Midwest Energy Emissions Corp. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED: DECEMBER 31, 2008
COMMISSION
FILE NUMBER: 000-33067
CHINA YOUTH MEDIA,
INC.
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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87-0398271
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|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(I.R.S.
Employer
Identification
No.)
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4143
Glencoe Avenue, Marina Del Rey, CA 90292
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (310) 728-1450
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer
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¨
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Accelerated
filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant as
of June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately
$2,570,775. The number of shares outstanding of the Common
Stock ($.001 par value) of the Registrant as of the close of business on
April 10, 2009 was 76,078,439.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
CHINA
YOUTH MEDIA, INC.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Description
of Business
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3
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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17
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Item
2.
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Properties
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18
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Item
3.
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Legal
Proceedings
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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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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19
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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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34
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Item
8.
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Financial
Statements and Supplementary Data
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34
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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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34
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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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37
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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
Accountant Fees and Services
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44
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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45
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Signatures
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49
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PART
I
ITEM
1. Description of
Business
Overview
China
Youth Media, Inc.
China
Youth Media, Inc. is a China focused youth marketing and media company whose
business is to deliver advertising and content to one of the most sought after
and fastest growing demographics in the world. We have secured
exclusive rights from the Chinese government controlled corporation, China Youth
Net, which position us to market to China’s massive student population with
preferred access online, on campus and on mobile. Our strategy is to
provide advertisers and corporations with direct and centralized access to this
coveted consumer group through a dedicated Intranet Television Network (ITVN)
media portal called “Koobee,” campus events and advanced mobile
marketing.
Koobee
The
cornerstone of our China youth marketing strategy is a large scale, advertising
supported ITVN media portal called Koobee. Koobee is a venue designed
for marketers to deliver traditional TV spots and new media advertising
campaigns to a highly targeted demographic in the world’s fastest growing
broadband market. Built on the existing broadband infrastructure
connecting colleges and universities throughout China, Koobee is initially
targeting campus-based college students in China, estimated to total more than
30 million. The student population in China is a valuable but
difficult to reach consumer group. With almost no television sets on
college campuses, Koobee will deliver a compelling solution for advertisers and
corporations to reach the most active online community in China and a key
segment of the world’s largest youth market. Almost all college
students have computer access with high-speed, filtered broadband connections,
and through our exclusive agreement with China Youth Net, Koobee will deliver
TV-style entertainment primarily on a dedicated fiber network directly to the
computers of these students.
Koobee
will initially be offering a 24 hour sports channel featuring All Sports Network
(ASN) content from the NFL, NHL, and Pac 10 and Big Ten games; a 24 hour music
channel by BTTV, a popular youth lifestyle and music entertainment TV channel in
China; a travel and leisure channel by Quest USA; and a fashion channel
featuring “China’s Next Top Model,” part of the international Top Model
franchise and based on the hit U.S. TV show “America’s Next Top
Model.”
While
Koobee will offer a range of premium international content, it will also be the
first live network to be populated directly by students for students, making it
a powerful tool set to promote events, ideas and interests to students
throughout China.
To our
advertisers, Koobee will offer multiple touch points ranging from interstitial
interactive ads to banners within social networking clubs and sponsored
competitions, all with accurate ad tracking that will help ensure that our
clients realize value from inventory that until now has never been available in
China. Koobee will give advertisers the impact of TV with the return
on investment of the Internet. We expect this combination to be
competitive and sufficiently appealing to capture market share in China’s fast
growth online advertising industry.
On
Campus Events
We have a
strategic partnership with Xinhua Sports & Entertainment Ltd. (Nasdaq:
XSEL), a leading media group in China with a wide range of media assets that
include an extensive event planning group with international brands as
clients. We will produce sponsored on-campus events throughout China
and offer coordinated Internet and campus event campaigns.
Mobile
Our
partner China Youth Net is in the final stages of securing our mobile video and
advertising license. Our plan is to deploy an advanced mobile media
and advertising delivery system catering specifically to the youth market in
China.
We are
organized in a single operating segment with no long-lived assets outside of the
United States of America. All of our revenues to date have been generated in the
United States, but with the development of our China ITVN media portal, we
expect that a portion of our future revenues will be from other
countries. Revenue sources could be from distribution of content,
advertising and licensing.
Organizational
History
China
Youth Media, Inc. (referred to herein as the "Company," "we," "us,"
and "our") was
organized under the laws of the State of Utah on July 19, 1983 under the name of
Digicorp. On February 22, 2007, we changed the Company’s domicile
from the State of Utah to the State of Delaware effected by the merger of the
Company, a Utah corporation, with and into, Digicorp, Inc., a newly formed
wholly owned subsidiary of the Company that was incorporated under the Delaware
General Corporation Law for the purpose of effecting the change of
domicile.
The
Company changed its name from “Digicorp, Inc.” to “China Youth Media, Inc.” (the
“Corporate Name Change”) pursuant to a Certificate of Amendment to our
Certificate of Incorporation filed with the State of Delaware which took effect
as of October 16, 2008. The Corporate Name Change was approved and
authorized by the Board of Directors of the Company and by the holders of shares
representing a majority of our voting securities which holders have given their
written consent. As a result of the Corporate Name Change, our stock symbol
changed to “CHYU” with the opening of trading on October 16, 2008 on the
OTCBB.
Youth
Media (BVI) Limited
On May 8,
2008, under the laws of the British Virgin Islands, the Company formed Youth
Media (BVI) Limited ("YM BVI"). YM BVI is a wholly-owned subsidiary
of the Company and was established to be the holding company for YMHK and YMBJ
(as identified below).
Youth
Media (Hong Kong) Limited and Youth Media (Beijing) Limited
Youth
Media (Hong Kong) Limited ("YMHK"), a company organized under the laws of Hong
Kong on May 19, 2008, and Youth Media (Beijing) Limited (“YMBJ”), a company
organized under the laws of the People's Republic of China on December 10, 2008,
are wholly-owned subsidiaries of YM BVI and were formed by the Company to take
advantage of its shift in business to aggregation and distribution of
international content and advertising for Internet or online consumption in
China.
ViraCast
and Beat9.com
Our
patent pending technology called ViraCast dynamically inserts and continuously
updates interactive, geo-targeted advertising into digital content, such as
Internet videos, podcasts, etc. ViraCast digitally embeds advertising into
digital content that then has the ability to propagate virally across the
Internet while continuously tracking ad consumption and user interaction.
ViraCast tracks impressions, clicks, and other pertinent data valuable to
advertisers. Our customers benefit from our verifiable ad tracking by paying
only for ads that are viewed, clicked or acted on. Currently,
ViraCast is available via our wholly-owned and operated website
www.Beat9.com.
Our
strategy for ViraCast is to pinpoint unexploited and unrealized market
opportunities that emerge from the evolving media and advertising landscapes and
build solutions around them. ViraCast technology focuses on the following
markets:
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Peer-to-peer
Distribution - the distribution of audio or video files over the
Internet for listening or viewing on mobile devices and personal
computers;
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Online
Advertising;
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Viral Marketing -
marketing and advertising techniques that use pre-existing social networks
to produce increases in brand awareness through self-replicating viral
processes.
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PerreoRadio.com
PerreoRadio.com
is a Latino based community website targeted to the young, urban Latino
demographic in both the United States and internationally, offering online radio
shows, podcasts, music, and music videos from some of the top DJ’s in the
Reggaeton genre from the United States, Latin America, and the Caribbean. On
February 7, 2006, we entered into an asset purchase agreement pursuant to which
we purchased the following Internet domain names and all materials, intellectual
property, goodwill and records in connection therewith (the "Assets"):
PerreoRadio.com, Radioperreo.com, Perreomobile.com, Perreotv.com,
Puroperreo.com, Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com,
Machetemusic.net, Machetemusic.org, Machetemusica.com and
Musicamachete.com.
Rebel
Crew Films, Inc.
Rebel
Crew Films is a wholly-owned subsidiary of the Company. Rebel Crew Films was
organized under the laws of the State of California on August 7, 2002 to
distribute Latino home entertainment products. Rebel Crew Films distributed
Spanish language films and served wholesale, retail, catalog, and e-commerce
accounts. Rebel Crew Film’s titles are sold at major retail outlets across the
United States of America and Canada.
In
January 2008, the Company entered into a license and distribution agreement with
Westlake Entertainment, Inc. This agreement effectively shifted all
manufacturing and distribution of our home video library to Westlake
Entertainment, Inc. The agreement with Westlake Entertainment allowed the
Company to increase its national exposure through existing Westlake
Entertainment sales channels while maintaining our existing sales to national
retailers, and to effectively transfer all day-to-day operations related to our
home video library to Westlake Entertainment. Pursuant to the agreement,
Westlake has taken over sales, production and all physical distribution of our
157 title library, while we will continue to manage digital distribution and
advertising rights. Westlake will distribute existing inventory for a fee
and will distribute new product on a revenue share basis. The licensing
transaction was part of an initiative to focus the Company’s efforts and
significant amount of resources to building and launching Koobee and the
associated business opportunities in the United States and
China.
Significant
Transactions During The Year Ended December 31, 2008
China
Youth Net (CYN)
On June
10, 2008 our subsidiary, YMHK, entered into a Cooperation Agreement (the
“Cooperation Agreement”) with China Youth Net Technology (Beijing) Co., Ltd.
("CYN"), China Youth Interactive Cultural Media (Beijing) Co., Ltd. ("CYI") and
China Youth Net Advertising Co. Ltd. ("CYN Ads") to cooperate with each other to
develop, build and operate a fully managed video and audio distribution network
under the auspices of CYN (the “Campus Network”). In addition, CYN
and CYI have agreed to exclusively grant YMHK the following rights during the
term of the Cooperation Agreement: exclusive right to advertise on the Campus
Network; exclusive right to sell and operate the commercial campus marketing
events; right to provide foreign commercial content to the Campus Network; and
enjoy the rights with respect to the setup, operation, maintenance and expansion
of the Campus Network according to a separate commercial and technical services
agreement.
Xinhua
Sports and Entertainment Limited (formerly Xinhua Finance Media
Limited)
On
December 26, 2008, our subsidiaries YMHK and YMBJ entered into a Joint Venture
Agreement (the "Joint Venture Agreement") with CYI and Xinhua Sports &
Entertainment Limited (“XSEL”), formerly known as Xinhua Finance Media Limited,
to develop business opportunities contemplated by the Cooperation Agreement YMHK
entered into on June 10, 2008 with CYN, CYI and CYN Ads. The Joint
Venture Agreement provides working capital for the purposes of deploying and
marketing the Campus Network. The Joint Venture Agreement provides
working capital for a minimum of twelve months ending December 31,
2009. XSEL is working with the Company’s subsidiaries to market and
develop ad sales. Additionally, XSEL will collaborate on the sale and
operation of brand sponsored campus events and the supply of sports and other
commercial content to the Company.
Yes
TV
On May
31, 2008, a Supply Agreement for Content (the "Supply Agreement") was
entered into between Yes Television (Hong Kong) Limited ("Yes TV"), and New
China Media, LLC and the Company’s subsidiary, YMHK (New China Media and Youth
Media together referred to as "Licensees"), pursuant to which Yes TV has agreed
to supply certain content, such as NFL, NHL College Pac 10, and NCAA, to
Licensees for distribution via the Internet in China. Yes TV is a content
aggregator providing, among other things, live and delay broadcast for
distribution and transmission via telecommunications networks. On
October 21, 2008, Licensees entered into a Supplemental Agreement (the
"Supplemental Agreement") with Yes TV pursuant to which the Supply Agreement was
extended by an additional eight (8) years for a total of ten (10)
years. The term of the Supply Agreement in conjunction with the
Supplemental Agreement commenced on signing and shall terminate on April 30,
2018.
New
China Media
On June
2, 2008, the Company entered into a Content License Agreement with New China
Media, YGP, LLC and TWK Holdings, LLC (New China Media, YGP and TWK collectively
referred to as "Content Providers") providing for the assignment by the Content
Providers and the assumption by us of certain rights of the Content Providers
for the territory of the People's Republic of China ("PRC") to use, transmit and
publicly display via the Internet certain content. On January 8,
2009, the Content License Agreement was extended by an additional eight (8)
years for a total of ten (10) years.
Revenues
During
the year ended December 31, 2008, the Company, including its subsidiaries,
generated revenue primarily from (i) digital content distribution; (ii) website
ad revenue; and (iii) DVD sales.
During
the fiscal year 2008, the Company generated approximately 44% of its revenue
through the production and distribution of digital content, and approximately
53% of its revenue through the direct sales of its home video content. In the
past, the Company, through its subsidiary Rebel Crew Films, generated revenue
through the direct sales of its licensed home video library and licensing
agreements with third parties that distributed the Company's licensed
content. The Company plans to use a significant portion of its
resources going forward to the aggregation and distribution of international
content and advertising for Internet consumption in
China. Consequently, in January 2008 and as described above, the
Company entered into a license and distribution agreement with Westlake
Entertainment, Inc. which effectively shifted all manufacturing and distribution
of its home video library to Westlake Entertainment along with all day-to-day
operations related to its home video library. This agreement calls
for a 25% - 50% distribution fee to Westlake on gross sales of licensed
products.
Intellectual Property and Technology
Development
We have
two United States and international patents pending that are directed to
important and innovative aspects of our technology. As the technology
evolves we intend to continue seeking patent protection where
appropriate.
Customers
We
believe that significant opportunities exist in the China Internet advertising
space, and we are actively pursuing this potential source of revenue.
Our
target customers are:
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Advertising Agencies with
China operations, including Dentsu, Ogilvy, and Universal
McCann;
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Media Planners, such as
MindShare China and Zenith;
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Large Brands, such as
Nike, Proctor & Gamble, LG, Samsung, Lenovo, Starbucks, and
Levi’s;
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Premium Advertisers and
Content Owners, including advertising agencies like WPP, Omnicom
and Interpublic; content owners with their own advertising, such as NBC,
CBS, ABC and The New York Times; and infomercial creators, like QVC and
Williams Group;
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Independent producers,
artists, designers and filmmakers who own untapped content;
and
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Advertising Networks,
including Advertising.com, ValueClick, ClickBooth, CJ.com and
Zedo.
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Sales
and Marketing
The goal
of our sales and marketing effort is to develop sales opportunities by
increasing the awareness of Koobee among students, advertisers and content
owners.
A key
component of our strategy is to build broad acceptance of Koobee by
students. We are planning a multi-faceted marketing campaign to
follow the launch of Koobee and encourage users to frequent our web portal and
associated services. Our campaign will include front page banners on
popular university websites, all 64 China Youth Net sites, campus billboards and
at company sponsored student events and competitions. We also plan to
use live concerts by major recording artists to encourage the millions of
students who cannot attend these events to tune in live on Koobee.
Ad sales
will be supported domestically through our strategic relationship with Xinhua
Sports & Entertainment Ltd. and internationally through outsourced media
partners.
We market
our products and services through a broad array of programs and media formats,
including video, internet, advertising campaigns, telemarketing, print
advertisements, retail distribution, and web advertising. Other marketing
strategies include online and offline cross-promotion and
co-branding.
Competition
We
operate in the market for media products, services and content development and
delivery, which is a highly competitive market characterized by rapid change,
converging technologies, and increasing competition from companies offering
communication, video, music, on-demand information and entertainment services
integrated into other products and media properties. However, we believe that we
enjoy a competitive edge that arises from our close affiliation with the Chinese
government controlled company, China Youth Net, and our unique brand building
strategy online, on campus and on mobile.
The
principal competitive factors relating to attracting and retaining users include
the quality of our video content and relevance of advertising; the effectiveness
and efficiency of our marketing services; the accessibility, integration and
personalization of the online services that we offer; and the creativity of the
marketing solutions that we offer.
There are
many popular video websites available in China: Tudou, Rox, 6Rooms, Pomoho
, 56.com
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Almost
all of these sites are comparable to YouTube: content is mostly user
generated (UGC), along with illegal clips from movies and TV, with
relatively little or no licensed
content
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Advertising
is limited to smaller domestic brands, as mainstream advertisers are
reluctant to risk brand affiliation with unknown or illegal
content
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Other
competitors include major portals such as Baidu, Sina, Tom Online,
TenCent
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This
group is similar to US portals such as Yahoo! and include but do not focus
on video
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These
portals are highly popular as search engines and carry feeds from major
news and entertainment sources
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These
sites have large advertising sales staffs with established relationships
to ad agencies
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China
Central Television (CCTV), Shanghai Media Group, Hunan TV and other major
broadcasters in mainland China offer programming that is a mix of comedy, sports
and drama shows, the majority of which consists of soap operas and other Chinese
content. Broadcasted international content is limited by Chinese
law.
We also
face competition from companies focused on markets where expertise in a
particular segment of the market (e.g., radio, internet, television) may provide
them a competitive advantage.
Management
believes that leveraging our competitive edge that arises from our close
affiliation with China Youth Net together with our plan to deliver premium
international and student generated content free on an ad supported basis will
contribute to our success. We will distinguish ourselves further by
ensuring that all professional content be legally licensed from rights holders
and receive government approval for distribution. Our close government
affiliation fast tracks content approval, cutting valuable time to revenue and
reducing costs, and deters piracy.
We also
face competition with respect to the sales and distribution of our licensed home
video library. Major U.S. movie studios have ventured into servicing
the Latino home video market as well. We also compete with retail
music and video stores, including online stores, dominated by large companies
such as Netflix, Blockbuster, Trans World Entertainment, and Movie Gallery
Inc.
Seasonality
Our
performance may be affected by seasonal revenue fluctuations and variation in
demand between local and national advertisers. The Company’s revenues may vary
throughout the year. As is typical in the distribution of content, the first
calendar quarter generally produces the lowest revenues.
Government
Regulation
In the
United States, we are not aware of any existing or probable governmental
regulations that may have a material effect on the normal operations of our
business. There also are no relevant environmental laws that require
compliance by us that may have a material effect on the normal operations of the
business.
The
regulatory framework for the online industry in China that we and or that our
partners operate under is governed and controlled by several government
ministries and agencies. For the purposes of our business operations
in China, the ministries and agencies which we may operate under
include:
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The
China Youth League
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The
Ministry of Public Security
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The
PRC State Administration of Radio, Film and
Television
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The
Movie and Television Network Center of China Youth
League
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The
Telecommunication Administrative Bureau of Beijing,
China
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The
various ministries and agencies have issued rules and regulations that regulate
a number of different areas of the online business in China, which we discuss
below:
Foreign
Ownership Restrictions
PRC
regulations currently limit foreign ownership of companies that provide Internet
content and related services, including operating a content
website. Our strategic partnerships with China Youth Net and China
Youth Net Interactive have allowed us to outsource the content approval process,
licensing, and other regulatory matters to our partners and, facilitate
compliance with foreign ownership restrictions.
License
Requirements
There are
a number of aspects to the operation of Koobee which require licenses from
various PRC regulatory authorities. The ability to operate Koobee in
China is dependent on our partners complying with PRC regulations related to
licensing requirements and maintaining good standing status with the associated
PRC government ministries.
Regulation
of Internet Content
The PRC
government has in place rules and regulations that govern Internet content that
are supervised by a number of ministries and agencies. These rules and
regulations specifically prohibit Internet activities such as the operation of
content websites that result in the publication of content that is found to,
among other things, propagate obscenity, violence, instigate crime, undermine
the cultural traditions of the PRC, or compromise State security. If
any website violates these rules and regulations, the PRC government may shut
down their website.
Regulation
of Information Security
Internet
content in China is regulated and restricted by several ministries and agencies
of the PRC government. According to PRC regulations, the following
actions are subject to criminal punishment in China: (1) improper entry into a
computer or system of strategic importance; (2) dissemination of politically
disruptive information; (3) leaking State secrets; (4) spreading
of false commercial information or information deemed to be
destabilizing to the State; or (5) infringing on intellectual property
rights. In particular, the Ministry of Public Security has
direct supervision and inspection rights, with respect to the aforementioned,
over all Internet websites in China and thus we may be subject to their
jurisdiction. Any entity that operates a website in China that
violates these rules and regulations may result in the PRC government shutting
down their website.
Regulation
of Content Import
Importing
content from abroad and into China is regulated by several ministries and
agencies of the PRC government, some of which require that copyright license
content agreements be approved and registered with a government
agency. Our ability to operate in China is dependent on our partners
complying with PRC regulations related to the import of content, registration,
if necessary, with the proper PRC government ministries, and maintaining good
standing status with the associated PRC government ministries.
Regulation of
Advertising
According
to PRC laws and regulations, in order to conduct an advertising business, a
company must have an approved business scope that covers such businesses.
Currently, we source our advertising business through our strategic partnerships
including our partnership with Xintai Huade Advertising Company which, to our
knowledge, is licensed to conduct such business.
Regulation
of Privacy
PRC law
does not prohibit Internet content providers from collecting and analyzing
personal information from their users. PRC law prohibits Internet
content providers from disclosing to any third parties any information
transmitted by users through their networks unless otherwise permitted by law.
If any such Internet content provider violates these regulations, penalties may
be imposed and the Internet content provider may be liable for damages caused to
its users.
Employees
As of
December 31, 2008, we had 6 full time employees in the United States and China.
None of our employees are covered by a collective bargaining agreement. We
believe that relations with our employees are good.
Available
Information
We file
with or submit to the SEC annual, quarterly and current periodic reports, proxy
statements and other information meeting the informational requirements of the
Exchange Act. You may inspect and copy these reports, proxy statements and other
information, as well as the registration statement and related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet website that contains reports, proxy and information statements and
other information filed electronically by us with the SEC which are available on
the SEC’s website at www.sec.gov. Copies
of these reports, proxy and information statements and other information may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549.
ITEM
1A. Risk Factors
Our
business involves a high degree of risk. In addition to other information in the
Form 10-K, potential investors should carefully consider the risks and
uncertainties described below and the other information in this report before
deciding whether to invest in shares of our common stock. Each of the following
risks may materially and adversely affect our business, results of operations
and financial condition. These risks may cause the market price of our common
stock to decline, which may cause you to lose all or a part of the money you
paid to buy our common stock.
RISKS RELATED TO OUR
BUSINESS
We
have a history of losses which may continue and which may negatively impact our
ability to achieve our business objective and our financial
results.
For the
year ended December 31, 2008 and 2007, we generated revenues of $107,000 and
$592,000, respectively, and incurred net losses of $3 million and $2.4
million, respectively. At December 31, 2008, we had a working capital deficit of
$742,000 and an accumulated deficit of $10.8 million. Our failure to increase our
revenues significantly or improve our gross margins will harm our business.
Even if we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis in the future. If our
revenues grow more slowly than we anticipate, our gross margins fail to improve,
or our operating expenses exceed our expectations, our operating results will
suffer.
Various
conditions raise substantial doubt about our ability to continue as a going
concern; Need For Additional Financing.
At
December 31, 2008, we had an accumulated deficit of approximately $10.8 million
and a working capital deficit of $742,000. During the year ended December 31,
2008, we incurred a loss of $3 million. During the year ended December 31,
2008, we primarily relied upon debt investments to fund our operations. These
conditions raise substantial doubt about our ability to continue as a going
concern.
We are
actively seeking sources of additional financing in order to maintain and
potentially expand our operations and to fund our debt repayment obligations.
Even if we are able to obtain funding, there can be no assurance that a
sufficient level of sales will be attained to fund such operations or that
unbudgeted costs will not be incurred. Future events, including the problems,
delays, expenses and difficulties frequently encountered by similarly situated
companies, as well as changes in economic, regulatory or competitive conditions,
may lead to cost increases that could make the net proceeds of any new funding
and cash flow from operations insufficient to fund our capital requirements.
There can be no assurances that we will be able to obtain such additional
funding from management or other investors on terms acceptable to us, if at all.
Additional financings, or the possible conversion of any of our debt obligations
into equity, will result in dilution for then current stockholders.
The
reliance of our network connectivity and interoperability services and content
services on third-party communications infrastructure, hardware and software
exposes us to a variety of risks we cannot control.
The
success of our network connectivity and interoperability services and content
services depends on our network infrastructure, including the capacity leased
from telecommunications suppliers. In particular, we rely on telecommunications
providers for leased long-haul and local loop transmission capacity. Our
business also depends upon the capacity, reliability and security of the
infrastructure owned by third parties that is used to connect telephone
calls.
We have
no control over the operation, quality or maintenance of a significant portion
of that infrastructure or whether or not those third parties will upgrade or
improve their equipment. We depend on these companies to maintain the
operational integrity of our connections. If one or more of these companies is
unable or unwilling to supply or expand its levels of service to us in the
future, our operations could be severely interrupted. In addition, rapid changes
in the telecommunications industry have led to the merging of many companies.
These mergers may cause the availability, pricing and quality of the services we
use to vary and could cause the length of time it takes to deliver the services
that we use to increase significantly.
Undetected
or unknown defects in our services could harm our business and future operating
results.
Services
as complex as those we offer or develop frequently contain undetected defects or
errors. Despite testing, defects or errors may occur in our existing or new
services, which could result in loss of or delay in revenues, loss of market
share, failure to achieve market acceptance, diversion of development resources,
and injury to our reputation, any of which could harm our business. The
performance of our services could have unforeseen or unknown adverse effects on
the networks over which they are delivered as well as on third-party
applications and services that utilize our services, which could result in legal
claims against us, harming our business. Furthermore, we often provide
implementation, customization, consulting and other technical services in
connection with the implementation and ongoing maintenance of our services,
which typically involves working with sophisticated software, computing and
communications systems. Our failure or inability to meet customer expectations
in a timely manner could also result in loss of or delay in revenues, loss of
market share, failure to achieve market acceptance, injury to our reputation and
increased costs.
If
we encounter system interruptions, we could be exposed to liability and our
reputation and business could suffer.
We depend
on the uninterrupted operation of various systems, secure data centers and other
computer and communication networks. Our systems and operations are vulnerable
to damage or interruption from:
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Power
loss, transmission cable cuts and other telecommunication
failures;
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Damage
or interruption caused by fire, earthquake, and other natural
disasters;
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Computer
viruses or software defects;
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Physical
or electronic break-ins, sabotage, intentional acts of vandalism,
terrorist attacks and other events beyond our
control.
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Most of
our systems are located at our facilities in Marina Del Rey, California,
Downtown Los Angeles, California, and Beijing, China, all of which are
susceptible to earthquakes. Any damage or failure that causes
interruptions in any of these facilities or our other computer and
communications systems could materially harm our business. Although we carry
insurance for property damage and business interruption, we do not carry
insurance or financial reserves for interruptions or potential losses arising
from earthquakes or terrorism.
In
addition, our ability to provide our services depend on the efficient operation
of the Internet connections from customers to our data centers. These
connections depend upon the efficient operation of Internet service providers
and Internet backbone service providers, all of which have had periodic
operational problems or experienced outages in the past.
We
rely on our intellectual property, and any failure by us to protect, or any
misappropriation of, our intellectual property could harm our
business.
Our
success depends on our internally developed technologies, patents and other
intellectual property. Despite our precautions, it may be possible for a third
party to copy or otherwise obtain and use our trade secrets or other forms of
our intellectual property without authorization. Furthermore, the laws of
foreign countries may not protect our proprietary rights in those countries to
the same extent U.S. law protects these rights in the United States. In
addition, it is possible that others may independently develop substantially
equivalent intellectual property. If we do not effectively protect our
intellectual property, our business could suffer. Additionally, we have filed
patent applications with respect to certain of our technology in the U.S. Patent
and Trademark Office. Patents may not be awarded with respect to these
applications and even if such patents are awarded, such patents may not provide
us with sufficient protection of our intellectual property. In the future, we
may have to resort to litigation to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. This type of litigation, regardless of its
outcome, could result in substantial costs and diversion of management and
technical resources.
The
Ad-Support Content business environment is highly competitive, and if we do not
compete effectively, we may not be able to gain market acceptance and market
share.
The
market for ad-supported content services is extremely competitive. Competitors
include developers of content and entertainment companies that service a variety
of domestic and international markets. If we do not compete effectively it
may affect our ability to gain market acceptance and grow and retain our
customer base.
Our
inability to react to changes in our industry and successfully introduce new
products and services could harm our business.
The
Internet and communications network services industry are characterized by rapid
technological change and frequent new product and service announcements which
require us continually to improve the performance, features and reliability of
our services, particularly in response to competitive offerings. In order to
remain competitive and gain market share, we must continually improve our access
technology and software, support the latest transmission technologies, and adapt
our products and services to changing market conditions and customer
preferences. We cannot assure you that we will be able to adapt to these
challenges or respond successfully or in a cost-effective way to adequately meet
them. Our failure to do so would adversely affect our ability to compete and
retain customers or market share.
If
we do not maintain the continued service of our chief executive officer, we may
not develop business operations.
Our
success is dependent upon the continued service of Jay Rifkin, our current Chief
Executive Officer. Although we have entered into a written employment agreement
with him, we do not have key man life insurance on Mr. Rifkin. While
our Chief Executive Officer currently does not, to our knowledge, have any
definitive plans to retire or leave our company in the near future, he could
decide to leave us at any time to pursue other opportunities. The loss of
services of Mr. Rifkin would pose a significant risk to our ability to develop
business opportunities.
The current global financial crises and
deteriorating economic conditions may have a material adverse impact on our
business and financial condition that we currently cannot
predict.
The
economic conditions in the United States and throughout the world have been
deteriorating. Global financial markets have been experiencing a
period of unprecedented turmoil and upheaval characterized by extreme volatility
and declines in prices of securities, diminished liquidity and credit
availability, inability to access capital markets, the bankruptcy, failure,
collapse or sale of financial institutions and an unprecedented level of
intervention from the United States federal government and other governments.
Although we cannot predict the impacts on us of the deteriorating economic
conditions, they could materially adversely affect our business and financial
condition, including our ability to raise any equity or debt financing in the
future.
RISKS
RELATED TO OUR SUBSIDIARIES
Our
operating subsidiaries, Youth Media (Beijing) Limited, Youth Media (Hong Kong)
Limited, and Rebel Crew Films all have limited operating histories and therefore
we cannot ensure the long-term successful operation of our business or the
execution of our business plan.
Our
operating subsidiaries Youth Media (Beijing) Limited organized under the laws of
the People's Republic of China on December 10, 2008, Youth Media (Hong Kong)
Limited organized under the laws of Hong Kong on May 19, 2008, and Rebel Crew
Films organized under the laws of the State of California on August 7, 2002.
Because our operating subsidiaries have limited operating history, our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by growing companies in evolving markets in which we operate. While
to date we have not experienced these problems, we must meet many challenges
including:
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Establishing
and maintaining broad market acceptance of our products and converting
that acceptance into direct and indirect sources of
revenue;
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Establishing
and maintaining our brand name;
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Timely
and successfully developing new
products;
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Developing
and maintaining strategic relationships to enhance the distribution of our
products.
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Our
business strategy may be unsuccessful and we may be unable to address the risks
we face in a cost-effective manner, if at all. If we are unable to successfully
address these risks our business will be harmed and we may experience a decrease
in revenues.
We
face significant competition which could reduce our market share and materially
and adversely affect our business, financial condition and results of
operations.
The
Internet content market in China is increasingly competitive. Our results of
operations to date may be a result, in part, of our close affiliation with the
Government of China which may not continue to be available to us. A number of
competitors have entered the Internet content business in China. We expect more
companies to enter the market and we expect a wider range of websites that offer
content to be introduced to the China market. Competition from other Internet
content operators, both based in China as well as overseas, is likely to
increase in the future. Other Internet content operators, such as Tudou, Rox,
6Rooms, Pomoho, 56.com, are current, or potential future,
competitors. As the Internet content industry in China is
relatively new and constantly evolving, our current or future competitors may
compete more successfully as the industry matures. In particular, any of these
competitors may offer products and services that provide significant
performance, creativity or other advantages over those offered by us. These
products and services may weaken the market strength of our brand name and
achieve greater market acceptance than ours. Furthermore, any of our current or
future competitors may be acquired by, receive investments from or enter into
other commercial relationships with, larger, well-established and well-financed
companies and therefore obtain significantly greater financial, marketing and
development resources than we have. In addition, increased competition in the
Internet content industry in China could make it difficult for us to retain
existing users and attract new users. We also compete with other forms of
entertainment, such as television and movies. If we are unable to compete
effectively in the Internet content market in China, our business, financial
condition and results of operations could be materially and adversely
affected.
The
limited use of personal computers in China and the relatively high cost of
Internet access with respect to per capita gross domestic product may limit the
development of the Internet in China and impede our growth.
Although
the use of personal computers in China has increased in recent years, the
penetration rate for personal computers in China is much lower than in the
United States. In addition, despite a decrease in the cost of Internet access in
China due to a decrease in the cost of personal computers and the introduction
and expansion of broadband access, the cost of personal Internet access, in
contrast with Internet access through Internet cafes, remains relatively high in
comparison to the average per capita income in China. The limited use of
personal computers in China and the relatively high cost of personal Internet
access may limit the growth of our business.
We
have limited business insurance coverage in China.
The
insurance industry in China is still at an early stage of development. In
particular, PRC insurance companies do not offer extensive business insurance
products. As a result, we do not have any business liability or disruption
insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster might result in our incurring substantial costs
and the diversion of resources.
The
PRC’s economic, political and social conditions, as well as government policies,
could affect our business.
The PRC
economy differs from the economies of most developed countries in many respects,
including in the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth since the late 1970s, growth has
been uneven, both geographically and among various sectors of the economy. The
PRC government has implemented numerous measures to encourage economic growth
and to guide the allocation of resources. Some of these measures may benefit the
overall PRC economy, but also have a negative effect on us.
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has implemented measures since the late
1970s emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of
productive assets in China is still owned by the PRC government. In addition,
the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. These actions, as well as future actions and policies
of the PRC government, could materially affect general economic conditions in
China and could have a material adverse effect on our business and results of
operations.
If
we are unable to license or acquire compelling content at reasonable costs or if
we do not develop compelling content, the number of users of our services may
not grow as anticipated, or may decline, which could harm our operating
results.
Our
future success depends in part upon our ability to aggregate compelling content
and deliver that content through our online and other multi-media properties and
programming and delivery technologies. We distribute some of the content that we
license on our online properties, such as audio and video content from third
parties. We have been providing increasing amounts of audio and video content to
our users as reflected in the increase in direct sales of our content, and we
believe that users will increasingly demand high-quality audio and video
content, such as music, film, and other special events. Such content may require
us to make substantial payments to third parties from whom we license or acquire
such content. For example, our entertainment properties rely on film producers
and distributors, and other organizations for a large portion of the content
available on our properties. Our ability to maintain and build relationships
with third-party content providers will be critical to our success. In addition,
as new methods for accessing and delivering content through media formats
becomes available, including through alternative devices, we may need to enter
into amended content agreements with existing third-party content providers to
cover the new devices. We may be unable to enter into new, or preserve existing,
relationships with the third parties whose content we seek to obtain. In
addition, as competition for compelling content increases both domestically and
internationally, our content providers may increase the prices at which they
offer their content to us, and potential content providers may not offer their
content on terms agreeable to us. An increase in the prices charged to us by
third-party content providers could harm our operating results and financial
condition. Further, some of our content licenses with third parties may be
non-exclusive. Accordingly, content providers and other media sources such as
radio or television may be able to offer similar or identical content and
technologies. This increases the importance of our ability to deliver compelling
content and media technologies in order to differentiate from other businesses.
If we are unable to license or acquire compelling content at reasonable prices,
if other companies acquire develop and/or distribute content that is similar to
or the same as that provided by us, or if we do not develop compelling content
or media technologies, the number of users of our services may not grow as
anticipated, or may decline, which could harm our operating
results.
We
may incur substantial costs enforcing our intellectual property rights and any
difficulty with enforcing such rights may cause our results of operations and
financial condition to suffer.
The
decreasing cost of electronic and computer equipment and related technology has
made it easier to create unauthorized versions of audio and audiovisual products
such as compact discs, videotapes and DVDs. Similarly, advances in Internet
technology have increasingly made it possible for computer users to share audio
and audiovisual information without the permission of the copyright owners and
without paying royalties to holders of applicable intellectual property or other
rights. Unauthorized copies and piracy of these products compete against
legitimate sales of these products. Our revenues are derived from our licensed
video content that is potentially subject to unauthorized copying and
widespread, uncompensated dissemination on the Internet. If our proprietary
video content is copied and distributed without authorization we may incur
substantial costs enforcing our intellectual property rights. If we fail to
obtain appropriate relief or enforcement through the judicial process, or if we
fail to develop effective means of protecting our intellectual property, our
results of operations and financial condition may suffer.
Failure
to properly manage our potential growth would be detrimental to holders of our
securities.
Since we
have limited operating history and our total assets at December 31, 2008
consisted of $34,000 in cash and total current assets of $309,000, any
significant growth will place considerable strain on our financial resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employees and maintain
close coordination among our technical, accounting, finance, marketing, sales
and editorial staff. We cannot guarantee that we will be able to do so, or that
if we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
Concentration
in a Significant Customer.
The
Company sells almost exclusively to one of its customers. During the year
ended December 31, 2008, the Company had sales to two customers that accounted
for majority of total sales. These customers owed to the Company $77,000
and $96,000 at December 31, 2008. During the year ended December 31, 2007, these
customers owed to the Company $302,000 and $96,000.
RISKS RELATED TO OUR COMMON
STOCK
Our
historic stock price has been volatile and the future market price for our
common stock is likely to continue to be volatile. Further, the limited
market for our shares will make our price more volatile. This may make it
difficult for you to sell our common stock for a positive return on your
investment.
The
public market for our common stock has historically been very volatile. Over the
past two fiscal years, the market price for our common stock as quoted on the
OTC Bulletin Board has ranged from $0.03 to $0.21. The closing sale price for
our common stock on March 27, 2009 was $0.14 per share. Any future market price
for our shares is likely to continue to be very volatile. This price volatility
may make it more difficult for you to sell shares when you want at prices you
find attractive. We do not know of any one particular factor that has caused
volatility in our stock price. However, the stock market in general has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of companies. Broad market
factors and the investing public’s negative perception of our business may
reduce our stock price, regardless of our operating performance. Further, the
market for our common stock is limited and we cannot assure you that a larger
market will ever be developed or maintained. The average daily trading volume of
our common stock has historically been insignificant. Market fluctuations and
volatility, as well as general economic, market and political conditions, could
reduce our market price. As a result, this may make it difficult or impossible
for you to sell our common stock or to sell our common stock for a positive
return on your investment.
Our
common stock is subject to the "Penny Stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.
The SEC
has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, Rule 15g-9 requires:
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That
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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The
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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Obtain
financial information and investment experience objectives of the person;
and
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Make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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Sets
forth the basis on which the broker or dealer made the suitability
determination; and
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That
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent,
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
ITEM
1B. Unresolved Staff
Comments
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
2. Properties
The
Company currently has the following buildings under operating
leases:
The
Company leases approximately 3,800 square feet of space in Marina Del Rey,
California. The operating lease expires September 30, 2012. At year
end December 31, 2008, the monthly lease payment was $7,200. The monthly
lease payment is subject to a customary 3% percent escalation per annum.
The Company Corporate headquarters are located at this
location.
The
Company leases approximately 10,000 square feet of additional space in Marina
Del Rey, California. The operating lease expires December 31, 2010.
At year end December 31, 2008, the monthly lease payment was $13,235.
The monthly lease payment is subject to a customary 3% percent escalation
per annum. During February 2008 and April 2008, the Company entered into
commercial sublease agreements with two non-related parties. It is
expected that the future lease payment obligation of the Company related to this
lease will be completely offset by the subleases and it is anticipated that they
will remain subleased for the remaining term of the lease. For the
year ended December 31, 2008, the sublease agreements resulted in $148,100 in
gross revenues.
On July
15, 2008, the Company entered into a commercial lease agreement for
approximately 50m2 of
office space in Beijing, China. The lease expires on June 30, 2009 and
requires monthly payments of $1,500.
At year
end December 31, 2008, the Company is confident that these buildings provide
more than adequate space to meet our needs and provide for future
growth.
ITEM
3. Legal
Proceedings
We are
not a party to any pending legal proceeding, nor are our properties the subject
of a pending legal proceeding, that is not in the ordinary course of business or
otherwise material to the financial condition of our business. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
ITEM
4. Submission of Matters to a Vote of
Security Holders
On
September 10, 2008, holders of shares representing a majority of the voting
securities of the Company gave their written consent to resolutions adopted by
the Board of Directors (i) to amend the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock, par value $.001 per
share, of the Company (the "Common Stock") from 60,000,000 to 500,000,000 and
increase the number of authorized shares of Preferred Stock, par value $.001 per
share, of the Company (the "Preferred Stock") from 1,000,000 to 2,000,000, and
(ii) to amend the Certificate of Incorporation so as to change the name of the
company from "Digicorp, Inc." to "China Youth Media, Inc.". Such written
consents were given by Rebel Holdings, LLC, Jay Rifkin and Dennis Pelino
representing an aggregate of 31,527,664 shares of Common Stock (59.9% of the
then outstanding Common Stock). Under Delaware corporation law, the consent
of the holders of a majority of the voting power is effective as stockholders'
approval. In accordance with the requirements of the Securities Exchange
Act of 1934 and Regulation 14C promulgated thereunder, an Information Statement
was mailed to stockholders.
PART
II
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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The
Company common stock as of December 31, 2008 is quoted on the Over-the-Counter
Bulletin Board (OTCBB) under the symbol CHYU.OB. The table below
delineates on a quarterly basis the high and low sales prices per share of our
common stock as reported by the OTCBB. The prices set forth in the table below
may not be an accurate indicator of the value of the Company shares. These
prices represent inter-dealer quotations and do not reflect retail markup,
markdown or commissions and may not necessarily represent actual
transactions.
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Common Stock Price
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High
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Low
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2008
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First
Quarter Ended
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March
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$ | 0.06 | $ | 0.06 | ||||
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Second
Quarter Ended
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June
30
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$ | 0.10 | $ | 0.10 | ||||
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Third
Quarter Ended
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September
30
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$ | 0.09 | $ | 0.09 | ||||
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Fourth
Quarter Ended
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December
31
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$ | 0.15 | $ | 0.15 | ||||
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2007
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First
Quarter Ended
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March
31
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$ | 0.19 | $ | 0.08 | ||||
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Second
Quarter Ended
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June
30
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$ | 0.18 | $ | 0.08 | ||||
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Third
Quarter Ended
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September
30
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$ | 0.15 | $ | 0.09 | ||||
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Fourth
Quarter Ended
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December
31
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$ | 0.12 | $ | 0.05 | ||||
Holders
of Record
As of
March 27, 2009, there were approximately 300 holders of record of the Company
common stock.
Dividend
Policy
We have
not declared any dividends to date. We have no present intention of paying any
cash dividends on our common stock in the foreseeable future, as we intend to
use earnings, if any, to generate growth. The payment by us of dividends, if
any, in the future, rests within the discretion of our Board of Directors and
will depend, among other things, upon our earnings, our capital requirements and
our financial condition, as well as other relevant factors. There are no
restrictions in our articles of incorporation or bylaws that restrict us from
declaring dividends.
Recent
Sales of Unregistered Securities
Capitalization
Amendment
Pursuant
to a Certificate of Amendment to our Certificate of Incorporation filed with the
State of Delaware which took effect as of October 16, 2008, the number of our
authorized shares of Common Stock, par value $.001 per share, of the Company has
been increased from 60,000,000 to 500,000,000 and the number of our authorized
shares of Preferred Stock, par value $.001 per share, has been increased from
1,000,000 to 2,000,000 (the "Capitalization Amendment"). The Capitalization
Amendment was approved and authorized by the Board of Directors of the Company
and by the holders of shares representing a majority of our voting securities
which holders have given their written consent.
Recent
Sales of Unregistered Securities
We sold
the following equity securities during the fiscal year ended December 31, 2008
that were not registered under the Securities Act of 1933, as amended (the
"Securities
Act").
Preferred
Stock - Series A
On May
23, 2008, the Company filed with the State of Delaware a Certificate of
Designation authorizing its Series A Convertible Preferred Stock consisting of
500,000 shares, each of $0.001 par value and convertible into shares of Common
Stock at a rate of one thousand (1,000) shares of Common Stock for every one
share of Series A Convertible Preferred Stock at the option of the holder at any
time subsequent to the filing of an amendment to the Company’s certificate of
incorporation with the Secretary of State of the State of Delaware whereby the
authorized Common Stock is increased to a minimum of 200,000,000 shares. In
addition, the Series A Convertible Preferred Stock (i) has no voting rights
prior to conversion except as otherwise provided under Delaware law, (ii) has no
mandatory or optional redemption rights, (iii) has no preemptive rights, and
(iv) shall pay cash dividends only in the event cash dividends have been
declared on the Company’s Common Stock.
On June
2, 2008, the
Company entered into a Content License Agreement with New China Media, LLC (“New
China Media”), YGP,
LLC (“YGP”) and TWK Holdings, LLC
(“TWK”) (New China Media, YGP and TWK collectively referred to as “Content
Providers”) providing for (i) the assignment by Content Providers and the
assumption by the Company of certain rights of Content Providers for the
territory of the People’s Republic of China to use, transmit and publicly
display via the Internet certain content; and (ii) the purchase by YGP, New
China Media and TWK of 16,200 shares, 3,000 shares and 12,000 shares of Series A
Convertible Preferred Stock of the Company for $16,200, $3,000 and $12,000,
respectively. On December 16, 2008, pursuant to a notice of
conversion, New China Media and YGP agreed to convert the entire amount of their
respective shares of Series A Convertible Preferred Stock of the Company into
3,000,000 and 16,200,000 shares of Common Stock, respectively. The
securities were issued in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
On June
10, 2008, the Company’s subsidiary, Youth Media (Hong Kong) Limited (“YMHK”),
entered into a Cooperation Agreement with China Youth Net Technology (Beijing) Co., Ltd. (“CYN”), China Youth Interactive
Cultural Media (Beijing) Co., Ltd. (“CYI”) and China Youth Net Advertising Co.
Ltd. (“CYN Ads”). In conjunction with the Cooperation Agreement, on June
10, 2008, the Company issued an aggregate of 71,020 shares of its Series A
Convertible Preferred Stock to three designees of CYN. The
securities were issued in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
Common
Stock
During
March 2008, the Company sold 10,000,000 shares of its common stock to an
unaffiliated accredited investor at a price of $0.03 per share, resulting in
gross proceeds of $300,000. The securities were issued in reliance upon the exemption from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended.
During June 2008, the Company sold a total of 1,583,335 shares of its common stock at $0.03 per share to six investors for an aggregate purchase price of $47,500 in cash. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.
On August
29, 2008, the Company entered into a subscription agreement with Year of the
Golden Pig, LLC ("YGP, LLC"), pursuant to which the Company sold 2.5 Units, with
each Unit consisting of a $100,000 principal amount of a 12% Convertible
Promissory Note (the "YGP, LLC Note") due three years from its issuance and
350,000 Common Stock Purchase Warrants, with each Warrant entitling the holder
thereof to purchase at any time beginning from the date of issuance through five
years thereafter one share of Common Stock at a price of $0.09 per share subject
to the Company's filing of a certificate of amendment to its certificate of
incorporation increasing the number of its available shares for issuance.
The subscription agreement with YGP, LLC provided the Company with $250,000 in
gross proceeds. Pursuant to the subscription agreement with YGP, LLC, the
Company issued 875,000 Purchase Warrants. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.
On
September 30, 2008, the Company entered into a subscription agreement with Mojo
Music, Inc. ("Mojo Music"), of which Jay Rifkin, the Company's President and
Chief Executive Officer, is the sole managing member, in which the Company sold
1.5 Units, with each Unit consisting of a $100,000 principal amount of a 12%
Convertible Promissory Note due three years from its issuance and 350,000 Common
Stock Purchase Warrants, with each Warrant entitling the holder thereof to
purchase at any time beginning from the date of issuance through five years
thereafter one share of Common Stock at a price of $0.09 per share. The
subscription agreement with Mojo Music provided the Company with $150,000 in
gross proceeds. Pursuant to the subscription agreement with Mojo
Music, the Company issued 525,000 Purchase Warrants. The securities were
issued in reliance upon the exemption from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended, and/or Rule 506
thereunder.
During
September 2008, the Company issued 1.5 million shares to American Capital
Ventures, Inc. ("ACV, Inc.") pursuant to the terms of a Consulting Agreement
entered into by the Company on September 1, 2008. ACV, Inc. will provide
the Company with investor relations consulting services for a period of two
years. In consideration, ACV, Inc. will receive 2.5 million shares of the
Company's Common Stock of which 1.5 million shares were issued and the remainder
will be issued on the thirteenth month of the agreement term. The
Consulting Agreement was valued at $225,000 based on the fair value of the
underlying shares of the Company's common stock on the effective date of the
Agreement and will be amortized on a straight-line basis over the agreement term
of two years. On February 6, 2009, pursuant to a letter of instruction from ACV, notwithstanding anything to the contrary to the Consulting Agreement between ACV and the Company, the Company agreed to issue in
advance of the thirteenth month of the Consulting Agreement 250,000 shares of
the Company's common stock that will be deducted from the 1,000,000 (one million) shares of
the Company’s common stock that were scheduled to be issued on the thirteenth month of the
Consulting Agreement so that the remaining shares of the Company’s common stock
to be issued to ACV on such date are 750,000, unless the Consulting Agreement is
earlier terminated pursuant to the terms thereof. The securities were
issued in reliance upon the exemption from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
Recent
Stock Option Grants
During
the year ended December 31, 2008, the Company did not grant options to purchase
shares of the Company's common stock.
ITEM
6. Selected Financial
Data
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and all
associated notes hereto contained in this Form 10-K. The discussion and analysis
and results of operations thereto contain historical information and
forward-looking statements based on current assumptions that involve risks and
uncertainties. This Form 10-K contains forward-looking statements attributed to
third parties that also involve risks and uncertainties. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements. In
many cases, you can identify forward-looking statements by terminology, such as
"may," "should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms and other comparable terminology. These statements are only predictions.
Known and unknown risks, uncertainties and other factors could cause our actual
results to differ materially from those projected in any forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including but not limited to, those set forth under "Risk
Factors" appearing under "Item 1A. Risk Factors" and elsewhere in this
report on Form 10-K. This Form 10-K contains forward-looking statements as
defined by Section 21E Application of Safe Harbor for Forward-Looking Statements
of the Securities Exchange Act of 1934 and as such are entitled to the
protection provisions of these laws.
The
Company is confident that the expectations implied in the forward-looking
statements are based upon reasonable assumptions. However, no assurance
can be given that they will be attained or that any divergence will be
immaterial. Given the uncertainty and assumptions in the forward-looking
statements discussed in this Form 10-K, the forward-looking events may not occur
and actual results may differ materially and adversely from those expressed or
implied by the forward-looking statements. Consequently, the Company disclaims
any obligation to publicize or undertake any updates or revisions to any
forward-looking statements contained herein with respect to any change in the
Company expectation of any such forward-looking statement or assumptions they
may be based on.
The
following "Overview" section is a brief summary of the significant issues
addressed in this MD&A. Investors should read the relevant associated
sections of the MD&A for a complete discussion of the issues summarized
below. The entire MD&A should be read in conjunction with ITEM 8. Financial
Statements and Supplementary Data.
Overview
China
Youth Media, Inc.
China
Youth Media, Inc. is a China focused youth marketing and media company whose
business is to provide advertisers and corporations with direct and centralized
access to China’s massive but difficult to reach student
population. The cornerstone of the Company’s China youth marketing
strategy is Koobee, a large scale, advertising supported Intranet Television
Network (ITVN) media portal that is initially targeting China’s campus-based
college students, estimated to total more than 30 million young
people.
Koobee
Koobee is
a venue designed for marketers to deliver traditional TV spots and new media
advertising campaigns to a highly targeted demographic in the world’s fastest
growing broadband market. Koobee will deliver TV-style entertainment
primarily on a dedicated fiber network directly to the computers of these
students, offering a compelling solution for advertisers and corporations to
reach the most active online community in China and a key segment of the world’s
largest youth market.
Koobee
will initially be offering a 24 hour sports channel featuring All Sports Network
(ASN) content from the NFL, NHL, and Pac 10 and Big Ten games; a 24 hour music
channel by BTTV, a popular youth lifestyle and music entertainment TV channel in
China; a travel and leisure channel by Quest USA; and a fashion channel
featuring “China’s Next Top Model,” part of the international Top Model
franchise and based on the hit U.S. TV show “America’s Next Top
Model.”
While we
plan to offer a range of premium international content, we also anticipate that
Koobee will be the first live network to be populated directly by students for
students, making it a powerful tool set to promote events, ideas and interests
to students all over China.
To our
advertisers, we plan to offer multiple touch points ranging from interstitial
interactive ads to banners within social networking clubs and sponsored
competitions, all with accurate ad tracking that will help ensure that clients
realize value from unique and fully licensed content. With Koobee, we
intend to provide advertisers the impact of TV with the ROI of the
Internet. We expect this combination to be competitive and
sufficiently appealing to capture market share in China’s fast growth online
advertising industry.
Online
Whether
through Koobee.com, Koobee.com.cn or Koobee.tv, we have strategically positioned
Koobee, the advertising supported ITVN media portal, to be the engine that
drives multiple revenue streams, including brand sponsorships, interactive
advertising and eCommerce. Koobee is a venue designed for marketers
to deliver traditional TV spots and new media advertising campaigns to a highly
targeted demographic in the world’s fastest growing broadband
market.
On
Campus
Our
access to China’s college students includes event staging and advertising rights
on campuses throughout China. China Youth Media will offer marketers
an opportunity to sponsor live events and showcase their brands with
international touring acts. We will carefully place each event at the
most appropriate campuses and venues to generate the largest turnout and highest
ROI. We will also offer coordinated Internet and campus event
campaigns that will bring international touring acts and sponsors directly to
China’s college students with live ITVN broadcast straight into their dorm
rooms. We have a strategic partnership with Xinhua Sports &
Entertainment Ltd., a leading media group in China with assets that include an
extensive event planning group with international brands as
clients.
On
Mobile
Our
partner China Youth Net is in the final stages of securing our mobile video and
advertising license. Our plan is to deploy an advanced mobile media
and advertising delivery system catering specifically to China’s youth
market. We will offer opt-in surveys and data collection, as well as
coordinated Internet, campus event and mobile campaigns.
Advertising
Services
China
Youth Media seeks to enable brands to achieve their media objective by providing
tailor-made advertising services and niche-targeted media
campaigns. Our brand-tailored advertising services will
include:
|
1)
|
Targeted
niche marketing into campuses
|
|
2)
|
Standard
digital media buys on our Koobee
portal
|
|
3)
|
In-show
ad inventory
|
|
4)
|
Creative
ad placements and overlays
|
|
5)
|
Channel
sponsorship and branded
content
|
|
6)
|
Competitive
CPMs and building priceless lifetime
loyalty
|
|
7)
|
Event
sponsorship
|
|
8)
|
Mobile
media and text campaigns
|
Our
secure and fully tracked network will help ensure that advertisers see real
returns and value. Our accurate ad tracking will detail precisely how
many times an ad has been consumed, where it has been viewed and for how long,
providing comprehensive student viewer profiles throughout.
Significant
Transactions During The Year Ended December 31, 2008
China
Youth Net (CYN)
On June
10, 2008 our subsidiary, Youth Media (Hong Kong) Limited ("YMHK"), entered into
a Cooperation Agreement (the “Cooperation Agreement”) with China Youth Net
Technology (Beijing) Co., Ltd. ("CYN"), China Youth Interactive Cultural Media
(Beijing) Co., Ltd. ("CYI") and China Youth Net Advertising Co. Ltd. ("CYN Ads")
to cooperate with each other to develop, build and operate a fully managed video
and audio distribution network under the auspices of CYN (the “Campus
Network”). In addition, CYN and CYI have agreed to exclusively grant
YMHK the following rights during the term of the Cooperation Agreement:
exclusive right to advertise on the Campus Network; exclusive right to sell and
operate the commercial campus marketing events; right to provide foreign
commercial content to the Campus Network; and enjoy the rights with respect to
the setup, operation, maintenance and expansion of the Campus Network according
to a separate commercial and technical services agreement.
Xinhua
Sports and Entertainment Limited (formerly Xinhua Finance Media
Limited)
On
December 26, 2008, our subsidiaries YMHK and Youth Media (Beijing) Limited
("YMBJ") entered into a Joint Venture Agreement (the "Joint Venture Agreement")
with CYI and Xinhua Sports & Entertainment Limited (“XSEL”), formerly known
as Xinhua Finance Media Limited, to develop business opportunities contemplated
by the Cooperation Agreement YMHK entered into on June 10, 2008 with CYN, CYI
and CYN Ads. The Joint Venture Agreement provides working capital for
the purposes of deploying and marketing Koobee, the Campus Network for video
distribution built on the existing broadband infrastructure connecting colleges
and universities throughout China. The Joint Venture Agreement
provides working capital for a minimum of twelve months ending December 31,
2009. XSEL is working with the Company’s subsidiaries to market and
develop ad sales for Koobee.com. Additionally, XSEL will collaborate
on the sale and operation of brand sponsored campus events and the supply of
sports and other commercial content to the Company.
Yes
TV
On May
31, 2008, a Supply Agreement for Content (the "Supply Agreement") was
entered into between Yes Television (Hong Kong) Limited ("Yes TV"), and New
China Media and Youth Media (Hong Kong) Limited, a subsidiary of the Company
("YMHK") (New China Media and Youth Media together referred to as "Licensees"),
pursuant to which Yes TV has agreed to supply certain content, such as NFL, NHL
College Pac 10, and NCAA, to Licensees for distribution via the internet in
China. Yes TV is a content aggregator providing, among other things, live and
delay broadcast for distribution and transmission via telecommunications
networks. On October 21, 2008, Licensees entered into a Supplemental
Agreement (the "Supplemental Agreement") with Yes TV pursuant to which the
Supply Agreement was extended by an additional eight (8) years for a total of
ten (10) years. The term of the Supply Agreement in conjunction with
the Supplemental Agreement commenced on signing and shall terminate on April 30,
2018.
New
China Media
On June
2, 2008, the Company entered into a Content License Agreement with New China
Media, LLC, YGP, LLC and TWK Holdings, LLC (New China Media, YGP and TWK
collectively referred to as "Content Providers") providing for the assignment by
the Content Providers and the assumption by us of certain rights of the Content
Providers for the territory of the People's Republic of China ("PRC") to use,
transmit and publicly display via the Internet certain content. On
January 8, 2009, the Content License Agreement was extended by an additional
eight years for a total of ten years. In consideration for the
increase in the term of the agreement, New China Media received 4,000,000 shares
of the Company's common stock.
Our
Wholly-Owned Subsidiaries
Youth
Media (BVI) Limited
On May 8,
2008, under the laws of the British Virgin Islands, the Company formed Youth
Media (BVI) Limited ("YM BVI"). YM BVI is a wholly-owned subsidiary
of the Company and was established for the purpose of incorporating the
Company's wholly-owned subsidiary in Hong Kong.
Youth
Media (Hong Kong) Limited and Youth Media (Beijing) Limited
Youth
Media (Hong Kong) Limited ("YMHK"), a company organized under the laws of Hong
Kong on May 19, 2008, and Youth Media (Beijing) Limited (“YMBJ”), a company
organized under the laws of the People's Republic of China on December 10, 2008,
are wholly-owned subsidiaries of YM BVI and were formed by the Company to take
advantage of its shift in business to aggregation and distribution of
international content and advertising for Internet or online consumption in
China.
Rebel
Crew Films, Inc.
Rebel
Crew Films is a wholly-owned subsidiary of the Company and was organized under
the laws of the State of California on August 7, 2002. In January 2008,
the Company entered into a license and distribution agreement with Westlake
Entertainment, Inc. which effectively shifted all day-to-day operations related
to our home video library to Westlake Entertainment. The licensing transaction
was part of an initiative to focus a significant amount of the Company's
available resources to building and launching www.Koobee.com, our ITVN media
portal in China.
ViraCast
and Beat9.com
Our
patent pending proprietary technology called ViraCast allows for enterprise
workflow management, processing, distribution and control of content by
dynamically inserting and continuously updating interactive, geo-targeted
advertising into digital content, such as Internet videos, podcasts, etc.
Digital content that has been processed with ViraCast then has the ability
to propagate virally across the Internet while ViraCast continuously tracks ad
consumption and user interaction. ViraCast provides content producers,
advertisers, and marketers new revenue models built around these emerging
platforms with enhanced user data, reporting, and
accountability. ViraCast tracks impressions, clicks, and other
pertinent data valuable to advertisers. Our customers benefit from our
verifiable ad tracking by paying only for ads that are viewed, clicked or acted
on. Currently, ViraCast is available via our wholly-owned and
operated website www.Beat9.com.
PerreoRadio.com
PerreoRadio.com
is our wholly-owned and operated website targeted to the young, urban Latino
demographic in both the United States and internationally. It offers online
radio shows, podcasts, music, and music videos from some of the top DJ's from
the United States, Latin America, and the Caribbean. PerreoRadio generates
almost exclusively all revenue from the placement of ads on the website. We are
a publisher-affiliate to all the large ad-network providers. We generally
recognize revenue on a monthly basis when payment is received from our
publisher-affiliates.
Company
History
China
Youth Media, Inc. (referred to herein as the "Company," "we," "us,"
and "our") was
organized under the laws of the State of Utah on July 19, 1983 under the name of
Digicorp. On February 22, 2007, we changed the Company’s domicile
from the State of Utah to the State of Delaware effected by the merger of the
Company, a Utah corporation, with and into, Digicorp, Inc., a newly formed
wholly owned subsidiary of the Company that was incorporated under the Delaware
General Corporation Law for the purpose of effecting the change of
domicile.
The
Company changed its name from “Digicorp, Inc.” to “China Youth Media, Inc.” (the
“Corporate Name Change”) pursuant to a Certificate of Amendment to our
Certificate of Incorporation filed with the State of Delaware which took effect
as of October 16, 2008. The Corporate Name Change was approved and
authorized by the Board of Directors of the Company and by the holders of shares
representing a majority of our voting securities which holders have given their
written consent. As a result of the Corporate Name Change, our stock symbol
changed to “CHYU” with the opening of trading on October 16, 2008 on the
OTCBB.
The
Company is organized in a single operating segment with no long-lived assets
outside of the United States of America. All of our revenues to date have
been generated in the United States, but with the development of our China ITVN
media portal, we expect that a portion of our future revenues will be from other
countries.
Revenue
Sources
During
the year ended December 31, 2008, the Company, including its subsidiaries,
generated revenue primarily from (i) digital content distribution; (ii) website
ad revenue; and (iii) DVD sales.
Advertising Supported Intranet
Television Network Media Website - Koobee is a large scale,
advertising supported Intranet Television Network (ITVN) media portal that is
initially targeting China’s campus based college students, estimated to total
more than 30 million young people. Koobee is a venue for marketers to
deliver traditional TV spots and new media advertising campaigns to a vast,
upwardly mobile, targeted demographic. Advertisers and channel owners
will have available to them multiple touch points ranging from interstitial
interactive ads to banners within social networking clubs and sponsored
competitions, all with accurate ad tracking that ensures clients realize value
from unique and fully licensed content. We expect this combination to
be competitive and sufficiently appealing to capture market share in China’s
fast growth online advertising industry. We believe that
significant opportunities exist in the China Internet advertising space, and we
will actively pursue this potential source of revenue during the year ending
December 31, 2009.
Digital Content Distribution.
- ViraCast and
www.Beat9.com - The Company generates revenue by dynamically inserting
and continuously updating interactive, geo-targeted advertising into digital
content, such as Internet videos, podcasts, etc. Our patent pending
technology, ViraCast, digitally embeds advertising into digital content that
then has the ability to propagate virally across the Internet while continuously
tracking ad consumption and user interaction. ViraCast tracks impressions,
clicks and other pertinent data valuable to advertisers. Ads are provided
from our publisher-affiliates and we generally recognize revenue on a monthly
basis when payment is received from our publisher-affiliates.
Website Ad Revenue. -
www.PerreoRadio.com - We generate revenue from our wholly owned and
operated website www.PerreoRadio.com. PerreoRadio generates revenue almost
exclusively from the placement of ads on the website. We are a
publisher-affiliate to all the large ad-network providers. We generally
recognize revenue on a monthly basis when payment is received from our
publisher-affiliates.
DVD Sales. - The Company
generates revenue through the direct sales of licensed content and licensing
agreements. In the past, through licensing agreements, the Company
received advance payments as consideration for rights granted to third parties
that distributed the Company's licensed content and were recorded as deferred
revenue. The Company recognized revenue under its licensing agreements as
royalties that were earned upon shipment of licensed content to customers by the
sub-licensor.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operation are
based upon the accompanying financial statements which have been prepared in
accordance with the generally accepted accounting principles in the United
States of America. The preparation of the financial statements requires
that we make estimates and assumptions that affect the amounts reported in
assets, liabilities, revenues and expenses. Management evaluates on an on-going
basis our estimates with respect to the valuation allowances for accounts
receivable, income taxes, accrued expenses and equity instrument valuation, for
example. We base these estimates on various assumptions and experience
that we believe to be reasonable. The following critical accounting
policies are those that are important to the presentation of our financial
condition and results of operations and require management’s most difficult,
complex, or subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain.
The
following critical accounting policies affect our more significant estimates
used in the preparation of our financial statements and, in particular, our most
critical accounting policy relates to the valuation of our intangible assets and
stock based compensation.
Allowance for Doubtful
Account - Our allowance for doubtful accounts relates to accounts
receivable. The allowance for doubtful accounts is an estimate prepared by
management that identifies a certain portion of receivables that may go
uncollected. In determining adequacy of the allowance for doubtful
account, we consider customer balances in receivables, historical bad debts,
customer concentrations, current economic trends and changes in customer payment
patterns. Changes in the financial condition of our customer may change,
which would require additional allowances. The allowance for doubtful
account is reviewed quarterly, and adjustments are made as deemed
necessary.
Beneficial Conversion Feature of
Convertible Notes Payable - The Beneficial Conversion Feature ("BCF")
of a convertible note, is normally characterized as the convertible portion or
feature of certain notes payable that provide a rate of conversion that is below
market value or in-the-money when issued. The Company accounts for
BCF in accordance with the guidelines established by Emerging Issues Task Force
("EITF") 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios. The Company records a BCF related to the
issuance of a convertible note when issued and also records the estimated fair
value of the warrants issued with those convertible notes. The BCF of a
convertible note is measured by allocating a portion of the note's proceeds to
the warrants and as a reduction of the carrying amount of the convertible note
equal to the intrinsic value of the conversion feature, both of which are
credited to additional paid-in-capital. The Company calculates the fair value of
warrants issued with the convertible note using the Black-Scholes valuation
model and uses the same assumptions for valuing employee options in accordance
with SFAS No. 123R. The only difference is that the contractual life
of the warrants is used. The value of the proceeds received from a
convertible note is then allocated between the conversion feature and warrants
on a relative fair value basis. The allocated fair value is
recorded in the consolidated financial statements as a debt discount
(premium) from the face amount of the note and such discount is amortized over
the expected term of the convertible note (or to the conversion date of the
note, if sooner) and is credited to interest expense.
Goodwill and Other Intangible
Assets - Goodwill and Intangible Assets correspond to the excess cost
over fair value of certain assets during acquisition. In accordance with
the provisions of FASB Statement No. 142, Goodwill and Other Intangible
Assets, goodwill and intangible assets acquired that are determined to
have an indefinite useful life are not subject to amortization, but instead are
tested for impairment at periodic intervals. Intangible assets with a
useful life that can be estimated are amortized over their respective estimated
useful lives to their estimated residual values and are reviewed periodically
for impairment in accordance with FASB Statement No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Certain events or changes in
circumstances may occur that indicate that goodwill or assets are impaired and
consequently require testing on a periodic basis. Determining the fair
value of goodwill or assets is subjective in nature and involves using estimates
and assumptions. We base our fair value estimates on assumptions we
believe to be reasonable but that are inherently uncertain. To date we
have not recognized impairments on any of our goodwill and other intangible
assets.
Stock-Based Compensation - We
have adopted the provisions of SFAS No. 123(R), Share-Based Payment, which
requires that share-based payments be reflected as an expense based upon the
grant-date fair value of those grants. Accordingly, the fair value of each
option grant, non-vested stock award and shares issued under our employee stock
purchase plan, were estimated on the date of grant. We estimate the fair
value of these grants using the Black-Scholes model which requires us to make
certain estimates in the assumptions used in this model, including the expected
term the award will be held, the volatility of the underlying common stock, the
discount rate, dividends and the forfeiture rate. The expected term represents
the period of time that grants and awards are expected to be outstanding.
Expected volatilities were based on historical volatility of our stock.
The risk-free interest rate approximates the U.S. treasury rate
corresponding to the expected term of the option. Dividends were assumed
to be zero. Forfeiture estimates are based on historical data. These
inputs are based on our assumptions, which we believe to be reasonable but that
include complex and subjective variables. Other reasonable assumptions could
result in different fair values for our stock-based awards. Stock-based
compensation expense, as determined using the Black-Scholes option pricing
model, is recognized on a straight line basis over the service period, net of
estimated forfeitures. To the extent that actual results or revised estimates
differ from the estimates used, those amounts will be recorded as a cumulative
adjustment in the period that estimates are revised.
Results
of Operations
Comparison
of Year End December 31, 2008 to 2007
Revenues
The
Company currently generates revenue primarily from (i) digital content
distribution; (ii) website ad revenue; and (iii) DVD sales. The following
table sets forth for the periods indicated the components of revenue included in
our consolidated statements of operations:
|
Year
Ended
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
Revenue
|
2008
|
2007
|
||||||
|
Sales
|
$ | 107,000 | $ | 557,365 | ||||
|
Other
Income
|
148,189 | 35,000 | ||||||
|
Total
revenue
|
$ | 255,189 | $ | 592,365 | ||||
Sales - We generated revenues
of $107,000 and $592,000 for the years ended December 31, 2008 and December 31,
2007, respectively. During the year ended December 31, 2008 approximately 53% of
sales revenue was from the sales of our home video content and approximately 44%
of sales revenue was from the production and distribution of digital content. In
the past, our revenue was in large part generated through licensing agreements
and sales of our home video library. The Company strategy has since
shifted to the aggregation and distribution of international content and
advertising for Internet consumption in China because we believe that
significant opportunities exist in the China Internet advertising
space. As a result, licensing revenues and sales of our home video
library have significantly decreased and we believe will be eliminated as we
continue to shift our focus and available resources to the China Internet
advertising space. In January 2008, the Company entered into a
license and distribution agreement with Westlake Entertainment, Inc. This
agreement effectively shifted all manufacturing and distribution of our home
video library to Westlake Entertainment along with all day-to-day operations
related to our home video library. This agreement calls for a 25% - 50%
distribution fee to Westlake on gross sales of licensed products.
Other Income - In March 2006,
the Company entered into a commercial lease agreement for additional office
space (the "Hollman Lease"). The Hollman Lease requires monthly payments
of base rent which increase from $12,475 in September 2006 to $14,041 in
December 2010. During February 2008 and April 2008, the Company entered into
commercial sublease agreements with two non-related parties. For the
year ended December 31, 2008, the sublease agreements resulted in $148,100 in
gross revenues.
Deferred Revenue - In the
past, through licensing agreements, the Company received advance payments as
consideration for rights granted to third parties that distributed the Company's
licensed content and were recorded as deferred revenue. The Company
recognized revenue under its licensing agreements as royalties that were earned
upon shipment of licensed content to customers by the sub-licensor. There
were deferred revenue balances of $70,000 and $70,000 at December 31, 2008 and
2007, respectively, and they represented advanced royalty payments that were
expected to be earned. During the year ended December 31, 2008, all
license and distribution agreements related to the deferred revenue had
expired. Licensee acceptance could not be secured. The
Company made reasonable effort, but documented royalty reports could not be
attained, and given that the time period during which the contractual provisions
that were in effect had lapsed, all deferred revenue was recognized on December
31, 2008.
Operating
Expenses
Operating expenses were $2.6
and $2.8 million during the years ended December 31, 2008 and 2007,
respectively. In addition to decreases in the cost of sales, depreciation
expense, and salaries to employees, the component that was almost exclusively
responsible for the decrease in operating expenses during the twelve months
ended December 31, 2008 was stock based compensation expense from grants of
nonqualified stock options to our employees and non-employee directors.. The
decrease in operating expenses was almost offset by significant increases in
Amortization and Interest expenses along with increases in professional
fees.
Stock based compensation
expense from grants of nonqualified stock options to our employees and
non-employee directors decreased to $163,000 during the year ended December 31,
2008 from $1.2 million during the year ended December 31, 2007. The decrease in
stock based compensation expense from grants of nonqualified stock options
during the year ended December 31, 2008 resulted primarily from forfeitures of
nonqualified stock options by employees no longer with the Company.
Cost of sales during the
twelve months ended December 31, 2008 was $55,000 which represents a significant
decrease from $197,000 during the twelve months ended December 31, 2007 .
The decrease in cost of sales can be attributed to the shift in Company
strategy to the aggregation and distribution of international content and
advertising for Internet consumption in China.
Salaries and employee benefits,
excluding stock based compensation expense, reflected a
decrease to $443,000 during the year ended December 31, 2008 from $558,000
during the year ended December 31, 2007. The reductions in costs reflect a shift
in our Company strategy which resulted in part in a targeted reduction in
employees that were related to the sales of our licensed home video
library.
The
remaining operating expenses consisted of professional fees, rent expense,
amortization expense and general and administrative expenses. Professional fees
were $254,000 more during the year ended December 31, 2008 compared to the year
ended December 31, 2007. The increase in professional fees are in large
part due to significant increase in amounts paid for legal and consulting fees
related to our operations in China and the establishment of our subsidiaries in
Hong Kong and Beijing.
Legal expense increased from
the previous year. Legal fees increased by $115,000 during the year ended
December 31, 2008. During the year ended December 31, 2008 and 2007, legal fees
were $174,000 and $59,000, respectively. For the year ended December 31, 2008
the majority of legal fees were related to the development of contracts,
establishment of our subsidiaries in Hong Kong and Beijing, and review of major
company transactions. In addition, legal fees during this period were
composed of fees paid for S.E.C. filing related matters, private placement
agreements and in preparation for financing activities. During the year ended
December 31, 2007, legal fees were almost exclusively related to patent and
trademark filing along with S.E.C. filing related expenses.
Consulting fees increase by
$169,000 during the year ended December 31, 2008. At December 31, 2008 and 2007,
consulting fees were $187,000 and $17,000, respectively. During the year ended
December 31, 2008, the majority of consulting expense was related to sales
contracting work and the development of our operations in China. During the year
ended December 31, 2007, consulting expense resulted from sales contracting work
in addition to work done to further develop the Company’s accounting department
and strengthen the Company’s accounting policies and control
procedures.
Rent expense increased by
approximately $43,000 during the year ended December 31, 2008 compared to the
year ended December 31, 2007 due in part to the company’s lease of additional
commercial office space in July 2008, with base rent of $1,500 per month
combined with the customary 3% increase in our base rent for our the current
corporate office space. The commercial office space in Beijing was leased in
anticipation of growth in the company’s China operations.
General and administrative
expense increased by approximately $53,000 during the year ended December
31, 2008 compared to the year ended December 31, 2007 and is attributed to the
strategic overall expansion of the business to the aggregation and distribution
of international content and advertising for Internet consumption in
China.
Net
Loss
For the
years ended December 31, 2008 and 2007 the Company had a net loss of
approximately $3 million and $2.4 million, respectively and is primarily
attributed to a significant decrease in revenues generated. The Company reduced
its operating expenses during the year ended 2008 as compared to 2007 by
implementing strategies to reduce its cash used in operating activities which
included a targeted reduction of the employee workforce, increasing the
efficiency of the Company’s developmental efforts, reducing discretionary
expenditures and negotiating favorable payment arrangements with service
providers.
Interest
Income and Other, Net
Given the
financials constraints of the Company and its reliance on financing activities,
interest expense related to the financing of capital increase to $274,000 during
the year ended December 31, 2008 from $180,000 during the year ended December
31, 2007.
Taxes
At
December 31, 2008, we had a net operating loss carryforward of approximately
$7.6 million to offset future taxable income for federal income tax purposes.
The utilization of the loss carryforward to reduce any future income taxes
will depend on our ability to generate sufficient taxable income prior to the
expiration of the net operating loss carryforwards. The carryforward expires
beginning in 2021.
A change
in the ownership of a majority of the fair market value of our common stock can
delay or limit the utilization of existing net operating loss carryforwards
pursuant to Internal Revenue Code Section 382. The Company believes that such a change occurred on December 29, 2005 and again during the year ended December 31, 2008. The Company is evaluating the net operating loss carryforward limitation imposed by Internal Revenue Code Section 382 for net operating losses incurred before the change dates.
Liquidity
and Capital Resources
Our principal sources of
liquidity are cash generated from current operations and cash from
financing activities. As of December 31, 2008, our cash and cash
equivalents were $34,400. We had a working capital deficit of
approximately $742,000 at December 31, 2008 and we continue to have recurring
losses. In the past we have primarily relied upon loans from related parties to
fund our operations and, to a lesser extent, revenues generated from licensing
our film content, on a non-exclusive basis, to other distributors of Latino home
entertainment content. These conditions raise substantial doubt about our
ability to continue as a going concern. We are actively seeking sources of
additional financing in order to maintain and potentially expand our operations
and to fund our debt repayment obligations. Even if we are able to obtain
funding, there can be no assurance that a sufficient level of sales will be
attained to fund such operations or that unbudgeted costs will not be incurred.
Future events, including the problems, delays, expenses and difficulties
frequently encountered by similarly situated companies, as well as changes in
economic, regulatory or competitive conditions, may lead to cost increases that
could make the net proceeds of any new funding and cash flow from operations
insufficient to fund our capital requirements. There can be no assurances that
we will be able to obtain such additional funding from management or other
investors on terms acceptable to us, if at all.
Total assets were $8,962,000
at December 31, 2008 versus $911,000 at December 31, 2007. The change in total
assets is primarily attributable to several major transactions conducted by the
Company resulting in a significant increase in Intangible Assets during the year
ended December 31, 2008. See Note 6 Intangible Asset.
Accounts receivable decreased
by $133,000 during the twelve months ended December 31, 2008 as compared to the
year ended December 31, 2007. The decrease in accounts receivable resulted
primarily from the change in strategy of the Company to focus on developing an
Internet media portal in China. As we continue to focus Company resources to the
development of an Internet media portal in China, the Company anticipates that
receivables from the sale of DVDs will continue to decline.
DVD sales decreased
significantly during the twelve months ended December 31, 2008 as compared to
the twelve months ended December 31, 2007. This decrease reflects the
Company's plan to shift its business to the aggregation and distribution of
content for Internet consumption in China.
Intangible Assets net for the
twelve months ended December 31, 2008 and 2007 was $8,537,000 and $395,000,
respectively. This significant increase in the Company's intangible assets
was exclusively as a result of the capitalization of a Content License Agreement
and a Cooperation Agreement entered into by the Company as described in Note 6
Intangible Assets. Furthermore, the significant increase in intangible
assets was slightly offset by the increase in the amortization expense of our
licensed content.
Operating activities used
$926,000 of cash during the year ended December 31, 2008 compared to
$849,000 during the year ended December 31, 2007. The
change in cash used for operating activities resulted primarily from a shift in
Company strategy to focus on the development of an internet media portal in
China and the associated legal and consulting fees. During the year
ended December 31, 2008, there was a significant decrease in sales revenue
related to the sale of our licensed content and an associated decrease in cost
of sales. As we continue to focus Company resources to the
development of an Internet media portal in China, the Company anticipates that
all revenues henceforth will be generated from our operations in China and not
from sales of our licensed home video library.
Cash used in investing
activities for the year ended December 31, 2008 of $5,500 resulted from
the purchase of computer hardware. Cash used in investing activities
for the year ended December 31, 2007 of $14,800, resulted from the purchase of
licensed Spanish language film content that was capitalized.
Contractual
Obligations as of December 31, 2008
Operating Leases - Set forth
below is a summary of our current obligations as of December 31, 2008 comprised
exclusively of rental lease obligations to make future payments due by the
period indicated below.
|
Operating Lease Payments |
Minimum
Payments |
||
|
2009 |
249,155 | ||
|
2010 |
239,566 | ||
|
2011 |
82,757 | ||
|
2012 |
63,508 | ||
|
Total |
$ | 634,986 | |
In August
2005 the Company entered into a commercial lease agreement for office space.
The lease requires monthly payments of base rent in the amount of $5,890
from August 21, 2005 through September 30, 2012. Further, on each anniversary
date the base rent is subject to a 3% increase over the previous year. In
March 2006 the Company entered into a commercial lease agreement for additional
office space. The additional lease requires monthly payments of base rent
which increase from $12,475 in September 2006 to $14,041 in December
2010. On July 15, 2008, the Company entered into a commercial lease
agreement for office space in Beijing, China. The lease requires monthly
payments of $1,500 for twelve months.
Off-Balance Sheet
Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Recently Issued Accounting
Pronouncements
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), Business
Combinations ("SFAS
141(R)"). This statement requires the acquiring entity in a
business combination to record all assets acquired and liabilities assumed at
their respective acquisition-date fair values, changes the recognition of assets
acquired and liabilities assumed arising from contingencies, changes the
recognition and measurement of contingent consideration, and requires the
expensing of acquisition-related costs as incurred. SFAS 141(R) also requires
additional disclosure of information surrounding a business combination, such
that users of the entity's financial statements can fully understand the nature
and financial impact of the business combination. SFAS 141(R) is
effective for the Company beginning January 1, 2009 and we will apply it
prospectively to business combinations completed on or after that
date.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of ARB 51 ("SFAS 160"). SFAS 160
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent's ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also established reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owner. SFAS No. 160 is effective for the Company
beginning January 1, 2009. We do not expect the adoption of this standard to
have a material impact on the Company’s income statement, financial position or cash
flows.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No.
133”, which is effective for fiscal years beginning after November 15,
2008. This statement amends and expands the disclosure requirements of SFAS No.
133 with the intent to provide users of financial statements with an enhanced
understanding of: a) How and why an entity uses derivative instruments; b) How
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations; and c) How derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for the Company
beginning in the first quarter of fiscal 2009. We do not expect the adoption of
SFAS No. 161 to have a material effect on the Company’s consolidated results of
operations and financial condition.
In April
2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of
Intangible Assets”, which is effective for fiscal years beginning after
November 15, 2008. This statement amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142. FAS No. 142-3 is
effective for the Company beginning January 1, 2009. We do not expect the
adoption of FAS No. 142-3 to have a material impact on the Company’s income statement,
financial position or cash flows.
In May 2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), which requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 became effective for the Company on January 1, 2009 and requires retroactive application. The adoption of FSP APB 14-1 is not expected to have a material impact on the Company’s consolidated financial position, cash flows, or results of operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, which is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board (PCAOB) amendments to
AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). We do not expect the adoption
of SFAS No. 162 to have a material impact on the Company’s income statement,
financial position or cash flows.
ITEM
7A. Quantitative and Qualitative
Disclosures About Market Risk
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
ITEM
8. Financial Statements and
Supplementary Data
See
Financials Statements on Page 50 of this Annual Report on Form
10-K.
ITEM
9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
ITEM
9A (T). Controls and
Procedures
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that, as of
December 31, 2008, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is: (1) accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure;
and (2) recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. There was no change to our
internal controls or in other factors that could affect these controls during
our last fiscal year that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, the chief executive officer
and chief financial officer and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
Our
evaluation of internal control over financial reporting includes using the COSO
framework, an integrated framework for the evaluation of internal controls
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
to identify the risks and control objectives related to the evaluation of our
control environment.
Based on
our evaluation under the frameworks described above, our management has
concluded that our internal control over financial reporting was effective as of
December 31, 2008.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation requirements by the company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this annual report.
ITEM
9B. Other
Information
Not
applicable.
PART
III
ITEM
10. Directors, Executive Officers and
Corporate Governance
The
following table sets forth the names and ages of the members of our Board of
Directors and our executive officers and the positions held by
each.
|
Name
|
Age
|
Position
|
||
|
Jay
Rifkin
|
53
|
Chief
Executive Officer, Director
|
||
|
William
B. Horne
|
40
|
Director
|
||
|
Alice
M. Campbell
|
58
|
Director
|
||
|
Alan
Morelli
|
47
|
Director
|
||
|
David
M. Kaye
|
54
|
Director
|
Officers
are elected annually by the Board of Directors (subject to the terms of any
employment agreement), to hold such office until an officer’s successor has been
duly appointed and qualified, unless an officer sooner dies, resigns or is
removed by the Board. Some of our directors, director nominees and executive
officers also serve in various capacities with our subsidiary Rebel Crew Films.
There are no family relationships among any of our directors and executive
officers.
Below is
a brief description of the above persons’ business experience during the past
five years based on information supplied by each of them.
Jay Rifkin, Chief Executive Officer,
Principal Financial Officer and Director. Mr. Rifkin has been our Chief Executive Officer since September 30,
2005 and has been a member of our Board of Directors since March 26, 2006. From 2004 to Present, Mr. Rifkin has been the sole Managing Member of
Rebel Holdings, LLC. In 1995, Mr. Rifkin founded Mojo Music, Inc., a music
publishing company, and he has been President of Mojo Music, Inc. since it was
founded. Mr. Rifkin has served as Producer and Executive Producer on various
motion pictures and is also a music producer, engineer and
songwriter. Mr. Rifkin received a Grammy Award for Best Children’s Album and an
American Music Award for Favorite Pop/Rock Album for his work on Disney’s "The
Lion King," and received a Tony nomination for "The Lion King" on Broadway. From
1988 to 2004, Mr. Rifkin, through Mojo Music, Inc., served as a Managing Member
of Media Ventures, LLC, an entertainment cooperative founded by Mr. Rifkin and
composer Hans Zimmer. In 1995, Mr. Rifkin founded Mojo Records, LLC, which in
1996 became a joint venture with Universal Records, and was subsequently sold to
Zomba/BMG Records in 2001.
William B. Horne, Director.
Mr. Horne has been a member of our Board of Directors since July 20, 2005.
From July 20, 2005 to April 20, 2007, Mr. Horne was our Chief Financial Officer.
From September 30, 2005 until December 29, 2005, Mr. Horne also served as our
Chief Executive Officer and Chairman of our Board of Directors. From July
2005 until June 2006, Mr. Horne was also the Chief Financial Officer and a
director of Ault Glazer Bodnar & Company, Inc. From July 2005 until October 2008, Mr. Horne
was Chief Financial Officer of Patient Safety Technologies, Inc. and
its subsidiaries, and was Chief Executive Officer from January 2007 until May 2008. From May 2002 to April 2005, Mr. Horne held the position of Chief Financial
Officer of Alaska Wireless Communications, a privately held advanced cellular
communications company. Since January 2002, Mr. Horne has also provided
strategic financial consulting services to both private and public companies.
From November 1996 to December 2001, Mr. Horne held the position of Chief
Financial Officer of The Phoenix Partners, a venture capital limited partnership
located in Seattle, Washington.
Alice M. Campbell, Director.
Ms. Campbell has been a member of our Board of Directors since July 16,
2005. From June 23, 2005 until January 30, 2006, Ms. Campbell served as a
director of IPEX, Inc., a public company quoted on the OTC Bulletin Board. Ms.
Campbell served as a director of Patient Safety Technologies, Inc., a public
company quoted on the OTC Bulletin Board, from October 22, 2004 until January
26, 2007. Since 2001, Ms. Campbell has been, and is currently, an investigator
and consultant specializing in research and litigation services, financial
investigations and computer forensics for major companies and law firms
throughout the United States. Ms. Campbell is a certified fraud specialist, as
well as a certified instructor for the Regional Training Center of the United
States Internal Revenue Service and for the National Business Institute. From
1979 to 2001, Ms. Campbell served as a special agent for the United States
Treasury Department where she conducted criminal investigations and worked
closely with the United States Attorney’s Office and with several federal
agencies, including the Internal Revenue Service, Federal Bureau of
Investigation, Secret Service, Customs Service, State Department, Drug
Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms and U.S. Postal
Service.
Alan Morelli, Director.
Mr. Morelli has been one of our directors since March 26, 2006. Mr.
Morelli is a consultant who has served as Managing Director of Analog Ventures,
LLC, a consulting firm located in Pacific Palisades, California, since 1997. Mr.
Morelli is also currently serving as a director of Physical Therapy Holdings,
Inc. and Precise Exercise Equipment. Physical Therapy Holdings, Inc. develops
tools for outpatient clinics. Precise developed innovative commercial fitness or
rehabilitation technology used in health clubs and consumer equipment since
1994. Mr. Morelli received a B.S. from Rutgers University (1983) and a J.D. from
Georgetown University Law Center (1986).
David M. Kaye, Director.
Mr. Kaye has been one of our directors since March 26, 2006. Mr.
Kaye is an attorney and has been a partner in the law firm of Kaye Cooper Fiore
Kay & Rosenberg, LLP, located in Florham Park, New Jersey, since the firm’s
inception in February 1996. Since 1980, Mr. Kaye has been a practicing attorney
in the New York City metropolitan area specializing in corporate and securities
matters. He is currently a director of Dionics, Inc., a company which designs,
manufactures and sells semiconductor electronic products. Mr. Kaye received his
B.A. from George Washington University (1976) and his J.D. from the Benjamin N.
Cardozo School of Law, Yeshiva University (1979).
Audit
Committee
The Audit
Committee is appointed by the Board of Directors in fulfilling its
responsibilities to oversee: (1) the integrity of our financial statements and
disclosure controls; (2) the qualifications and independence of our independent
accountants; (3) the performance of our independent accountants; and (4)
compliance with legal and regulatory requirements. The Audit Committee presently
consists of Alice M. Campbell and William B. Horne. Ms. Campbell is Chairwoman
of the Audit Committee. The Board has determined that Ms. Campbell and Mr.
Horne are each an "audit committee financial expert" as defined under Item
407(d)(5) of Regulation S-K promulgated pursuant to the Securities Exchange Act
of 1934, as amended.
Compensation
Committee
The
Compensation Committee is appointed by the Board of Directors to discharge the
responsibilities of the Board relating to compensation of our executive
officers. The Compensation Committee presently consists of Alice M.
Campbell, William B. Horne, Alan Morelli and David M. Kaye. Ms. Campbell
is Chairwoman of the Compensation Committee.
Code of Ethics
We have
adopted a Code of Ethics and Business Conduct that applies to our Chief
Executive Officer and Chief Financial Officer, which is filed as Exhibit 14.1 to
our annual report on Form 10-KSB for the fiscal year ended June 30, 2005.
Upon request, we will provide to any person without charge a copy of our
Code of Ethics. Any such request should be made to Attn: Secretary, China Youth
Media, Inc., 4143 Glencoe Avenue, Marina Del Rey, CA 90292. We are in the
process of building a website where our Code of Ethics will be available to
investors.
Section
16(A) Beneficial Ownership Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other of our
equity securities. Officers, directors and greater than ten percent stockholders
are required by SEC regulations to furnish us with copies of all Section 16(a)
forms they file.
Based
solely on our review of the copies of any Section 16(a) forms received by us or
written representations from the reporting persons, we believe that with respect
to the fiscal year ended December 31, 2008, all the reporting persons complied
with all applicable filing requirements, except that Jay Rifkin filed two
reports late relating to two transactions and Dennis Pelino filed two reports
late relating to three transactions.
Item
11.
Executive
Compensation
The
following summary compensation tables set forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the years ended December 31, 2008 and, December 31, 2007, of those persons
who were, at December 31, 2008 (i) the chief executive officer and (ii) the
other most highly compensated executive officers of the Company, whose total
compensation was in excess of $100,000 (the named executive
officers):
Summary Compensation
Table
|
Name
and Principal
Position
|
Year
|
Salary($)
(2)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($) (3)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
|
||||||||||||||||||||||||
|
Jay
Rifkin, (1)
|
2008
|
$ | 165,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 165,000 | ||||||||||||||||
|
President
and
|
2007
|
$ | 165,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 165,000 | ||||||||||||||||
|
Chief
Executive Officer
|
|||||||||||||||||||||||||||||||||
|
(1)
|
Mr.
Rifkin was appointed President on September 30, 2005, and Chief Executive
Officer and director nominee on December 29,
2005.
|
|
(2)
|
Consists
of
accrued salary for 2008 and 2007, none of which has been paid as of
December 31, 2008.
|
|
(3)
|
Represents
the
dollar amount recognized for financial reporting purposes of stock options
awarded in 2008, 2007 and 2006 computed in accordance with SFAS
123(R).
|
Equity
Awards
The
following table provides certain information concerning equity awards held by
the named executive officers as of December 31, 2008.
Outstanding
Equity Awards at December 31, 2008
|
Options Awards
|
|||||||||||||
|
No. of Securities
Underlying
Unexercised
Options (#)
|
No. of Securities
Underlying
Unexercised
Options (#)
|
Option
Exercise Price
|
Option
Expiration
|
||||||||||
|
Name
|
Exercisable
|
Unexercisable
|
($)
|
Date
|
|||||||||
|
Jay
Rifkin
|
4,400,000 | 0 | $ | 0.85 |
9/30/2015
|
||||||||
| 75,000 | 75,000 | $ | 0.20 |
11/8/2016
|
|||||||||
Benefit
Plans
Effective
July 20, 2005, the Board of Directors approved our Stock Option and Restricted
Stock Plan. Under the Stock Option and Restricted Stock Plan, we can issue
restricted shares of common stock, options to purchase shares of common stock
(both incentive stock options and non-incentive stock options) and warrants to
purchase shares of common stock to employees, directors and consultants.
The number of shares subject to the Stock Option and Restricted Stock Plan
may not exceed 15,000,000 shares. The Stock Option and Restricted Stock
Plan is administered by our Compensation Committee. On July 14, 2006, the
stockholders approved our Stock Option and Restricted Stock
Plan.
Compensation
of Directors
During
2008, the Company did not compensate any of its directors in cash. The
Chairperson of the Audit Committee is entitled to receive $6,000 annually paid
in cash. During 2008, the Company did not pay this amount. All
directors are reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to the Company. In addition, directors are
eligible to receive restricted shares of common stock and stock options pursuant
to our Stock Option Restricted Stock Plan described above.
The
following table provides certain summary information concerning the compensation
paid to directors, other than Jay Rifkin (our Chief Executive Officer), during
2008. All compensation paid to Mr. Rifkin is set forth in the table under
"Executive Compensation."
Director
Compensation
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Stock
Awards ($)
|
Option Awards
($) (1)
|
All Other
Compensation ($)
|
Total ($)
|
|||||||||||||||
|
Alan
Morelli
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Alice
M. Campbell
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
David
M. Kaye
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
William
B. Horne
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
(1)
|
Represents
the dollar amount recognized for financial reporting purposes of stock
options awarded in 2008 computed in accordance with Financial Accounting
Standards 123R.
|
Employment
Agreements with Executive Officers
In
connection with the acquisition of Rebel Crew Films, on December 29, 2005, we
entered into an employment agreement with Jay Rifkin to employ Mr. Rifkin as our
Chief Executive Officer effective as of September 30, 2005. The term of the
employment continues for three years from September 30, 2005 and automatically
renews for successive one-year terms unless either party delivers to the other
party written notice of termination at least 30 days before the end of the then
current term. Mr. Rifkin’s base compensation in the first year of the term is
$150,000, will increase at least 10% in the second year of the term and at least
10% more in the third year of the employment term. Mr. Rifkin was granted
options to purchase 4,400,000 shares of common stock with an exercise price
equal to the FMV of the common stock on September 30, 2005 and vesting annually
over a period of three years from December 29, 2005. Mr. Rifkin is also eligible
to receive shares of common stock and stock options from time to time and an
annual bonus as determined by the Board of Directors. The agreement also
contains customary provisions for disability, death, confidentiality,
indemnification and non-competition. If Mr. Rifkin voluntarily terminates the
agreement without good reason or if we terminate the agreement for cause, we
must pay Mr. Rifkin all accrued compensation through the date of termination and
provide life, accident and disability insurance, and health, dental and vision
benefits to Mr. Rifkin and his dependents for a period of three months after
termination. If we terminate the agreement without cause, if Mr. Rifkin
terminates the agreement for good reason or if the agreement is terminated upon
the death or disability of Mr. Rifkin, then we must pay Mr. Rifkin or his estate
all unpaid compensation through the duration of the three-year employment term
and must provide insurance and health benefits through the duration of such
term. "Good Reason" is defined in the agreement as: (i) material breach of the
agreement by us including, without limitation, any diminution in title, office,
rights and privileges of Mr. Rifkin or failure to receive base salary payments
on a timely basis; (ii) relocation of the principal place for Mr. Rifkin to
provide his services to any location more than 20 miles away from 4143 Glencoe
Ave, Marina Del Rey, Ca 90292; (iii) failure to maintain in effect directors’
and officers’ liability insurance covering Mr. Rifkin; (iv) any assignment or
transfer of any of our rights or obligations under the agreement; or (v) any
change in control of our company including, without limitation, if Mr. Rifkin
shall cease to own a majority of our outstanding voting
securities.
ITEM
12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth certain information, as of March 27, 2009 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of the named executive officers
and directors; and (iii) our directors and named executive officers as a group.
Except as otherwise indicated, each of the stockholders listed below has sole
voting and investment power over the shares beneficially owned.
|
Name of Beneficial Owner (1)
|
Common Stock
Beneficially Owned
(2)
|
Percentage
of Common
Stock (2)
|
||||||
|
Jay
Rifkin
|
97,517,563 | (3) | 64.12% | |||||
|
William
B. Horne
|
834,789 | (4) | 1.09% | |||||
|
Alice
M. Campbell
|
700,000 | (5) | 0.91% | |||||
|
Alan
Morelli
|
850,000 | (6) | 1.10% | |||||
|
David
M. Kaye
|
600,000 | (7) | 0.78% | |||||
|
Dennis
Pelino
|
36,852,777 | (8) | 46.22% | |||||
|
TWK
Holdings, LLC
|
12,000,000 | (9) | 13.62% | |||||
|
China
Youth Net Technology (Beijing) Co., Ltd.
|
71,020,000 | (10) | 48.28% | |||||
|
All
named executive officers and directors as a group (5
persons)
|
100,502,352 | 64.83% | ||||||
|
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o China
Youth Media, Inc., 4143 Glencoe Avenue, Marina Del Rey, CA
90292.
|
|
(2)
|
Applicable
percentage ownership is based on 76,078,439 shares of common stock
outstanding as of March 27, 2009 plus, for each stockholder, any
securities that stockholder has the right to acquire within 60 days of
March 27, 2009 pursuant to options, warrants, conversion privileges or
other rights. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common
stock that a person has the right to acquire beneficial ownership of upon
the exercise or conversion of options, convertible stock, warrants or
other securities that are currently exercisable or convertible or that
will become exercisable or convertible within 60 days of March 27, 2009
are deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such person,
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other
person.
|
|
(3)
|
Includes:
(a) 19,086,372 shares held by Rebel Holdings, LLC ("Rebel Holdings")
of which Mr. Rifkin is the sole managing member; (b) 2,421,292 shares
which are directly held by Mr. Rifkin; (c) 1,666,666 shares issuable upon
conversion of a $150,000 principal amount convertible note held by Mojo
Music, Inc. of which Mr. Rifkin is the sole managing member, with a
conversion price of $0.09 per share; (d) 525,000 shares issuable upon
exercise of stock warrants with an exercise price of $0.09 per share; (e)
69,268,233 shares issuable upon conversion of a $2,078,047 principal
amount secured convertible note held by Rebel Holdings of which Mr. Rifkin
is the sole managing member, with a conversion price of $0.03 per share;
(f) 4,400,000 shares issuable upon exercise of stock options with an
exercise price of $0.85 per share, which stock options vest annually over
a period of three years from December 30, 2006; and (g) 150,000 shares
issuable upon exercise of stock options with an exercise price of $0.20
per share, which stock options vest annually over a period of three years
from November 8, 2007. Mr. Rifkin’s reported beneficial ownership does not
include certain shares of common stock issued and issuable
for which certain shareholders have granted Mr. Rifkin an irrevocable
proxy to vote for certain directors.
|
|
(4)
|
Includes
(a) 50,000 shares owned by Mr. Horne; (b) 400,000 shares issuable upon
exercise of stock options with an exercise price of $0.25 per share and an
expiration date 18 months from the date Mr. Horne’s services terminate;
(c) 150,000 shares issuable upon exercise of stock options with an
exercise price of $0.20 per share which stock options vest annually over a
period of four years from November 8, 2007; and (d) 234,789 shares
issuable upon conversion of a $5,000 principal demand promissory note and
interest accrued totaling approximately $813 and various other amounts
owed to Mr. Horne totaling approximately $1,231 with a conversion price of
$0.03 per share. Mr. Horne has granted Mr. Rifkin an irrevocable proxy to
vote the shares of common stock issuable upon exercise of such stock
options for certain directors.
|
|
(5)
|
Represents
(a) 350,000 shares issuable upon exercise of stock options with an
exercise price of $0.25 per share and an expiration date 18 months from
the date Ms. Campbell’s services terminate; (b) 150,000 shares issuable
upon exercise of stock options with an exercise price of $0.20 per share
which stock options vest annually over a period of four years from
November 8, 2007; and (c) 200,000 shares issuable upon conversion of
amounts owed to Ms. Campbell as fees for services as the Audit Committee
Chairwoman totaling $6,000 with a conversion price of $0.03 per share. Ms.
Campbell has granted Mr. Rifkin an irrevocable proxy to vote the shares of
common stock issuable upon exercise of such stock options for certain
directors.
|
|
(6)
|
Includes:
(a) options to purchase 350,000 shares of common stock with an exercise
price of $1.50 per share, which stock options vest annually over a period
of three years from March 26, 2006; (b) 250,000 shares issuable upon
exercise of warrants with an exercise price of $0.145 per share and an
expiration date of September 15, 2010, and (c) options to purchase 250,000
shares of common stock with an exercise price of $0.14 per share, which
stock options vest annually over a period of four years from August 8,
2008.
|
|
(7)
|
Includes
(a) options to purchase 350,000 shares of common stock with an exercise
price of $1.50 per share, which stock options vest annually over a period
of three years from March 26, 2006; and (b) options to purchase 250,000
shares issuable upon exercise of stock options with an exercise price of
$0.20 per share which stock options vest annually over a period of four
years from November 8, 2007.
|
|
(8)
|
Includes
(a) 10,000,000 shares which are directly held by Mr. Pelino; (b)
7,000,000 shares which are held by New China Media LLC of which Mr.
Pelino is the sole managing member; (c) 16,200,000 shares which are held
by Year of the Golden Pig LLC (“YGP”) of which Mr. Pelino is the sole
managing member; (d) 2,777,777 shares issuable upon conversion of a
$250,000 principal amount of a convertible note held by YGP; and (e)
875,000 shares issuable upon exercise of stock warrants with an exercise
price of $0.09 per share. The address for Dennis Pelino
is 400 Alton Road Suite 3107, Miami Beach, FL 33129.
|
|
(9)
|
Represents
12,000,000 shares issuable upon conversion of 12,000 shares of Series A
Convertible Preferred Stock issued to TWK Holdings, LLC. Its
address is 3 Lorong Bukit Candan 3, Taman Impian Batu 4 1/2, Jalan IPOH,
51100 KL, Malaysia.
|
|
(10)
|
Represents
71,020,000 shares issuable upon conversion of 71,020 shares of Series A
Convertible Preferred Stock issued to three designees of China Youth Net
Technology (Beijing) Co., Ltd. Its address is 16th/F, Changbao
Plaza, 1 An Hua Bei Li, Guangqumennei Street, Chongwen District, Beijing,
China.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table shows information with respect to each equity compensation plan
under which the Company’s common stock is authorized for issuance as of the
fiscal year ended December 31, 2008.
Equity Compensation Plan
Information
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
|
||||||||||
|
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
6,983,333 | $ | 0.74 | 8,016,667 | ||||||||
|
Equity
compensation plans not approved by security holders
|
550,000 | $ | 0.18 | -0- | ||||||||
|
Total
|
7,533,333 | $ | 0.70 | 8,016,667 | ||||||||
ITEM
13. Certain Relationships and Related
Transactions, and Director Independence
Since
January 1, 2008, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party: (i) in which the amount involved exceeds the lesser of $120,000 or one
percent of the average of our total assets at year-end for the last three
completed fiscal years; and (ii) in which any director, executive officer,
shareholder who beneficially owns 5% or more of our common stock or any member
of their immediate family had or will have a direct or indirect material
interest, except as follows:
Our
management believes that all of the below transactions were on terms at least as
favorable as could have been obtained from unrelated third parties.
During
March 2008, the Company sold 10,000,000 shares of its common stock to Dennis
Pelino, who is a managing member of both Year of the Golden Pig, LLC ("YGP LLC")
and New China Media, LLC ("New China Media"), at a price of $0.03 per share,
resulting in gross proceeds of $300,000.
On June
2, 2008, the
Company entered into a Content License Agreement with New China Media, YGP, LLC and TWK Holdings, LLC
(“TWK”) (New China Media, YGP and TWK collectively referred to as “Content
Providers”) providing for (i) the assignment by Content Providers and the
assumption by the Company of certain rights of Content Providers for the
territory of the People’s Republic of China to use, transmit and publicly
display via the Internet certain content; and (ii) the purchase by YGP, New
China Media and TWK of 16,200 shares, 3,000 shares and 12,000 shares of Series A
Convertible Preferred Stock of the Company for $16,200, $3,000 and $12,000,
respectively. On December 16, 2008, pursuant to a notice of
conversion, New China Media and YGP agreed to convert the entire amount of their
respective shares of Series A Convertible Preferred Stock of the Company into
3,000,000 and 16,200,000 shares of Common Stock, respectively. On January 8,
2009, the Content License Agreement was extended by an additional eight years
for a total of ten years. In connection with such extension, the
Company agreed to issue to New China Media 4,000,000 shares of the Company’s
Common Stock for $4,000.
Effective
on June 10, 2008, the Company’s subsidiary, Youth Media (Hong Kong) Limited,
entered into a Cooperation Agreement (the “Cooperation Agreement”) with China
Youth Net Technology (Beijing) Co., Ltd. (“CYN”), China Youth Interactive
Cultural Media (Beijing) Co., Ltd. and China Youth Net Advertising Co.
Ltd. pursuant to which the parties agreed to cooperate with each
other to develop, build and operate a fully managed video and audio distribution
network based on, including but not limited to, the China Education and Research
Network, the broadband network infrastructure built in schools, universities and
other education institutions. In conjunction with Cooperation
Agreement, the Company issued an aggregate of 71,020 shares of its Series A
Convertible Preferred Stock to three designees of CYN.
On August
29, 2008, the Company entered into a subscription agreement with YGP LLC,
pursuant to which the Company sold 2.5 Units, with each Unit consisting of a
$100,000 principal amount of a 12% Convertible Promissory Note due three years
from its issuance and 350,000 Common Stock Purchase Warrants, with each Warrant
entitling the holder thereof to purchase at any time beginning from the date of
issuance through five years thereafter one share of Common Stock at a price of
$0.09 per share. The subscription agreement with YGP, LLC provided the
Company with $250,000 in gross proceeds. Pursuant to the subscription
agreement with YGP, LLC, the Company issued 875,000 Purchase
Warrants.
On September 10, 2008, the Company, on the one hand, and Jay Rifkin, the Company’s President and Chief Executive Officer, and Rebel Holdings, LLC (“Rebel Holdings”), of which Mr. Rifkin is the sole managing member, on the other hand, entered into a Loan Consolidation and Amendment to Security Agreement (the “Loan Consolidation Agreement”), effective as of July 1, 2008. Pursuant to the Loan Consolidation Agreement, the parties agreed to consolidate various outstanding loans made to the Company by Jay Rifkin and Rebel Holdings (some of which are due and payable on demand), and other amounts incurred by or due to Mr. Rifkin, in each case through June 30, 2008, into one convertible promissory note payable to Rebel Holdings in the principal amount of $2,078,047, with a maturity date of July 1, 2010 and interest at the prime rate (the “Consolidated Note”). The Consolidated Note is comprised of a $556,307 secured convertible note owed to Rebel Holdings (the “Rebel Holdings Note”) that accrued simple interest at the rate of 4.5%; $1,063,000 loaned to the Company by Mr. Rifkin from December 2005 to December 2007; $82,000 loaned to the Company by Mr. Rifkin from January 15, 2008 to February 15, 2008; and $376,740 in other accrued amounts owed to Mr. Rifkin.
The Consolidated Note provides that the principal amount thereof shall, at the option of Rebel Holdings, be convertible at a conversion price equal to the lesser of, or more favorable to Rebel Holdings, of the following (i) $0.03 per share of Common Stock (which represents the offering price of the Company’s Common Stock in its most recently completed equity financing transaction) provided a notice of conversion is submitted no later than 45 days after September 10, 2008, or (ii) the then current offering terms for any bona fide pending offering of the Company, provided a notice of conversion pursuant thereto is submitted no later than 30 days following the completion of the offering, and contains such other terms and conditions as set forth therein. Pursuant to a notice of conversion provided within the allowable time period, Rebel Holdings elected to convert the entire principal amount outstanding under the Consolidated Note into 69,268,233 shares of Common Stock at $0.03 per share. As of December 31, 2008, the 69,268,233 shares of Common Stock related to the Consolidated Note have not been issued.
The Consolidated Note provides that the principal amount thereof shall, at the option of Rebel Holdings, be convertible at a conversion price equal to the lesser of, or more favorable to Rebel Holdings, of the following (i) $0.03 per share of Common Stock (which represents the offering price of the Company’s Common Stock in its most recently completed equity financing transaction) provided a notice of conversion is submitted no later than 45 days after September 10, 2008, or (ii) the then current offering terms for any bona fide pending offering of the Company, provided a notice of conversion pursuant thereto is submitted no later than 30 days following the completion of the offering, and contains such other terms and conditions as set forth therein. Pursuant to a notice of conversion provided within the allowable time period, Rebel Holdings elected to convert the entire principal amount outstanding under the Consolidated Note into 69,268,233 shares of Common Stock at $0.03 per share. As of December 31, 2008, the 69,268,233 shares of Common Stock related to the Consolidated Note have not been issued.
On
September 30, 2008, the Company entered into a subscription agreement with Mojo
Music, Inc. ("Mojo Music"), of which Jay Rifkin, the Company's President and
Chief Executive Officer, is the sole managing member, in which the Company sold
1.5 Units, with each Unit consisting of a $100,000 principal amount of a 12%
Convertible Promissory Note due three years from its issuance and 350,000 Common
Stock Purchase Warrants, with each Warrant entitling the holder thereof to
purchase at any time beginning from the date of issuance through five years
thereafter one share of Common Stock at a price of $0.09 per share subject to
the Company's filing of a certificate of amendment to its certificate of
incorporation increasing the number of its available shares for
issuance. The subscription agreement with Mojo Music provided
the Company with $150,000 in gross proceeds. Pursuant to the subscription
agreement with Mojo Music, the Company issued 525,000 Purchase
Warrants.
On July 13, 2006, William Horne, the Company’s former Chief Financial Officer and Director, loaned the Company $5,000. As consideration for the loan, the Company issued Mr. Horne a demand promissory note (the “July 06 Note”) at a rate equal to the prime rate published in The Wall Street Journal from time to time, and currently 8.25%, to the date of payment in full. Pursuant to the terms of a Conversion and Note Termination Agreement dated July 1, 2008, by and between Mr. Horne and the Company (the “Conversion Note”), the entire principal amount outstanding and all interest accrued from inception of the July 06 Note through the date of the Conversion Note, totaling approximately $813, and other various amounts owed to Mr. Horne totaling approximately $1,231, will be converted into 234,789 shares of Common Stock (the “Conversion Shares”). The conversion of the note was based upon a common stock value of $0.03 per share, which represented the offering price of the Company’s Common Stock in its most recently completed equity financing transaction on the date of the Conversion Note. At December 31, 2008, the Conversion Shares had not been issued.
Director
Independence
Our board
of directors currently consists of five members. They are Jay Rifkin,
William B. Horne, Alice M. Campbell, Alan Morelli and David M. Kaye.
Morelli and Kaye are independent directors. We have determined their
independence using the definition of independence set forth in Nasdaq Marketplace Rule 4200(a)(15).
Item
14.
Principal Accountant Fees and
Services.
Audit
Fees
The
aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements, for the reviews of the
financial statements included in our annual report on Form 10-K, and for other
services normally provided in connection with statutory filings were $40,000 and
$90,000 for the years ended December 31, 2008 and December 31, 2007,
respectively.
Audit-Related
Fees
We did
not incur any fees for the years ended December 31, 2008 and December 31, 2007,
respectively, for professional services rendered by our principal accountants
that are reasonably related to the performance of the audit or review of our
financial statements and not included in "Audit Fees."
All
Other Fees
During
the year ended 2008, we received additional professional services in the amount
of $8,500 rendered by our principal accountants in connection with the
preparation of our tax returns and other tax compliance services.
Audit
Committee Pre-Approval Policies and Procedures
Our Audit
Committee was formed during the year ended December 31, 2005. The fees for
audit services were approved by our chief executive officer and the full board
approved the financial statements filed on Forms 10-Q and 10-K. Management
is required to periodically report to the Audit Committee regarding the extent
of services provided by the independent auditor.
PART
IV
Item
15.
Exhibits and
Financial Statement Schedules
The
following documents are filed as part of this report:
(1) Financial
Statements
Financial
Statements are listed in the Table of Contents to the Financial Statements on
page 50 of this report.
(2) Financial
Statement Schedules
No
financial statement schedules are included because such schedules are not
applicable, are not required, or because required information is included in the
financial statements or notes thereto.
(3) Exhibits
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Stock
Purchase Agreement dated as of December 20, 2005 among Digicorp, Rebel
Crew Films, Inc., Rebel Holdings, LLC and Cesar Chatel (Incorporated by
reference to the Company’s Form 8-K filed with the Securities and Exchange
Commission on December 21, 2005)
|
|
|
2.2
|
Letter
Agreement dated December 20, 2005 among Digicorp, Rebel Crew Films, Inc.,
Rebel Holdings, LLC and Cesar Chatel (Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
December 21, 2005)
|
|
|
2.3
|
Purchaser
and Company Disclosure Schedules to Stock Purchase Agreement dated as of
December 20, 2005 among Digicorp, Rebel Crew Films, Inc., Rebel Holdings,
LLC and Cesar Chatel (Incorporated by reference to the Company’s Form 8-K
filed with the Securities and Exchange Commission on January 5,
2006)
|
|
|
3.1
|
Articles
of Incorporation (Utah) (Incorporated by reference to the Company’s
registration statement on Form 10-SB (File No. 000-33067) filed with the
Securities and Exchange Commission on August 9, 2001)
|
|
|
3.2
|
Certificate
of Incorporation of Digicorp, Inc. (Delaware) (Incorporated by reference
to the Company’s quarterly report on Form 10-QSB for the quarter ended
September 30, 2006, filed with the Securities and Exchange Commission on
December 13, 2006)
|
|
|
3.3
|
State
of Utah Articles of Merger of Digicorp, a Utah corporation, into Digicorp,
Inc., a Delaware corporation (Incorporated by reference to the Company’s
quarterly report on Form 10-QSB for the quarter ended September 30, 2006,
filed with the Securities and Exchange Commission on December 13,
2006)
|
|
|
3.4
|
State
of Delaware Articles of Merger of Digicorp, a Utah corporation, into
Digicorp, Inc., a Delaware corporation (Incorporated by reference to the
Company’s quarterly report on Form 10-QSB for the quarter ended September
30, 2006, filed with the Securities and Exchange Commission on December
13, 2006)
|
|
3.5
|
Certificate
of Designation filed with the State of Delaware on May 23, 2008,
authorizing our Series A Convertible Preferred Stock consisting of 500,000
shares, each of $.001 par value (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
June 4, 2008)
|
|
|
3.6
|
Certificate
of Amendment to our Certificate of Incorporation filed with the Secretary
of State of Delaware effective as of October 16, 2008 authorizing the
increase of the number of our authorized shares of Common Stock, par value
$.001 per share, from 60,000,000 to 500,000,000 and the number of our
authorized shares of Preferred Stock, par value $.001 per share, from
1,000,000 to 2,000,000, and our name change from “Digicorp, Inc.” to
“China Youth Media, Inc.” (Incorporated by reference to the Company's Form
8-K filed with the Securities and Exchange Commission on October 16,
2008)
|
|
|
3.7
|
Bylaws
(Incorporated by reference to the Company’s registration statement on Form
10-SB (File No. 000-33067) filed with the Securities and Exchange
Commission on August 9, 2001)
|
|
|
3.8
|
Amendment
No. 1 to Bylaws (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on July 21,
2005)
|
|
|
4.1
|
Secured
Convertible Note due December 19, 2010 in the principal amount of
$556,306.53 issued to Rebel Crew Holdings, LLC (Incorporated by reference
to the Company’s Form 8-K filed with the Securities and Exchange
Commission on January 5, 2006)
|
|
|
4.2
|
Promissory
Note due June 30, 2006 in the principal amount of $73,000 issued to Jay
Rifkin (Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
|
|
|
4.3
|
Revolving
Line of Credit dated and effective as of March 23, 2006 by and between
Ault Glazer Bodnar Acquisition Fund LLC and Digicorp (Incorporated by
reference to the Company’s Form 8-K filed with the Securities and Exchange
Commission on April 10, 2006)
|
|
|
4.4
|
Form
of Demand Promissory Note issued at various times by Digicorp to Jay
Rifkin for loans made by Jay Rifkin from July 2006 to date (Incorporated
by reference to the Company’s annual report on Form 10-KSB for the fiscal
year end December 31, 2006 filed with the Securities and Exchange
Commission on April 17, 2007).
|
|
|
4.5
|
Demand
Promissory Note in the principal amount of $5,000 issued July 13, 2006 to
William Horne (Incorporated by reference to the Company’s quarterly report
on Form 10-QSB for the quarter ended June 30, 2006, filed with the
Securities and Exchange Commission on August 21, 2006)
|
|
|
9.1
|
Voting
Agreement dated December 29, 2005 by and among Jay Rifkin and the
stockholders of Digicorp listed on the signature pages thereto
(Incorporated by reference to the Company’s Form 8-K filed with the
Securities and Exchange Commission on January 5, 2006)
|
|
|
10.1
|
Securities
Purchase Agreement dated December 29, 2005 by and among Rebel Holdings,
LLC and Digicorp (Incorporated by reference to the Company’s Form 8-K
filed with the Securities and Exchange Commission on January 5,
2006)
|
|
10.2
|
Assignment
Agreement dated December 29, 2005 by and among Rebel Holdings, LLC,
Digicorp and Rebel Crew Films, Inc. (Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
January 5, 2006)
|
|
|
10.3
|
Security
Agreement dated December 29, 2005 by and among Digicorp and Rebel Crew
Holdings, LLC (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on January 5,
2006)
|
|
|
10.4
|
Digicorp
Stock Option and Restricted Stock Plan (Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
December 22, 2005)
|
|
|
10.5
|
Employment
Agreement effective as of September 30, 2005 by and between Digicorp and
Jay Rifkin (Incorporated by reference to the Company’s Form 8-K filed with
the Securities and Exchange Commission on January 5,
2006)
|
|
|
10.6
|
Standard
Industrial/Commercial Multi-Tenant Lease dated July 18, 2005 between The
Welk Group, Inc. and Rebel Crew Films, Inc. (Incorporated by reference to
the Company’s Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
|
|
|
10.7
|
Subscription
Agreement made as of April 20, 2006 by and between Digicorp and MLPF&S
Custodian, FBO William B. Horne, IRA ((Incorporated by reference to the
Company’s Form 8-K filed with the Securities and Exchange Commission on
April 24, 2006)
|
|
|
10.8
|
Placement
Agreement dated April 26, 2006 between Digicorp and Ault Glazer Bodnar
Securities LLC (Incorporated by reference to the Company’s Form 8-K filed
with the Securities and Exchange Commission on April 27,
2006)
|
|
|
10.9
|
Content
License Agreement dated June 2, 2008 by and between Digicorp, Inc. and New
China Media, LLC, YGP, LLC and TWK Holdings, LLC (Incorporated by
reference to the Company's Form 8-K filed with the Securities and Exchange
Commission on June 4, 2008)
|
|
|
10.10
|
Supply
Agreement for Content dated May 31, 2008 by and between Youth Media (Hong
Kong) Limited, a subsidiary of the Company, Yes Television (Hong Kong)
Limited, and New China Media LLC (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
June 4, 2008)
|
|
|
10.11
|
Cooperation
Agreement effective as of June 10, 2008 by and between Youth Media (Hong
Kong) Limited, a subsidiary of the Company, China Youth Net Technology
(Beijing) Co., Ltd., China Youth Interactive Cultural Media (Beijing) Co.,
Ltd. and China Youth Net Advertising Co. Ltd. (Incorporated by reference
to the Company's Form 8-K filed with the Securities and Exchange
Commission on June 16, 2008)
|
|
|
10.12
|
Loan
Consolidation and Amendment to Security Agreement dated as of September
10, 2008 among Digicorp, Inc., Rebel Holdings, LLC and Jay Rifkin
(Incorporated by reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on September 19,
2008)
|
|
|
10.13
|
Secured
Convertible Consolidated Promissory Note between Digicorp, Inc. and Rebel
Holdings, LLC, dated September 10, 2008 (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange Commission on
September 19, 2008).
|
|
14.1
|
Code
of Ethics (Incorporated by reference to the Company’s annual report on
Form 10-KSB for the fiscal year ended June 30, 2005, filed with the
Securities and Exchange Commission on September 28,
2005)
|
|
|
21.1*
|
Subsidiaries
of the Registrant
|
|
|
31.1*
|
Certification
by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
|
31.2*
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
of the Exchange Act
|
|
|
32.1*
|
Certification
by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
|
|
32.2*
|
Certification
by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b)
of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code
|
* Filed
herewith
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CHINA
YOUTH MEDIA, INC.
|
||
|
Date:
April 10, 2009
|
By:
|
/s/
Jay Rifkin
|
|
Jay
Rifkin
|
||
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Jay Rifkin
|
||||
|
Jay
Rifkin
|
Chief
Executive Officer and Director
(Principal Executive Officer,
Principal Financial Officer
and
Principal Accounting Officer)
|
April
10, 2009
|
||
|
/s/
William B. Horne
|
||||
|
William
B. Horne
|
Director
|
April
10, 2009
|
||
|
/s/
Alice M. Campbell
|
||||
|
Alice
M. Campbell
|
Director
|
April
10, 2009
|
||
|
/s/
Alan Morelli
|
||||
|
Alan
Morelli
|
Director
|
April
10, 2009
|
||
|
/s/
David M. Kaye
|
||||
|
David
M. Kaye
|
Director
|
April
10, 2009
|
||
China Youth Media, Inc. |
Consolidated Financial Statements |
Table of Contents |
Page |
|||
| Report of Independent Registered Public Accounting Firm | 51 |
||
Consolidated Balance Sheets |
52 |
||
Consolidated Statements of Operations |
53 |
||
Consolidated Statements of Cash Flows |
54 |
||
Consolidated Statements of Stockholders’ Equity |
55 |
||
Notes to the Consolidated Financial Statements |
56-77 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Of China Youth Media, Inc.
We have audited the accompanying consolidated balance sheet of China Youth Media, Inc. (Company) as of December 31, 2008 and 2007, and the related consolidated statement of income, stockholders’ equity (deficit), and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Youth Media, Inc. as of December 31, 2008 and 2007 and the results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed further in Note 1, the Company has incurred significant losses. The Company’s viability is dependent upon its ability to obtain future financing and the success of its future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Tarvaran Askelson & Company, LLP
Laguna Niguel, California
April 10, 2008