related sales are recorded.
Net
Loss Per Share
Basic and
Diluted net loss per share have been computed by dividing the net loss by the
weighted average number of common shares outstanding. The assumed
exercise of dilutive warrants, less the number of treasury shares assumed to be
purchased from the proceeds of such exercises using the average market price of
the Company’s common stock during each respective period, have been excluded
from the calculation of diluted net loss per share as their effect would be
antidilutive.
Foreign
Currency Translation
The
Company’s Jinan Broadband subsidiary and Shandong Media joint venture located in
China uses its local currency (RMB) as its functional currency. Translation
adjustments are reported as other comprehensive income or expenses and
accumulated as other comprehensive income in the equity section of the balance
sheet. The financial information is translated into U.S. Dollars at prevailing
or current rates respectively, except for revenue and expenses which are
translated at average current rates during the reporting period.
Exchange
gains and losses resulting from accumulated losses are reported as a separate
component of stockholders’ equity and are included in Comprehensive
Loss.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of accounts receivable.
The
Company generally requires advance payments on the provision of internet
services. Other concentrations of credit risk are limited due to the
large customer base in Jinan, a sub-provincial city of Shandong province in the
People’s Republic of China.
Fair
value of Financial Instruments
The fair
values of accounts receivable, prepaid expenses and accounts payable and
accrued expenses are estimated to approximate the carrying values at December
31, 2009 due to the short maturities of such instruments.
Stock-Based
Compensation
The
Company awards stock options and other equity-based instruments to its
employees, directors and consultants. and (collectively “share-based
payments”). Compensation cost related to such awards is measured
based on the fair value of the instrument on the grant date and is recognized on
a straight-line basis over the requisite service period, which generally equals
the vesting period. All of the Company’s stock-based compensation is
based on grants of equity instruments and no liability awards have been
granted.
Warrant Liability
Effective
January 1,2009, we adopted the provisions of FASB ASC Topic 815,
“Derivatives and Hedging” (“ASC 815”) (previously ElTF 07-5,
“Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock”). As a result of adopting ASC 815, warrants to purchase the
Company's common stock previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment as there was a
down-round protection (full-ratchet down round protection). As a result, the
warrants are not considered indexed to the Company's own stock, and as such, all
future changes in the fair value of these warrants will be recognized currently
in earnings until such time as the warrants are exercised or
expire.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in 2008.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the manner of
presentation in the current year.
Recent Accounting
Pronouncements
ASC 105. In June
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
No. 168, The FASB
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles”,
(“SFAS No. 168”) “— a replacement of FASB Statement
No. 162. SFAS No. 168
is the new source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. This statement was incorporated into ASC 105, Generally Accepted Accounting
Principles under the new FASB codification which became effective on
July 1, 2009. The new Codification supersedes all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Company has included the references to the Codification,
as appropriate, in these consolidated financial statements. Adoption of this
statement did not have an impact on the Company’s consolidated results of
operations, cash flows or financial condition.
F-8
ASC 805. FASB
Statement No. 141(R)
Business
Combinations was issued in December
2007. This statement was incorporated into ASC 805, Business Combinations, under
the new FASB codification. ASC 805 requires that upon initially obtaining
control, an acquirer should recognize 100% of the fair values of acquired
assets, including goodwill and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100% of its target.
Additionally, contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price consideration
and transaction costs will be expensed as incurred. This statement also
modifies the recognition for pre-acquisition contingencies, such as
environmental or legal issues, restructuring plans and acquired research and
development value in purchase accounting. This statement amends ASC 740-10,
Income Taxes (“ASC
740”) to require the acquirer to recognize changes in the amount of its deferred
tax benefits that are recognizable because of a business combination either in
income from continuing operations in the period of the combination or directly
in contributed capital, depending on the circumstances. ASC 805 is effective for
fiscal years beginning after December 15, 2008. The Company adopted this
statement on January 1, 2009 and accounted for its acquisition in 2009 in
accordance with the provisions of ASC 805.
ASC 805 Update. In
February 2009, the FASB issued SFAS No. 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies,
which allows an exception to the recognition and fair value measurement
principles of ASC 805. This exception requires that acquired contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably
estimated during the allocation period. This statement update was effective for
the Company as of January 1, 2009 for all business combinations that close
on or after January 1, 2009 and it did not have an impact on the Company’s
consolidated results of operations, cash flows or financial
condition.
ASC 810. In
December 2007, the FASB issued FASB Statement No. 160, Non-controlling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51,
which is effective for fiscal years beginning after December 15,
2008. Early adoption is prohibited. SFAS No. 160 was incorporated into
ASC 810, Consolidation
(“ASC 810”) and requires companies to present minority interest
separately within the equity section of the balance sheet. The Company adopted
this statement as of January 1, 2009 and it did not have an impact on the
Company’s consolidated results of operations, cash flows or financial
condition.
ASC 855. In May
2009, the FASB issued FASB Statement No. 165, Subsequent
Events (“SFAS No. 165”).
The statement establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but prior to the issuance of
financial statements. This statement was incorporated into ASC 855, Subsequent Events (“ASC
855”). This statement was effective for interim or annual reporting periods
after June 15, 2009. ASC 855 sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements as well as the circumstances under which the entity would
recognize them and the related disclosures an entity should make. This statement
became effective for the Company’s financial statements as of June 30,
2009.
ASC 810. In June
2009, the FASB issued FASB Statement No. 167, Amendments to
FASB Interpretation No. 46 (R) (“SFAS No. 167”),
which amended the consolidation guidance for variable-interest entities. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. This
Statement is effective for financial statements issued for fiscal years periods
beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company will adopt these provisions on
January 1, 2010 and the adoption will not have an impact on the Company’s
financial statements..
ASC 275 and ASC
350. In April 2008, the FASB issued FASB Staff Position
(“FSP”) No. 142-3, Determination of
the Useful Lives of Intangible Assets, which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of an intangible asset. Under the new codification
this FSP was incorporated into two different ASC’s, ASC 275, Risks and Uncertainties (“ACS
275”) and ASC 350, Intangibles — Goodwill and Other (“ASC
350”). This interpretation was effective for financial statements issued for
fiscal years beginning after December 15, 2008 and interim periods within
those years. The Company adopted this FSP on January 1, 2009, and it did
not have a material impact on the Company’s consolidated results of operations,
cash flows or financial condition, and did not require additional disclosures
related to existing intangible assets.
F-9
ASC 820. On
February 12, 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”), which delayed the effective date of
SFAS No. 157 Fair Value
Measurements,
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008. Under
the new codification the FSP was incorporated into ASC 820, Fair Value Measurements and
Disclosures (“ASC 820”). The Company adopted this ASC update on
January 1, 2009 and it did not have a material impact on the Company’s
consolidated results of operations, cash flows or financial condition, and did
not require additional disclosures.
ASC 820. FSP 157-4,
FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB
28-1. On April 2, 2009, the FASB issued three FSPs to address
concerns about measuring the fair value of financial instruments when the
markets become inactive and quoted prices may reflect distressed transactions,
recording impairment charges on investments in debt instruments, and requiring
the disclosure of fair value of certain financial instruments in interim
financial statements. These FSP’s were incorporated into ASC 820 under the new
codification.
The first
ASC update Staff Position, FSP FAS 157-4, “Determining
Whether a Market is Not Active and a Transaction is Not Distressed”, provides additional
guidance to highlight and expand on the factors that should be considered in
estimating fair value when there has been a significant decrease in market
activity for a financial asset. This update became effective for the Company’s
financial statements as of June 30, 2009 and it did not have a
material impact on the Company’s consolidated results of operations, cash flows
or financial condition and did not require additional
disclosures.
The
second ASC update Staff Position, FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of
Other-Than-Temporary Impairments (“FSP 115-2 and
FSP 124-2”), changes the method for
determining whether an other-than-temporary impairment exists for debt
securities and the amount of an impairment charge to be recorded in earnings.
The Company adopted this update during the second quarter of 2009 and it did not
have a material impact on the Company’s consolidated results of operations, cash
flows or financial condition, and did not require additional
disclosures.
The third
ASC update, Staff Position, FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”) increases the frequency of
fair value disclosures from annual only to quarterly. All three updates are
effective for interim periods ending after June 15, 2009, with the option
to early adopt for interim periods ending after March 15, 2009. ASC update
FSP FAS 107-1 and APB 28-1 became effective for the Company’s
financial statements as of June 30, 2009.
ASC 260. In June
2008, the FASB issued FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (“FSP EITF 03-6-1”). Under the new
FASB codification this FSP was incorporated into ASC 260, Earnings Per Share (“ASC
260”). ASC 260 clarifies that unvested share-based payment awards that entitle
holders to receive non-forfeitable dividends or dividend equivalents (whether
paid or unpaid) are considered participating securities and should be included
in the computation of earnings per share (“EPS”) pursuant to the two-class
method. The Company does not currently have any share-based awards that would
qualify as participating securities. Therefore, application of this FSP will
not have an effect on the Company's financial reporting.
ASU 2009-05. The
FASB issued Accounting Standards Update (“ASU”) No. 2009-05 which provides
additional guidance on how companies should measure liabilities at fair value
and confirmed practices that have evolved when measuring fair value such as the
use of quoted prices for a liability when traded as an asset. While reaffirming
the existing definition of fair value, the ASU reintroduces the concept of entry
value into the determination of fair value. Entry value is the amount an entity
would receive to enter into an identical liability. Under the new guidance, the
fair value of a liability is not adjusted to reflect the impact of contractual
restrictions that prevent its transfer. The effective date of this ASU is the
first reporting period (including interim periods) after August 26, 2009.
Early application is permitted for financial statements for earlier periods that
have not yet been issued. The adoption of these provisions did not have an
effect on the Company’s financial reporting.
F-10
ASU 2010-06. The
FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required
for significant transfers in and out of Level 1 and Level 2 fair value
measurements, disaggregation regarding classes of assets and liabilities,
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements for Level 2 or Level 3. These
disclosures are effective for the interim and annual reporting periods beginning
after December 15, 2009. Additional new disclosures regarding the
purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The
adoption of these provisions did not have an effect on the Company’s financial
reporting.
ASU 2010-09. The
FASB issued ASU No. 2010-09 which provides amendments to certain
recognition and disclosure requirements. Previous guidance required that an
entity that is an SEC filer be required to disclose the date through which
subsequent events have been evaluated. This update amends the requirement of the
date disclosure to alleviate potential conflicts between ASC 855-10 and the
SEC’s requirements. The adoption of these provisions did not have an effect on
the Company’s financial reporting.
In May
2008, the FASB issued ASC 470-20, Debt with Conversion and Other
Options (ASC 470-20). ASC 470-20 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The FSP includes guidance that convertible debt instruments that may be settled
in cash upon conversion should be separated between the liability and equity
components, with each component being accounted for in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods.. Adoption of this statement did not have an
impact on the Company’s consolidated results of operations, cash flows or
financial condition.
Management
does not believe that any recently issued, but not yet effective, accounting
standards, if currently adopted, would have a material effect on the
accompanying financial statements.
|
3.
|
Going Concern and Management’s
Plans
|
The
Company has incurred significant losses during 2008 and 2009 and has a working
capital deficit at December 31, 2009 and has relied on debt and equity
financings to fund operations. These conditions raise susbstantial doubt
about the Company’s ability to
continue as a going concern.
The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and, accordingly, do not include any
adjustments that might result from the outcome of this uncertainty. The
Company has limited cash resources and management continues its efforts to raise
additional funds through debt or equity offerings. The Company continues to
evaluate what type of offering the Company will use, how much capital the
Company will raise and which company it will merge with or
acquire. There is no guarantee that the Company will be able to raise
any capital through any type of offerings or merge with or acquire any other
companies.
|
4.
|
Acquisition
of AdNet
|
Effective
as of April 7, 2009, China Broadband, through its wholly owned subsidiary China
Broadband, Ltd., a Cayman Islands company (“China Broadband Cayman”) completed
the acquisition (the “AdNet Acquisition”) of Wanshi Wangjing Media Technologies
(Beijing) Co., Ltd., a/k/a Adnet Media Technologies (Beijing) Co., Ltd., a
recently organized development stage PRC based company (“AdNet”) pursuant to a
Share Issuance Agreement (the “AdNet Agreement”) between the Company,
China Broadband Cayman, AdNet and its 10 shareholders (inclusive of its two
executives, Ms. Priscilla Lu and Mr. Wang Yingqinee Michael Wang).
Pursuant
to the terms of the AdNet Agreement, among other provisions, China Broadband
issued 11,254,898 shares of its common stock, par value, $.001 per share (the
“Broadband Shares”) to the AdNet shareholders, in exchange for 100% of the
equity ownership of AdNet (the “AdNet Shares”) and cash consideration of
$100,000. The acquisition of AdNet resulted in the ownership by AdNet
shareholders of 15% of China Broadband’s common stock on a fully diluted basis
(exclusive of certain notes and warrants).
F-11
The fair
value of the Broadband Shares issued in the AdNet Acquisition totaled
$1,688,235. The fair value of these shares was determined to be $.15
per share based on the sale of shares sold at $.15 per share in the private
equity transactions that occurred in the same period.
The
purchase price has been allocated to each major class of identifiable assets
acquired and liabilities assumed based upon their estimated fair values at the
date of the acquisition. The Company initially recorded a $1,900,000
intangible asset related to the AdNet Acquisition. Since then we have
completed our valuation and the following represents the allocation of the
purchase price.
|
Adnet
|
||||
|
Cash
|
$ | 17,568 | ||
|
Due
from former AdNet shareholders
|
100,000 | |||
|
Property
and equipment
|
6,986 | |||
|
Other
assets
|
18,935 | |||
|
Software
technology
|
756,969 | |||
|
Loan
payable
|
(199,358 | ) | ||
|
Accounts
payable
|
(5,478 | ) | ||
|
Accrued
expenses
|
(53,229 | ) | ||
|
Other
current liabilities
|
(4,207 | ) | ||
|
Deferred
tax liability
|
(189,242 | ) | ||
|
Net
identifiable assets and liabilities
|
$ | 448,944 | ||
|
Goodwill
|
1,239,291 | |||
|
Consideration
paid
|
$ | 1,688,235 | ||
The
purchase price allocation for acquisitions requires extensive use of accounting
estimates and judgments to allocate the purchase price to the identifiable
tangible and intangible assets acquired and liabilities assumed based on their
respective fair values.
AdNet
holds an Internet Content Provider (“ICP”) license with the rights
to provide delivery of multimedia advertising content to internet cafés in
China. AdNet is licensed to operate in 28 provinces in the PRC with
servers in five data centers including Wuhan, Wenzhou, Yantai, Yunan and with a
master distribution server in Tongshan. Due to the shift of our
business model to the PPV / VOD business, as of December 31, 2009 we temporarily
suspended day to day operations of AdNet. We have maintained our
licenses, contracts, technology and other assets for future use in our new PPV
business. Consequently, we recorded an impairment charge to goodwill
of $1,239,291.
|
5.
|
Shandong
Media Joint Venture - Cooperation Agreement and Additional
Payment
|
On March
7, 2008, through our WFOE in the PRC, we entered into a Cooperation Agreement
(the "Shandong Newspaper Cooperation Agreement") by and among our WFOE
subsidiary, Shandong Broadcast & TV Weekly Press and Modern Movie & TV
Biweekly Press, each PRC companies (collectively "Shandong
Newspaper"). The Shandong Newspaper Cooperation Agreement provided
for, among other terms, the creation of a joint venture entity in the PRC,
Shandong Lushi Media Co., Ltd. (referred to herein as "Shandong Media") that
would own and operate Shandong Newspaper's television program guide, newspaper
and magazine publishing business in the Shandong region of the PRC (the
"Shandong Newspaper Business") which businesses were previously owned and
operated by the Shandong Newspaper entities pursuant to exclusive
licenses.
Under the
terms of the Shandong Newspaper Cooperation Agreement and related pledge and
trust documents, the Shandong Newspaper entities mentioned above contributed
their entire Shandong Newspaper Business and transferred certain employees, to
Shandong Media in exchange for a 50% stake in Shandong Media, with the other 50%
of Shandong Media to be owned by our WFOE in the PRC in the second quarter of
2008 with the joint venture becoming operational in July of 2008. In
exchange therefore, the Cooperation Agreement provided for total initial
consideration from us of approximately $1.5 million (approximately 10 million
RMB) which was contributed to Shandong Media as working and acquisition
capital. As part of the transaction, and to facilitate our
subsidiary’s ownership and control over Shandong Newspaper under PRC law,
through our WFOE in the PRC, we loaned Shandong Media said funds pursuant to a
loan agreement and equity option agreement, and a majority of the shares of
Shandong Newspaper are held on our behalf by Pu Yue, our CFO, as trustee on
behalf of the Company pursuant to a pledge agreement and trustee
agreement. The results of the Shandong Newspaper Business have been
consolidated with the Company’s consolidated financial statements as of July 1,
2008.
F-12
Based on
certain financial performance we were required to make an additional payment of
5 million RMB (approximately US $730,000). In 2008 we recorded the
additional payment due as an increase to our Shandong noncontrolling
interest account. The due date of the additional payment has been
extended to May 31, 2010.
In order
to facilitate the transfer of equitable ownership and control of Shandong Media,
this acquisition was completed in accordance with a pledge and loan agreement,
pursuant to which all of the shares of Shandong Media which we acquired are held
in trust on our behalf by Pu Yue, our CFO as nominee holder, as security for a
loan to Shandong Media’s parent seller.
Financial
accounting standards require the “primary beneficiary” of a VIE to include the
VIE’s assets, liabilities and operating results in its consolidated financial
statements. In general, a VIE is a corporation, partnership,
limited-liability company, trust or any other legal structure used to conduct
activities or hold assets that either (a) has an insufficient amount of equity
to carry out its principal activities without additional subordinated financial
support, (b) has a group of equity owners that are unable to make significant
decisions about its activities, or (c) has a group of equity owners that do not
have the obligation to absorb losses or the right to receive returns generated
by its operations.
Our
consolidated VIEs were recorded at fair value on the date we became the primary
beneficiary. Our VIEs at December 31, 2009 include Jinan Broadband
and Shandong Media.
|
7.
|
Fair
Value Measurements
|
Accounting
standards require the categorization of financial assets and liabilities, based
on the inputs to the valuation technique, into a three-level fair value
hierarchy. The various levels of the fair value hierarchy are described as
follows:
|
|
·
|
Level 1 —
Financial assets and liabilities whose values are based on unadjusted
quoted market prices for identical assets and liabilities in an active
market that we have the ability to
access.
|
|
|
·
|
Level 2 —
Financial assets and liabilities whose values are based on quoted prices
in markets that are not active or model inputs that are observable for
substantially the full term of the asset or
liability
|
|
|
·
|
Level 3 —
Financial assets and liabilities whose values are based on prices or
valuation techniques that require inputs that are both unobservable and
significant to the overall fair value
measurement.
|
Accounting
standards require the use of observable market data, when available, in making
fair value measurements. When inputs used to measure fair value fall within
different levels of the hierarchy, the level within which the fair value
measurement is categorized is based on the lowest level input that is
significant to the fair value measurement.
The
following table presents the fair value hierarchy for those assets and
liabilities measured at fair value on a recurring basis as of December
31:
F-13
|
2009
|
||||||||||||||||
|
Fair Value Measurements
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total Fair Value
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 47,244 | $ | - | $ | - | $ | 47,244 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Fair
value of warrants
|
$ | - | $ | - | $ | 819,150 | $ | 819,150 | ||||||||
|
2008
|
||||||||||||||||
|
Fair Value Measurements
|
||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total Fair Value
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Available-for-sale
securities
|
$ | 254,496 | $ | - | $ | - | $ | 254,496 | ||||||||
|
8.
|
Related
Party Transactions
|
Loan
Receivable
During
2009, the Company advanced and aggregate of approximately $290,000 in the form
of a loan to Music Magazine to fund its operations. The loan is
unsecured, interest free and is due on December 31, 2010. Music
Magazine is related through Modern Movie Times Magazine.
Amounts
due from Shareholders
Amounts
due from shareholders include $109,000 advanced to Shandong Broadcast & TV
Weekly Press and $60,000 advanced to Modern Movie & TV Biweekly
Press. Both companies are our partners in our Shandong Media joint venture
company. The amount due from Shandong Broadcast & TV Weekly Press
is unsecured, interest free and has no fixed repayment terms. The
amount due from Modern Movie & TV Biweekly Press is unsecured, interest free
and is due on December 31, 2010. During the year ended December 31,
2009, we advanced approximately $650,000 to these companies and also received
repayments of $481,000.
Payable
to Jinan Parent
During
the fiscal year ended 2009, Jinan Broadband paid $2,643,000 to Jinan
Parent. At December 31, 2009, $152,000 remains due to Jinan
Parent. This amount represents the remaining balance due from the
initial acquisition which is unsecured, interest free and has no fixed repayment
terms.
|
9.
|
Property and
Equipment
|
Property and equipment at December 31, 2009 and
2008 consisted of the
following:
|
2009
|
2008
|
|||||||
|
Furniture
and office equipment
|
$ | 984,000 | $ | 835,000 | ||||
|
Headend
facilities and machinery
|
14,172,000 | 13,177,000 | ||||||
|
Vehicles
|
30,000 | 27,000 | ||||||
|
Total
property and equipment
|
15,186,000 | 14,039,000 | ||||||
|
Less:
accumulated depreciation
|
(7,823,000 | ) | (4,740,000 | ) | ||||
|
Net
carrying value
|
$ | 7,363,000 | $ | 9,299,000 | ||||
|
Depreciation
expense
|
$ | 3,068,000 | $ | 2,800,000 | ||||
|
10.
|
Goodwill
and Other Intangible Assets
|
In the
fourth quarter of 2009 the Company decreased the value of our intangible assets
by reclassifying approximately $279,000 from noncontrolling
interest. The reclassification was made to correct an error related
to the valuation of our Shandong Media intangibles which includes our
publication rights, operating permits and customer relationships. The
Company assessed the impact of this adjustment on the current year and all prior
periods and determined that the effect of this adjustment was not material to
the full year 2009 results and did not result in a material misstatement to any
previously issued annual or quarterly financial statements.
F-14
In 2008
we made an adjustment to the original purchase price allocation of our Jinan
service agreement which was permitted under ASC 805, to adjust the deferred
taxes related to the service agreement for approximately $324,000.
The
Company amortizes its service agreement, publication rights, operating permits,
customer relationships and software technology that have finite
lives. Our service agreement, publication rights and operating
permits are amortized over 20 years. Customer relationships are
amortized over 10 years and our software technology is amortized over 3
years.
We have
intangible assets relating to the acquisition of our Jinan Broadband subsidiary,
Shandong Media joint venture and AdNet Media acquisition.
|
Balance at
|
Amortizaton /
|
Balance at
|
||||||||||||||||||
|
December 31,
|
Impairment
|
Other
|
December 31,
|
|||||||||||||||||
|
2008
|
Additions
|
Charge
|
Changes
|
2009
|
||||||||||||||||
|
Amortized
intangible assets:
|
||||||||||||||||||||
|
Service
agreement
|
$ | 1,570,482 | $ | - | $ | (86,720 | ) | $ | - | $ | 1,483,762 | |||||||||
|
Publication
rights
|
968,977 | - | (42,250 | ) | (101,915 | ) | 824,812 | |||||||||||||
|
Customer
relationships
|
228,933 | - | (20,491 | ) | (24,712 | ) | 183,730 | |||||||||||||
|
Operating
permits
|
1,450,366 | - | (63,236 | ) | (152,547 | ) | 1,234,583 | |||||||||||||
|
Software
technology
|
- | 756,969 | (189,242 | ) | - | 567,727 | ||||||||||||||
|
Total
amortized intangible assets
|
$ | 4,218,758 | $ | 756,969 | $ | (401,939 | ) | $ | (279,174 | ) | $ | 4,294,614 | ||||||||
|
Unamortized
intangible assets:
|
||||||||||||||||||||
|
Goodwill
|
$ | - | $ | 1,239,291 | $ | (1,239,291 | ) | $ | - | $ | - | |||||||||
|
Balance at
|
Amortizaton /
|
Balance at
|
||||||||||||||||||
|
December 31,
|
Impairment
|
Other
|
December 31,
|
|||||||||||||||||
|
2007
|
Additions
|
Charge
|
Changes
|
2008
|
||||||||||||||||
|
Amortized
intangible assets:
|
||||||||||||||||||||
|
Service
agreement
|
$ | 1,981,307 | $ | - | $ | (86,719 | ) | $ | (324,106 | ) | $ | 1,570,482 | ||||||||
|
Publication
rights
|
- | 993,823 | (24,846 | ) | - | 968,977 | ||||||||||||||
|
Customer
relationships
|
- | 240,982 | (12,049 | ) | - | 228,933 | ||||||||||||||
|
Operating
permits
|
- | 1,487,555 | (37,189 | ) | - | 1,450,366 | ||||||||||||||
|
Total
amortized intangible assets
|
$ | 1,981,307 | $ | 2,722,360 | $ | (160,803 | ) | $ | (324,106 | ) | $ | 4,218,758 | ||||||||
In
accordance with ASC 250, we recorded amortization expense of approximately
$402,000 in 2009. In 2008, we recorded amortization expense of
approximately $161,000 related to our intangible assets.
The
following table outlines the amortization expense for the next five years and
thereafter:
|
Jinan
|
Shandong
|
AdNet
|
||||||||||||||
|
Broadband
|
Media
|
Media
|
Total
|
|||||||||||||
|
2010
|
$ | 86,720 | $ | 132,934 | $ | 252,323 | $ | 471,977 | ||||||||
|
2011
|
86,720 | 132,934 | 252,323 | 471,977 | ||||||||||||
|
2012
|
86,720 | 132,934 | 63,081 | 282,735 | ||||||||||||
|
2013
|
86,720 | 132,934 | - | 219,654 | ||||||||||||
|
2014
|
86,720 | 132,934 | - | 219,654 | ||||||||||||
|
Thereafter
|
1,050,161 | 1,578,455 | - | 2,628,616 | ||||||||||||
|
Total
amortization to be recognized
|
$ | 1,483,762 | $ | 2,243,125 | $ | 567,727 | $ | 4,294,614 | ||||||||
The
Company initially recorded a $1,900,000 intangible asset related to the AdNet
Acquisition. After completion of our purchase accounting for the
AdNet acquisition, we recorded $1,239,291 to goodwill and $756,969 to software
technology. For reasons noted in footnote 4 above, we recorded an
impairment charge to goodwill of $1,239,291 as of December 31,
2009.
|
11.
|
Accrued
Expenses
|
Accrued
expenses at December 31, 2009 and 2008 consist of the following:
|
2009
|
2008
|
|||||||
|
Accrued
expenses
|
$ | 1,053,000 | $ | 543,000 | ||||
|
Accrued
payroll
|
786,000 | 393,000 | ||||||
| $ | 1,839,000 | $ | 936,000 | |||||
|
12.
|
Private
Financings, June 2009
|
During
the year ended December 31, 2009, we completed a private placement transaction
and sold 5% Convertible Promissory Notes, or the 2009 Notes, for gross proceeds
of approximately $305,000 and an aggregate of 2,000,000 shares of our common
stock at a purchase price of $.15 per share, for aggregate proceeds of $300,000.
The Notes accrue interest at 5% per year payable quarterly in cash or stock, are
initially convertible at $.20 per share, and become due and payable in full on
May 27, 2010. The Company did not pay any placement agent or similar
fees in connection with the Note Offering.
F-15
In
connection with the 2009 private placement, we entered into a waiver letter with
all the holders of January 2008 Notes, pursuant to which, among other things,
the conversion price of the January 2008 Notes were reduced from $.75 per share
to (i) $.20 per share for existing note holders that invested in the 2009
private placement and (ii) $.25 per share for those that did not
participate. All of the existing note holders waived certain anti
dilution adjustments contained in the January 2008 Notes and the Class A
Warrants in exchange for the above changes.
|
13.
|
Convertible
Notes, January 2008
|
On
January 11, 2008, we completed a private placement transaction and sold an
aggregate of $4,971,250 principal amount of notes due January 11, 2013, or the
January 2008 Notes, and Class A Warrants to purchase an aggregate of 6,628,333
shares of our common stock, at $.60 per share and expiring on June 11,
2013. The conversion price of these January 2008 Notes was originally
$.75 per share and, in June of 2009 in connection with a subsequent financing
with these investors, reduced to $.20 per share (see “Private Financings; June
2009 – Waiver Letters” above). One investor had his conversion price
reduced to $.25 per share. We recorded a $504,661 original issue
discount related to the Notes. We calculate the interest at 5%
annually and issued shares for interest payments on a quarterly
basis. We recorded amortization of original issue discount as
interest expense of $100,879 and $97,838 for the years ended December 31, 2009
and 2008, respectively.
The
convertible notes due are as follows at Decmeber 31:
|
2009
|
2008
|
|||||||
|
Convertible
notes
|
$ | 4,971,250 | $ | 4,971,250 | ||||
|
Less: Original
issue discount
|
(305,944 | ) | (406,823 | ) | ||||
| $ | 4,665,306 | $ | 4,564,427 |
|
14.
|
Warrant
Liability
|
In June
2008, the FASB issued authoritative guidance on determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock. Under the
authoritative guidance, effective January 1, 2009, instruments which do not have
fixed settlement provisions are deemed to be derivative instruments. Certain
issued by the Company , do not have fixed settlement provisions because their
exercise prices may be lowered if the Company issues securities at lower prices
in the future. The Company was required to include the reset provisions in order
to protect the holders from potential dilution associated with future
financings. The warrants have been characterized as derivative liabilities to be
re-measured at the end of every reporting period with the change in value
reported in the statement of operations.
The
derivative liabilities were valued using The Black-ScholesMerton model which
incorporates the following assumptions:
|
December
31,
|
January
1,
|
|||||||
|
2009
|
2009
|
|||||||
|
Risk-free
interest rate
|
1.50 | % | 1.30 | % | ||||
|
Expected
volatility
|
309.62 | % | 311.69 | % | ||||
|
Expected
life (in years)
|
3.4
years
|
4.4
years
|
||||||
|
Expected
dividend yield
|
0
|
0
|
||||||
The FASB
authoritative guidance was adopted as of January 2009 and is reported as a
cumulative change in accounting principles. The cumulative effect on the
accounting for the warrants at January 1, 2009 was as follows:
|
Additional
|
Accumulated
|
Derivative
|
||||||||||
|
Paid-in
Capital
|
Deficit
|
Liability
|
||||||||||
|
Warrants
|
$ | (731,496 | ) | $ | (424,373 | ) | $ | 307,123 | ||||
The
warrants were originally recorded at their relative fair value as an increase in
additional paid-in capital. The decrease in the accumulated deficit includes
gains resulting from decreases in the fair value of the derivative liabilities
through December 31, 2008. The derivative liability amount reflects the fair
value of the derivative instrument from issuance date as of the January 1, 2009
date of implementation.
F-16
|
15.
|
Net
Loss Per Common Share
|
Basic net
loss per common share is calculated by dividing the net loss by the weighted
average number of outstanding common shares during the period. Diluted net loss
per common share includes the weighted average dilutive effect of stock options
and warrants.
Potential
common shares outstanding as of December 31, 2009 and 2008:
|
Warrants
|
16,874,800
|
|||
|
Options
|
317,500
|
For the
year ended December 31, 2009 and 2008, the number of securities not included in
the diluted EPS because the effect would have been anti-dilutive was
17,192,300.
|
16.
|
Comprehensive
Income/(Loss)
|
Comprehensive
income/(loss) consists of the following:
|
2009
|
2008
|
|||||||
|
Net
loss attributable to shareholders
|
$ | (5,439,125 | ) | $ | (3,354,865 | ) | ||
|
Other
comprehensive income (loss):
|
||||||||
|
Foreign
currency translation adjustment
|
28,345 | (10,906 | ) | |||||
|
Unrealized
loss on marketable equity securities
|
(17,920 | ) | - | |||||
|
Comprehensive
loss
|
$ | (5,428,700 | ) | $ | (3,365,771 | ) | ||
|
17.
|
Settlement
Agreement
|
On
January 11, 2008, the Company entered into a Settlement Agreement (the
“Settlement Agreement”) by and among the Company and its subsidiaries, Stephen
P. Cherner, Maxim Financial Corporation, Mark L. Baum, BCGU, LLC, Mark I. Lev,
Wellfleet Partners, Inc., Pu Yue, Clive Ng, Chardan Capital Markets, LLC, Jaguar
Acquisition Corporation, and China Cablecom Holdings, Ltd, pursuant to which the
parties released certain potential claims against one another.
The
following represents the details of the net gain the Company recognized as a
result of the Settlement Agreement during the fiscal year ended December 31,
2008 which is classified within “Interest and other income (expense)”
in the accompaning Statement of Operations:
| $ | 2,515,500 | |||
|
Waiver
of accrued compensation
|
212,054 | |||
|
Warrant
extensions
|
(1,426,862 | ) | ||
|
Net
gain
|
$ | 1,300,692 |
|
18.
|
Interest
Expense and Share Issuance
|
In
connection with the Convertible Notes issued in January 2008 and June 2009 as
described above in Notes 12 and 13, during the fiscal years ended December 31,
2009 and 2008 the Company incurred $362,000 and $346,000 in interest expense
related to these Notes and Warrants, respectively.
As set
forth in the related documents and with the consent of the Note holders, we
issued 921,040 and 329,856 shares to the Note holders in lieu of cash of
approximately $260,000 and $247,000 for interest in the fiscal years ended
December 31, 2009 and 2008, respectively.
F-17
|
19.
|
Stock
Based Compensation
|
In March
2008, the board of directors of the company approved the China Broadband, Inc.
2008 Stock Incentive Plan (the “Plan”), pursuant to which options or other
similar securities may be granted. Qualified or Non-qualified Options to
purchase up to 2,500,000 shares of the Company’s common stock may be issued
under the Plan. The Plan may also be administered by an independent committee of
the board of directors. Through December 31, 2009, 317,500 options
have been issued under the plan and 2,182,500 shares remain available to be
issued.
The
following table provides the details of the total stock based compensation for
the fiscal years ended December 31, 2009 and 2008:
|
Year
Ended
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Stock
option amortization
|
$ | 33,656 | $ | 44,898 | ||||
| Warrant amortization | - | 14,198 | ||||||
| Stock issued in lieu of interest | 260,558 | 247,391 | ||||||
|
Stock
issued as nonregistration penalty
|
- | 12,125 | ||||||
| $ | 294,214 | $ | 318,612 | |||||
The
Company accounts for its stock option awards pursuant to the provisions of ASC
718, Stock
Compensation.
|
|
·
|
Expected
volatility - the Company estimates the volatility of common stock at the
date of grant using historical
volatility.
|
|
|
·
|
Expected
term - the Company estimates the expected term of options granted based on
a combination of vesting schedules, term of the option and historical
experience.
|
|
|
·
|
Risk-free
interest rate - the Company estimates the risk-free interest rate using
the U.S. Treasury yield curve for periods equal to the expected term of
the options in effect at the time of
grant.
|
|
|
·
|
Dividends
- the Company uses an expected dividend yield of zero. The
Company intends to retain any earnings to fund future operations and,
therefore, does not anticipate paying any cash dividends in the
foreseeable future.
|
The following table outlines the assumptions used in the
Black-Scholes option-pricing model for the year ended December 31, 2008:
|
2008
|
||||
|
Risk
free interest rate
|
3.53 | % | ||
|
Volatility
|
188.76 | % | ||
|
Dividend
yield
|
- | |||
|
Expected
option life
|
4
years
|
|||
We issued
317,500 stock options in 2008 and no stock options were issued in
2009. As of December 31, 2009, there were 317,500 options outstanding
with 230,000 options exercisable at a weighted average exercise price of $0.61
with a weighted average remaining life of 5.0 years.
As of
December 31, 2009 the Company had total unrecognized compensation expense
related to options granted of $35,000 which will be recognized over a remaining
service period of 2 years.
|
20.
|
Warrants
|
In
connection with the Company’s Share Exchange, capital raising efforts in 2007
and the Company’s January 2008 Financing of Convertible Notes and Class A
Warrants, the Company issued warrants to investors and service providers to
purchase common stock of the Company. The following table outlines
the warrants outstanding as of December 31, 2009 and 2008:
|
Number
of
|
|||||||||
|
Warrants
|
Exercise
|
Expiration
|
|||||||
|
Name
|
Issued
|
Price
|
Date
|
||||||
|
Share
Exchange Consulting Warrants
|
4,474,800 | $ | 0.60 |
1/11/2013
|
|||||
|
2007
Private Placement Broker Warrants
|
640,000 | $ | 0.60 |
1/11/2013
|
|||||
|
2007
Private Placement Investor Warrants
|
4,000,000 | $ | 2.00 |
1/11/2013
|
|||||
|
January
2008 Financing Class A Warrants
|
6,628,333 | $ | 0.60 |
6/11/2013
|
|||||
|
January
2008 Financing Broker Warrants
|
1,131,667 | $ | 0.50 |
6/11/2013
|
|||||
| 16,874,800 | |||||||||
F-18
|
21.
|
Income
Taxes
|
Deferred
taxes are recognized for the future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and income tax purposes using enacted rates expected to be in
effect when such amounts are realized or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. The income tax benefit for the
years ended December 31, 2009 and 2008 results from changes in calculated
deferred taxes, particularly liabilities associated with intangible
assets. Deferred tax assets associated with net operating losses have
a full valuation allowance recorded against them.
The
Company’s current management does not believe that China Broadband, Inc. has
filed United States corporate income tax returns for several years prior to the
January 23, 2007 merger transaction and accompanying change in management.
Management believes that because of the lack of taxable income there will be no
material penalties resulting from any previous non-compliance.
Management
believes that it has $6,706,453 of pre-exchange transaction net operating loss
carryovers that expire in various years through 2025. Since
Management has not been able to determine whether income tax returns were filed
prior to the January 23, 2007 merger transaction and may not be able to recreate
the records to file them if they have not they may be unable to claim the net
operating loss carryovers. In addition, even if the net operating
loss carryovers were to be properly established, the future use of any
pre-exchange transaction net operating loss carryovers will be significantly
limited under section 382 of the internal revenue code because of the change of
control in January 2007 as well as by previous changes in the control of the
Corporate entity. The extent of these limitations has not yet been
determined.
As of
December 31, 2009 the Company has available additional U.S. net operating loss
carryovers of $1,439,883 which equals $3,168,207 shown on the tax returns less
$1,728,324 resulting from the nonrecognition for financial reporting purposes of
the tax benefits of certain a tax position taken by the Company because of the
uncertainty of the position being sustained. The net operating loss carryovers
expire in the years 2027 through 2029. The nonrecognition of the tax benefits,
while reducing the net operating loss carryovers, gives rise to a capital loss
carryover of $1,255,495 and an AMT credit of $17,602. Jinan
Broadband, Shandong Media and AdNet Media have the following estimated Chinese
net operating loss carryovers at December 31, 2009 with the expiration dates as
shown:
|
Jinan
|
Shandong
|
AdNet
|
||||||||||||||
|
Expiring
|
Broadband
|
Media
|
Media
|
Total
|
||||||||||||
|
2012
|
$ | 373,572 | $ | - | $ | - | $ | 373,572 | ||||||||
|
2013
|
406,885 | 86,199 | - | 493,084 | ||||||||||||
|
2014
|
1,087,565 | 174,576 | 423,319 | 1,685,460 | ||||||||||||
| $ | 1,868,022 | $ | 260,775 | $ | 423,319 | $ | 2,552,116 | |||||||||
The
estimation of the income tax effect of any future repatriation of the Company’s
51% share of any profits generated by its interests in Jinan Broadband, Shandong
Media and AdNet is not practicable. This is because it may involve
additional Chinese taxation on the distributions, or sale proceeds, to the
extent that they are in excess of the investments made, but with credits for
some or all of the Chinese taxes against U.S. taxes, plus the utilization of
operating losses of the WFOE. All of the foregoing would be subject
to various tax-planning strategies.
F-19
China
Broadband Ltd. is not subject to Cayman Islands taxation.
The
Company has not recognized deferred tax assets relating to the excess of its
income tax bases in its non-U.S. subsidiaries over their financial statement
carrying value because the Company expects to hold the investments and reinvest
future earnings indefinitely.
The
Company’s income tax benefit for the year ended December 31, 2009 consisted
entirely of foreign deferred taxes arising from net operating loss
carryforwards.
The
Company’s United States income tax returns are subject to examination by the
Internal Revenue Service (“IRS”) for at least 2006 and later years. Because of
the uncertainty regarding the filing of tax returns for earlier years it is
possible that the Company is subject to examination by the IRS for earlier
years. All of the Chinese tax returns for the Chinese operating companies are
subject to examination by the Chinese tax authorities for all periods from the
companies’ inceptions in 2007, 2008 and 2009 as applicable.
The
following is a reconciliation of the beginning and ending amounts of
unrecognized tax benefits:
|
Balance,
beginnning of year
|
$ | - | ||
|
Increase
from prior years' tax positions
|
18,577 | |||
|
Balance,
end of year
|
$ | 18,577 |
The
Company's deferred tax assets and liabilities at December 31, 2009 and 2008
consisted of:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets
|
||||||||
|
U.S.
NOL - pre-stock exchange transaction
|
$ | 2,280,194 | $ | 2,280,194 | ||||
|
U.S.
NOL - subsequent to stock exchange transaction
|
489,560 | 510,082 | ||||||
|
Foreign
NOL
|
674,694 | 219,379 | ||||||
|
Deferred
revenue
|
393,114 | 345,526 | ||||||
|
Fixed
assets cost basis
|
613,727 | 409,876 | ||||||
|
Accrued
payroll
|
259,596 | 133,716 | ||||||
|
Nonqualified
options
|
9,214 | - | ||||||
|
Marketable
securities
|
144,705 | - | ||||||
|
AMT
credit
|
17,952 | - | ||||||
|
Capital
loss carryover
|
426,855 | - | ||||||
|
Total
deferred tax assets
|
5,309,611 | 3,898,773 | ||||||
|
Less: valuation
allowance
|
(4,912,026 | ) | (3,649,485 | ) | ||||
|
Deferred
tax liability - intangible assets
|
(1,115,212 | ) | (1,039,905 | ) | ||||
|
Net
deferred tax liability
|
$ | (717,627 | ) | $ | (790,617 | ) | ||
The
deferred tax valuation allowance increased $1,262,541 and $899, 352 during the
years ended December 31, 2009 and 2008, respectively.
A
reconciliation of the expected income tax derived by the application of the 34%
U.S. corporate income tax rate to the Company's loss before income tax benefit
is as follows:
|
2009
|
2008
|
|||||||
|
Net
loss before income taxes
|
$ | (6,785,536 | ) | $ | 3,870,498 | |||
|
Expected
income tax benefit at 34%
|
(2,307,082 | ) | (1,315,973 | ) | ||||
|
Nondeductible
expenses
|
651,508 | 273 | ||||||
|
Rate-differential
on foreign income invested indefinitely
|
316,498 | 135,132 | ||||||
|
WFOE
NOL not recognized for indefinite reversal
|
9,741 | 12,681 | ||||||
|
Depreciation
of fixed assets and amortization of intangible assets
|
- | 123,779 | ||||||
|
Deferred
revenue
|
- | (345,526 | ) | |||||
|
Stock
options and warrants
|
- | (26,830 | ) | |||||
|
Write-down
in value of available for sale securities
|
- | 611,109 | ||||||
|
Increase
in valuation allowance
|
1,262,541 | 899,352 | ||||||
|
Change
in estimates
|
(195,438 | ) | - | |||||
|
Unrecognized
tax benefits
|
18,577 | - | ||||||
|
Income
tax expense (benefit)
|
$ | (243,655 | ) | $ | 93,997 | |||
|
22.
|
Reclassifications
|
Certain
prior year information has been reclassified to be comparable with the current
year presentation, principally due to the adoption of ASC 810, Consolidation.
In
presenting the Company’s consolidated balance sheet at December 31, 2008, and
statement of cash flows for the year ended December 31, 2008, the Company
presented $268,449 loan receivable from related party and $64,394 amounts due
from shareholders as other long term assets and $242,155 as operating cash
flows. In presenting the Company’s consolidated balance sheet at
December 31, 2009, and statement of cash flows for the year ended December 31,
2009, the Company has reclassified the loan receivable from related party and
amounts due from shareholders as current assets and their cash flows as
investing cash flows in the accompanying December 31, 2009 financial
statements.
|
23.
|
Non-Controlling
Interests
|
In
December 2007, the FASB issued authoritative guidance which establishes
reporting standards that require companies to more clearly identify in the
financial statements and disclose the impact of noncontrolling interests in a
consolidated subsidiary on the consolidated financial
statements. Noncontrolling interests are now classified as equity in
the financial statements. The consolidated income statement is presented by
requiring net income to include net income for both the parent and the
noncontrolling interests, with disclosure of both amounts on the consolidated
statements of income. The calculation of earnings per share continues
to be based on income amounts attributable to the parent. Prior
period amounts related to noncontrolling interests have been reclassified to
conform to the current period presentation. The Company adopted this
guidance on January 1, 2009.
F-20
|
24.
|
Subsequent
Events
|
On March
9, 2010, China Broadband Cayman entered into a note purchase agreement and a
non-binding Letter of Intent, or the LOI with Sinotop Group Ltd., a Hong Kong
corporation, or Sinotop Hong Kong. Through a series of contractual
arrangements referred to herein as “VIE Contracts”, Sinotop Hong Kong
controls Beijing Sino Top Scope Technology Co., Ltd., or Sinotop
Beijing. Sinotop Beijing, a corporation established in the PRC is, in
turn, a party to a joint venture with two other PRC companies to
provide integrated value-added service solutions for the delivery of
pay-per-view (“PPV”), video-on-demand (“VOD”), and enhanced premium content for
cable providers.
The LOI
summarizes the proposed terms of the acquisition by CB Cayman of 100% of the
outstanding capital stock of Sinotop Hong Kong from its sole stockholder in
consideration for a percentage of China Broadband to be determined in the
definitive agreement. Among other customary closing conditions, the
acquisition is contingent upon the (1) the drafting and negotiation of
definitive agreements that cover the matters discussed in the LOI, (2) the
funding of the Note (as defined below), which has already occurred, (3) the
contribution by CB Cayman of at least $5,000,000 to the capital of Sinotop Hong
Kong (or the purchase by CB Cayman of newly issued shares of Sinotop Hong Kong
in consideration for the same amount), and (4) the absence of any debts,
obligations or encumbrances on the equity or assets of Sinotop Hong Kong and the
WFOE other than the Note and the VIE Contracts. The LOI contains a
binding exclusivity provision that prohibits Sinotop Hong Kong and Sinotop Hong
Kong’s sole stockholder from soliciting, initiating, entertaining, participating
in any discussions or negotiations concerning, or making or accepting any offer
or proposed transaction with any third party with regard to, any of the
transactions contemplated by the LOI or any similar
transaction. This transaction has not been consummated
yet and we are dependent on our ability to raise capital in order to complete
this transaction.
Pursuant
to the Note Purchase Agreement, on March 9, 2010, CB Cayman acquired a
Convertible Promissory Note, or Note from Sinotop Hong Kong in consideration of
CB Cayman’s loan to Sinotop Hong Kong under the Note in the amount of $580,000
as contemplated by the LOI.
The Note
accrues interest at a simple annual rate of 5% and is due on the date, or the
Maturity Date that is the earlier of the fifth anniversary of the
date of issuance of the Note or the day following a change of control (as
described in the Note). The outstanding principal amount of the Note
along with all accrued interest is convertible into common shares of Sinotop
Hong Kong upon the occurrence of (1) Sinotop Hong Kong consummating a financing
transaction, or Financing, resulting in aggregate gross proceeds of at least $1
million, in which case the Note would automatically be converted into ordinary
shares of Sinotop Hong Kong at a price equal to 70% of the price per share paid
by investors in such Financing, or (2) a change of control of Sinotop Hong Kong
(as described in the Note), in which case the Note would automatically be
converted into ordinary shares that represent 50% of the issued and outstanding
capital stock of Sinotop Hong Kong. The outstanding principal amount
of the Note and all accrued interest thereon may also be converted at the option
of CB Cayman at any time after the Maturity Date or an event of default into
ordinary shares of Sinotop Hong Kong representing 50% of the issued and
outstanding voting capital stock of Sinotop Hong Kong. The Note may
not be prepaid prior to the Maturity Date without the consent of the holder of
the Note. The Note contains customary events of default.
F-21
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
2.1
|
Share
Exchange Agreement, dated as of January 23, 2007, by and among the
Company, China Broadband, Ltd. and its shareholders. [incorporated by
reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-KSB
filed May 25, 2007]
|
|
|
3.1
|
Articles
of Incorporation of the Company, as amended to date.*
|
|
|
3.2
|
Bylaws
of the Company, as amended to date.*
|
|
|
4.1
|
Form
of Note Purchase Agreement, dated June 30, 2009, among the Company and
certain investors. [Incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
4.2
|
Form
of 5% Convertible Promissory Note, issued as of June 30, 2009.
[Incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed on July 6, 2009]
|
|
|
4.3
|
Form
of 5% Convertible Promissory Note, issued as of January 11, 2008.
[Incorporated by reference to Exhibit 4.2 to the Company’s Current Report
on Form 8-K filed on January 17, 2008]
|
|
|
4.4
|
Form
of Class A Warrant, issued as of January 11, 2008. [Incorporated by
reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K
filed on January 17, 2008]
|
|
|
4.5
|
Form
of Broker’s Common Stock Warrant, issued as of January 11, 2008.
[Incorporated by reference to Exhibit 10.6 to the Company’s Current Report
on Form 8-K filed on January 17, 2008]
|
|
|
4.6
|
Form
of Warrant Amendment, dated March 2008 [Incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 8,
2008]
|
|
|
4.7
|
Form
of 7% Convertible Promissory Note issued by China Broadband, Ltd. and
assumed by the Company. [incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
4.8
|
Form
of Warrant, issued as of January 23, 2007. [incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
4.9
|
Form
of Warrant, issued as of January 23, 2007 to Maxim Financial Corporation.
[incorporated by reference to Exhibit 10.5 to the Company’s Current Report
on Form 8-K filed March 20, 2007]
|
|
|
4.10
|
Form
of Warrant, issued as of January 23, 2007 to BCGU, LLC. [incorporated by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-KSB
filed May 25, 2007]
|
|
|
4.11
|
Form
of Registration Rights Agreement, dated as of January 23, 2007
[incorporated by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed March 20, 2007]
|
|
|
10.1
|
Form
of Stock Purchase Agreement, dated as of June 30, 2009, among the Company
and certain investors [Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
10.2
|
Form
of Waiver Letter, dated as of June 30, 2009, between the Company and
certain existing note holders [Incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on July 6,
2009]
|
|
|
10.3
|
Form
of Subscription Agreement, dated as of January 11, 2008, between the
Company and certain investors. [Incorporated by reference to Exhibit 4.1
to the Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.4
|
Form
of Funds Escrow Agreement, dated January 11, 2008, by and among the
Company, Grushko and Mittman, P.C., and
investors. [Incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.5
|
Settlement
Agreement, dated January 11, 2008, by and among the Company, China
Broadband Ltd., Stephen Cherner, Maxim Financial Corporation, Mark L.
Baum, BCGU, LLC, Mark I Lev, Wellfleet Partners, Inc., Pu Yue, Clive Ng,
Chardan Capital Markets, LLC, Jaguar Acquisition Corporation, and China
Cablecom Holdings, Ltd. [Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
Exhibit
No.
|
Description
|
|
|
10.6
|
Form
of Subscription and Release Agreement, dated March 2008 [Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on May 8, 2008]
|
|
|
10.7
|
Form
of Release Agreement, dated March 2008 [Incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 8,
2008]
|
|
|
10.8
|
Form
of Subscription Agreement, dated January 23, 2007, by and among the
Company and certain investors. [incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed March 20,
2007]
|
|
|
10.9
|
Cooperation
Agreement dated as of December 26, 2006 between China Broadband, Ltd. and
Jianan Guangdian Jiahe Digital Television Co., Ltd. [incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 20, 2007]
|
|
|
10.10
|
Exclusive
Service Agreement, dated December, 2006, by and among Beijing China
Broadband Network Technology Co., Ltd., Jinan Guangdian Jiahe Digital
Television Co., Ltd. and Jinan Broadcast &Televison Information
Network Center. [incorporated by reference to Exhibit 10.11 to the
Company’s Current Report on Form 8-K filed June 11,
2007]
|
|
|
10.11
|
Cooperation
Agreement, dated March 7, 2008, by and among Ji’Nan Zhongkuan Dian Guang
Information Technology Co., Shandong Broadcast & TV Weekly Press and
Modern Movie & TV Biweekly Press. [incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 13, 2008]
|
|
|
10.12
|
Share
Issuance Agreement, dated April 7, 2009 between the Company, China
Broadband, Ltd., Waanshi Wangjing Media Technologies (Beijing) Co., Ltd.
and its shareholders. [incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed April 14,
2009]
|
|
|
10.13
|
Loan
Agreement, dated as of April 7, 2009, between China Broadband, Ltd. and
Wangjing Media Technologies (Beijing) Co., Ltd..*
|
|
|
10.14
|
Equity
Option Agreement, dated as of April 7, 2009, between China Broadband, Ltd.
and Wangjing Media Technologies (Beijing) Co., Ltd.*
|
|
|
10.15
|
Pledge
Agreement, dated as of April 7, 2009, between China Broadband, Ltd. and
Wangjing Media Technologies (Beijing) Co., Ltd.*
|
|
|
10.16
|
Trustee
Appointment Letter, dated as of April 7, 2009, by China Broadband, Ltd.,
appointing Mr. Wang Yingqi as trustee on its behalf*
|
|
|
10.17
|
Employment
Agreement, dated January 24, 2007, between China Broadband, Ltd. and Clive
Ng. [incorporated by reference to Exhibit 10.6 to the Company’s Current
Report on Form 8-K filed March 20, 2007]
|
|
|
10.18
|
Employment
Agreement Amendment, dated January 11, 2008, between China Broadband, Ltd.
and Clive Ng. [Incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on January 17,
2008]
|
|
|
10.19
|
Employment
Agreement, dated January 24, 2007, between China Broadband, Ltd. and Pu
Yue. [incorporated by reference to Exhibit 10.8 to the Company’s Current
Report on Form 8-K filed March 20, 2007]
|
|
|
10.20
|
Employment
Agreement Amendment, dated January 11, 2008, between China Broadband, Ltd.
and Pu Yue. [Incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed on January 17, 2008]
|
|
|
10.21
|
Employment
Agreement, dated March 13, 2008, between the Company and Marc
Urbach. [incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 13,
2008]
|
|
|
10.22
|
Consulting
Agreement, dated January 24, 2007, between the Company and Maxim Financial
Corporation. [incorporated by reference to Exhibit 10.9 to the Company’s
Amended Current Report on Form 8-K/A filed June 4,
2007]
|
|
|
21
|
Subsidiaries
of the Company.*
|
|
|
31.1
|
Certifications
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of
2002.*
|
|
Exhibit
No.
|
Description
|
|
|
31.2
|
Certifications
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
32.1
|
Certification
of Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of Principal Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
|
|
|
99.1
|
China
Broadband, Inc. 2008 Stock Incentive Plan. [incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 13,
2008]
|
|
|
99.2
|
China
Broadband, Inc. Audit Committee Charter [incorporated by reference to
Exhibit 99.2 to the Company’s Annual Report on Form 10-K filed April 15,
2009]
|
|
|
99.3
|
China
Broadband, Inc. Nominating and Corporate Governance Committee Charter
[incorporated by reference to Exhibit 99.3 to the Company’s Annual Report
on Form 10-K filed April 15, 2009]
|
|
|
99.4
|
China
Broadband, Inc. Compensation Committee Charter [incorporated by reference
to Exhibit 99.4 to the Company’s Annual Report on Form 10-K filed April
15, 2009]
|
*Filed
herewith