UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
| |
| For the quarterly period ended September 30, 2009 |
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the transition period from __________ to __________ |
For the transition period from __________ to __________
Commission File Number: 000-19644
China Broadband, Inc.
(Exact name of registrant as specified in its charter)
Nevada | | 20-1778374 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
1900 Ninth Street, 3rd Floor
Boulder, Colorado 80302
(Address of principal executive offices)
(303) 449-7733
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.company:
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 65,086,15264,433,033 shares as of May 17, 2010.November 20, 2009.
Explanatory Note
China Broadband, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, which was originally filed with the Securities and Exchange Commission (the “Commission”) on November 23, 2009 (the “Original Filing”).
The Company is amending the financial statements included in Part 1, Item 1 of the Original Filing as follows:
| 1) | Reclassify certain warrants from shareholders’ equity to liabilities in accordance with EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (FASB ASC 815-40-15-5) ("ASC 815”). ASC 815 became effective and should have been adopted by the Company as of January 1, 2009 by classifying certain warrants as liabilities measured at fair value with changes in fair value recognized in earnings each reporting period and recording a cumulative-effect adjustment to the opening balance of accumulated deficit. The cumulative-effect adjustment at January 1, 2009 was as follows: |
| | Additional | | | Accumulated | | | Warrant | |
| | Paid-in Capital | | | Deficit | | | Liabilities | |
Warrants | | $ | (731,000 | ) | | $ | 424,000 | | | $ | 307,000 | |
For the three months and nine months ended September 30, 2009, the adoption of ASC 815 had the effect of decreasing warrant liabilities and net loss by approximately $131,000 and for the nine months ended September 30, 2009, the effect increased warrant liabilities and net loss by approximately $1,110,000.
| 2) | Correct an error related to the valuation of our Shandong Media intangibles which include our publication rights, operating permits and customer relationships and minor changes to the valuation of property and equipment. The correction resulted in a decrease to the value of our intangible assets and property and equipment by reclassifying approximately $275,000 from noncontrolling interest. |
| 3) | Adjust the original purchase accounting for our AdNet acquisition. Our AdNet intangible asset was decreased by approximately $1,150,000 and approximately $1,239,000 was recorded to goodwill, $100,000 was recorded to amount due from former AdNet shareholders and approximately $189,000 was recorded to deferred tax liability. In addition, amortization expense of approximately $63,000 and $126,000 was recorded for the three months and nine months ended September 30, 2009. |
| 4) | Reclassify legal costs for approximately $8,000 related to stock issued for our AdNet acquisition and related to stock issued for cash to additional paid in capital. |
In addition, the Company is concurrently filing certain additional improvements to its disclosures in this amended Form 10-Q/A for the quarter ended September 30, 2009.
For the convenience of the reader, this Form 10-Q/A sets forth the entire filing which was prepared and relates to the Company as of and for the quarter ended September 30, 2009. Accordingly, except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and does not reflect events occurring after the Original Filing, and does not modify or update those disclosures affected by subsequent events. Forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that have become known to us after the date of the Original Filing (other than the current restatements described above), and such forward looking statements should be read in their historical context. Unless otherwise stated, the information in this Form 10-Q/A not affect by such current restatements is unchanged and reflects the disclosures made at the time of the Original Filing. Accordingly, in conjunction with reading this amendment to the Original Filing, you should also read all other filings we have made with the Securities and Exchange Commission since November 23, 2009.
QUARTERLY REPORT ON FORM 10-Q10-Q/A
OF CHINA BROADBAND, INC.
FOR THE PERIOD ENDED MARCH 31, 2010SEPTEMBER 30, 2009
TABLE OF CONTENTS
PART I | - | | FINANCIAL INFORMATION | | | 3 | |
| | | | | | | |
Item 1. | | | Financial Statements | | | 3 | |
Item 2. | | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | | 16 | |
Item 3 | | | Quantitative and Qualitative Disclosures About Market Risk | 20 | | 24 | |
Item 4. | | | Controls and Procedures | 20 | | 24 | |
| | | | | | | |
PART II | - | | OTHER INFORMATION | 21 | | 25 | |
| | | | | | | |
Item 1. | | | Legal Proceedings | 21 | | 25 | |
Item 1A. | | | Risk Factors | 21 | | 25 | |
Item 2. | | | Unregistered Sales of Equity Securities and Use of Proceeds | 21 | | 25 | |
Item 3. | | | Defaults Upon Senior Securities | 21 | | 25 | |
Item 4. | | Removed and Reserved | 21Submission of Matters to a Vote of Security Holders | | | 25 | |
Item 5. | | | Other Information | 21 | | 25 | |
Item 6. | | | Exhibits | 21 | | 25 | |
Signatures | 22 | | 26 | |
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q/A contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008 under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.
References
ExceptReferences to the “PRC” or “China” are to the People’s Republic of China. Unless otherwise noted, all currency figures are in U.S. dollars. All references to U.S. dollar amounts herein which relate to operations or revenues from the PRC have been converted into U.S. dollars based on the applicable exchange rates.
References to "yuan" or "RMB" are to the Chinese yuan, which is also known as the renminbi. Unless otherwise indicated byspecified, the context, references in this report to (i) thewords “Company,” “we,” “us,” and “our” are“our,” refer collectively to the combined business of China Broadband, Inc., a Nevada corporation, and its consolidated subsidiaries; (ii) “Broadband Cayman” are to our wholly-ownedwholly owned subsidiary in the Cayman Islands, China Broadband, Ltd., a Cayman Islands company; (iii) “WFOE” are to our wholly-owned subsidiaryand Beijing China Broadband Network Technology, Co., Ltd., a wholly foreign owned entity formed under the laws of the PRC, company; (iv) “Jinan Broadband” arewhich is commonly referred to herein as our 51% ownedWholly Foreign Owned Entity “WFOE” and, each of their respective subsidiary Jinan Guangdian Jia He Broadband Co. Ltd, a PRC company; (v) “Shandong Publishing” are to our 50% joint venture Shandong Lushi Media Co., Ltd., a PRC company; (vi) “AdNet” are to our wholly-owned subsidiary Wanshi Wangjing Media Technologies (Beijing) Co., Ltd. (a/k/a AdNet Media Technologies (Beijing) Co., Ltd.), a PRC company; (vii) “SEC” are tobusinesses in the United States Securities and Exchange Commission; (viii) “Securities Act” are to Securities Act of 1933, as amended; (ix) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (x) “PRC” and “China” are to People’s Republic of China; (xii) “Renminbi” and “RMB” are to the legal currency of China; and (xiii) “U.S. dollar,” “$” and “US$” are to United States dollars.PRC.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
China Broadband, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| | | September 30, | | | December 31, | |
| | March 31, | | | December 31, | | | 2009 | | | 2008 | |
| | 2010 | | | 2009 | | | (Unaudited) | | | | |
| | (Unaudited) | | | | | | (Restated) | | | | |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,513,927 | | | $ | 2,190,494 | | | $ | 1,941,266 | | | $ | 4,425,529 | |
Marketable equity securities, available for sale | | 123,812 | | | 47,244 | | |
Accounts receivable, net | | 232,676 | | | 213,713 | | |
Marketable equity securities | | | | 67,608 | | | | 254,496 | |
Accounts receivable | | | | 168,710 | | | | 136,709 | |
Inventory | | 493,529 | | | 455,492 | | | | 778,674 | | | | 877,309 | |
Prepaid expense | | 238,401 | | | 237,704 | | | | 118,144 | | | | 46,380 | |
Loan receivable from related party | | 290,020 | | | 289,974 | | |
Loan receivable | | | | 280,033 | | | | - | |
Amounts due from shareholders | | 736,843 | | | 168,907 | | | | 634,687 | | | | - | |
Other current assets | | | 79,831 | | | | 78,478 | | | | 68,509 | | | | 153,277 | |
Total current assets | | 3,709,039 | | | 3,682,006 | | | | 4,057,631 | | | | 5,893,700 | |
| | | | | | | | | | | | | | | | |
Property and equipment, net | | 6,783,901 | | | 7,362,641 | | | | 7,786,070 | | | | 9,299,473 | |
Intangible assets, net | | 4,176,619 | | | 4,294,614 | | | | 4,394,225 | | | | 4,218,758 | |
Convertible promissory note receivable | | 581,748 | | | - | | |
Goodwill | | | | 1,239,291 | | | | - | |
Other assets | | | 407,388 | | | | 430,561 | | | | 455,093 | | | | 692,911 | |
Total assets | | $ | 15,658,695 | | | $ | 15,769,822 | | | $ | 17,932,310 | | | $ | 20,104,842 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 1,549,881 | | | $ | 1,350,076 | | | $ | 1,250,452 | | | $ | 1,237,251 | |
Accrued expenses | | 1,932,046 | | | 1,839,272 | | | | 1,562,637 | | | | 936,134 | |
Deferred revenue | | 1,531,854 | | | 1,637,283 | | | | 1,646,868 | | | | 1,382,103 | |
Deferred tax liability | | 281,626 | | | 281,626 | | |
Convertible notes payable | | 304,853 | | | 304,853 | | | | 304,853 | | | | - | |
Warrant liabilities | | 777,336 | | | 819,150 | | |
Loan payable | | 398,960 | | | 398,960 | | | | 398,937 | | | | - | |
Loan payable to beneficial owner | | 600,000 | | | - | | |
Payable to Shandong Media | | 145,679 | | | 145,679 | | | | 145,679 | | | | 145,679 | |
Payable to Jinan Parent | | 133,276 | | | 152,268 | | | | 152,259 | | | | 2,795,472 | |
Warrant liabilities | | | | 1,417,335 | | | | - | |
Other current liabilities | | | 428,041 | | | | 378,847 | | | | 130,194 | | | | 72,013 | |
Total current liabilities | | 8,083,552 | | | 7,308,014 | | | | 7,009,214 | | | | 6,568,652 | |
| | | | | | | | | | | | | | | | |
Convertible notes payable | | 4,690,181 | | | 4,665,306 | | | | 4,639,879 | | | | 4,564,427 | |
Deferred tax liability and uncertain tax position liability | | | 440,850 | | | | 454,578 | | |
Deferred tax liability | | | | 935,819 | | | | 790,617 | |
Total liabilities | | | 13,214,583 | | | | 12,427,898 | | | | 12,584,912 | | | | 11,923,696 | |
| | | | | | | | | | | | | | | | |
Commitments and Contingencies | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Shareholders' equity | | | | | | | | | | | | | | | | |
Preferred stock, $.001 par value; 5,000,000 shares authorized, no shares issued and outstanding | | - | | | - | | | | - | | | | - | |
Common stock, $.001 par value; 95,000,000 shares authorized, 65,086,152 and 64,761,396 issued and outstanding | | 65,087 | | | 64,762 | | |
Common stock, $.001 par value; 95,000,000 shares authorized, 64,433,033 and 50,585,455 issued and outstanding | | | | 64,434 | | | | 50,586 | |
Additional paid-in capital | | 14,975,335 | | | 14,901,493 | | | | 14,835,135 | | | | 13,372,358 | |
Accumulated deficit | | (18,019,550 | ) | | (17,215,041 | ) | | | (15,546,470 | ) | | | (12,200,287 | ) |
Accumulated other comprehensive income | | | 427,468 | | | | 331,283 | | | | 351,428 | | | | 320,858 | |
Total China Broadband shareholders' deficit | | (2,551,660 | ) | | (1,917,503 | ) | |
Total shareholders' (deficit) equity | | | | (295,473 | ) | | | 1,543,515 | |
Noncontrolling interests | | | 4,995,772 | | | | 5,259,427 | | | | 5,642,871 | | | | 6,637,631 | |
| | | | | | | | | | | | | | | | |
Total shareholders' equity | | | 2,444,112 | | | | 3,341,924 | | |
Total China Broadband shareholders' equity | | | | 5,347,398 | | | | 8,181,146 | |
| | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 15,658,695 | | | $ | 15,769,822 | | | $ | 17,932,310 | | | $ | 20,104,842 | |
See notes to consolidated financial statements.
China Broadband, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited(Unaudited)
| | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | March 31, | | | March 31, | | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | (Restated) | | | (Restated) | | | | | | (Restated) | | | | |
| | | | | | | | | | | | | | | | | | |
Revenue | | $ | 1,875,681 | | | $ | 1,949,410 | | | $ | 2,106,454 | | | $ | 1,880,806 | | | $ | 6,045,381 | | | $ | 3,937,439 | |
Cost of revenue | | | 1,073,808 | | | | 1,173,881 | | | | 1,541,084 | | | | 949,299 | | | | 3,817,881 | | | | 1,845,354 | |
Gross profit | | 801,873 | | | 775,529 | | | | 565,370 | | | | 931,507 | | | | 2,227,500 | | | | 2,092,085 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | 723,270 | | | 717,928 | | | | 800,198 | | | | 582,085 | | | | 2,259,003 | | | | 1,393,999 | |
Professional fees | | 168,765 | | | 110,496 | | | | 154,350 | | | | 141,785 | | | | 446,747 | | | | 447,201 | |
Depreciation and amortization | | | 945,444 | | | | 831,307 | | | | 917,299 | | | | 768,951 | | | | 2,653,430 | | | | 2,210,481 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | (1,035,606 | ) | | (884,202 | ) | | | (1,306,477 | ) | | | (561,314 | ) | | | (3,131,680 | ) | | | (1,959,596 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | | | | | | | | | |
Settlement gain | | | | - | | | | - | | | | - | | | | 1,300,692 | |
Interest income | | 3,109 | | | 3,458 | | | | 721 | | | | 16,300 | | | | 6,105 | | | | 35,426 | |
Interest expense | | (91,235 | ) | | (87,384 | ) | | | (93,085 | ) | | | (89,333 | ) | | | (270,133 | ) | | | (256,776 | ) |
Change in fair value of warrant liabilities | | 41,814 | | | (613,809 | ) | | | 130,575 | | | | - | | | | (1,110,212 | ) | | | - | |
Loss on sale of marketable equity securities | | - | | | (20,352 | ) | |
Other, net | | | 26 | | | | (328 | ) | |
Gain (loss) on sale of securities | | | | 15,807 | | | | - | | | | (14,828 | ) | | | 17,498 | |
Other | | | | (12,883 | ) | | | 349 | | | | (13,158 | ) | | | (12,779 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes and noncontrolling interest | | (1,081,892 | ) | | (1,602,617 | ) | | | (1,265,342 | ) | | | (633,998 | ) | | | (4,533,906 | ) | | | (875,535 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income tax benefit | | | 13,728 | | | | 14,680 | | | | 14,680 | | | | 6,433 | | | | 44,040 | | | | 19,299 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss, net of tax | | (1,068,164 | ) | | (1,587,937 | ) | | | (1,250,662 | ) | | | (627,565 | ) | | | (4,489,866 | ) | | | (856,236 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interests | | | 263,655 | | | | 245,589 | | | | 335,066 | | | | 80,734 | | | | 719,312 | | | | 368,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband | | $ | (804,509 | ) | | $ | (1,342,348 | ) | |
Net loss attributable to China Broadband shareholders | | | $ | (915,596 | ) | | $ | (546,831 | ) | | $ | (3,770,554 | ) | | $ | (487,964 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss per share | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.01 | ) |
Diluted | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.06 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 64,765,004 | | | | 50,586,376 | | | | 64,104,665 | | | | 50,416,266 | | | | 58,951,679 | | | | 50,262,731 | |
Diluted | | | 64,765,004 | | | | 50,586,376 | | | | 64,104,665 | | | | 50,416,266 | | | | 58,951,679 | | | | 50,262,731 | |
See notes to consolidated financial statements.
China Broadband, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
for the Periods Ended March 31, 2010September 30, 2009 (Unaudited) (Restated) and December 31, 20092008
| | | | | | | | | | | | | | Accumulated | | | China | | | | | | | | | | |
| | | | | | | | Additional | | | | | | Other | | | Broadband | | | | | | | | | | |
| | Common | | | Par | | | Paid-in | | | Accumulated | | | Comprehensive | | | Shareholders' | | | Noncontrolling | | | Total | | | Comprehensive | |
| | Shares | | | Value | | | Capital | | | Deficit | | | Income(loss) | | | (Deficit)/Equity | | | Interest | | | Equity | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2008 | | | 50,585,455 | | | $ | 50,586 | | | $ | 13,372,359 | | | $ | (12,200,289 | ) | | $ | 320,858 | | | $ | 1,543,514 | | | $ | 6,637,631 | | | $ | 8,181,145 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of accounting | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
change for warrants - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reclassification of warrants to warrant liabilities | | | - | | | | - | | | | (731,496 | ) | | | 424,373 | | | | - | | | | (307,123 | ) | | | - | | | | (307,123 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shandong Media valuation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (275,448 | ) | | | (275,448 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued as payment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for convertible note interest | | | 921,043 | | | | 921 | | | | 259,637 | | | | - | | | | - | | | | 260,558 | | | | - | | | | 260,558 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 33,656 | | | | - | | | | - | | | | 33,656 | | | | - | | | | 33,656 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for AdNet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
acquisition | | | 11,254,898 | | | | 11,255 | | | | 1,676,980 | | | | - | | | | - | | | | 1,688,235 | | | | - | | | | 1,688,235 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs related to stock issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for AdNet acquisition | | | - | | | | - | | | | (3,622 | ) | | | - | | | | - | | | | (3,622 | ) | | | | | | | (3,622 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for cash | | | 2,000,000 | | | | 2,000 | | | | 298,000 | | | | - | | | | - | | | | 300,000 | | | | - | | | | 300,000 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs related to stock issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for cash | | | - | | | | - | | | | (4,021 | ) | | | - | | | | - | | | | (4,021 | ) | | | - | | | | (4,021 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (5,439,125 | ) | | | - | | | | (5,439,125 | ) | | | (1,102,756 | ) | | | (6,541,881 | ) | | $ | (5,439,125 | ) |
Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adjustments | | | - | | | | - | | | | - | | | | - | | | | 28,345 | | | | 28,345 | | | | - | | | | 28,345 | | | | 28,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
marketable equity securities | | | - | | | | - | | | | - | | | | - | | | | (17,920 | ) | | | (17,920 | ) | | | - | | | | (17,920 | ) | | | (17,920 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2009 | | | 64,761,396 | | | $ | 64,762 | | | $ | 14,901,493 | | | $ | (17,215,041 | ) | | $ | 331,283 | | | $ | (1,917,503 | ) | | $ | 5,259,427 | | | $ | 3,341,924 | | | $ | (5,428,700 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued as payment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for convertible note interest | | | 324,756 | | | | 325 | | | | 65,626 | | | | - | | | | - | | | | 65,951 | | | | - | | | | 65,951 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 8,216 | | | | - | | | | - | | | | 8,216 | | | | - | | | | 8,216 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (804,509 | ) | | | - | | | | (804,509 | ) | | | (263,655 | ) | | | (1,068,164 | ) | | $ | (804,509 | ) |
Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adjustments | | | - | | | | - | | | | - | | | | - | | | | 19,617 | | | | 19,617 | | | | - | | | | 19,617 | | | | 19,617 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
marketable equity securities | | | - | | | | - | | | | - | | | | - | | | | 76,568 | | | | 76,568 | | | | - | | | | 76,568 | | | | 76,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance March 31, 2010 | | | 65,086,152 | | | $ | 65,087 | | | $ | 14,975,335 | | | $ | (18,019,550 | ) | | $ | 427,468 | | | $ | (2,551,660 | ) | | $ | 4,995,772 | | | $ | 2,444,112 | | | $ | (708,324 | ) |
| | | | | | | | | | | | | | Accumulated | | | China | | | | | | | | | | |
| | | | | | | | Additional | | | | | | Other | | | Broadband | | | | | | | | | | |
| | Common | | | Par | | | Paid-in | | | Accumulated | | | Comprehensive | | | Shareholders' | | | Noncontrolling | | | Total | | | Comprehensive | |
| | Shares | | | Value | | | Capital | | | Deficit | | | Income (loss) | | | (Deficit)/Equity | | | Interest | | | Equity | | | Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2007 | | | 50,048,000 | | | $ | 50,048 | | | $ | 10,485,874 | | | $ | (8,845,424 | ) | | $ | 331,768 | | | $ | 2,022,266 | | | $ | 4,879,802 | | | $ | 6,902,068 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warrant valuation associated with convertible notes payable & other | | | - | | | | - | | | | 745,694 | | | | - | | | | - | | | | 745,694 | | | | - | | | | 745,694 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Option valuation associated with employment agreeement | | | - | | | | - | | | | 44,898 | | | | - | | | | - | | | | 44,898 | | | | - | | | | 44,898 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for penalty of non-registration | | | 207,599 | | | | 208 | | | | 421,970 | | | | - | | | | - | | | | 422,178 | | | | - | | | | 422,178 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warrant valuation associated with extension from settlement agreement | | | - | | | | - | | | | 1,426,862 | | | | - | | | | - | | | | 1,426,862 | | | | - | | | | 1,426,862 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued as payment for convertible note interest | | | 329,856 | | | | 330 | | | | 247,061 | | | | - | | | | - | | | | 247,391 | | | | - | | | | 247,391 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shandong Media joint venture | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,367,459 | | | | 2,367,459 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (3,354,865 | ) | | | - | | | | (3,354,865 | ) | | | (609,630 | ) | | | (3,964,495 | ) | | | | |
Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | (10,906 | ) | | | (10,906 | ) | | | - | | | | (10,906 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2008 | | | 50,585,455 | | | $ | 50,586 | | | $ | 13,372,359 | | | $ | (12,200,289 | ) | | $ | 320,862 | | | $ | 1,543,518 | | | $ | 6,637,631 | | | $ | 8,181,149 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of accounting change for warrants - reclassification of warrants to warrant liabilities | | | - | | | | - | | | | (731,496 | ) | | | 424,373 | | | | - | | | | (307,123 | ) | | | - | | | | (307,123 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shandong Media valuation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (275,448 | ) | | | (275,448 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued as payment for convertible note interest | | | 260,703 | | | | 261 | | | | 126,193 | | | | - | | | | - | | | | 126,454 | | | | - | | | | 126,454 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock option compensation expense | | | - | | | | - | | | | 33,656 | | | | - | | | | - | | | | 33,656 | | | | - | | | | 33,656 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for AdNet acquisition | | | 11,254,898 | | | | 11,255 | | | | 1,676,980 | | | | - | | | | - | | | | 1,688,235 | | | | - | | | | 1,688,235 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs related to stock issued for AdNet acquisition | | | - | | | | - | | | | (3,622 | ) | | | - | | | | - | | | | (3,622 | ) | | | | | | | (3,622 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for cash | | | 2,000,000 | | | | 2,000 | | | | 298,000 | | | | - | | | | - | | | | 300,000 | | | | - | | | | 300,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Costs related to stock issued for cash | | | - | | | | - | | | | (4,021 | ) | | | | | | | | | | | (4,021 | ) | | | - | | | | (4,021 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (2,854,958 | ) | | | - | | | | (2,854,958 | ) | | | (384,246 | ) | | | (3,239,204 | ) | | $ | (2,854,958 | ) |
Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | 21,720 | | | | 21,720 | | | | - | | | | 21,720 | | | | 21,720 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss on marketable equity securities | | | - | | | | - | | | | - | | | | - | | | | (36,293 | ) | | | (36,293 | ) | | | - | | | | (36,293 | ) | | | (36,293 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance June 30, 2009 | | | 64,101,056 | | | $ | 64,102 | | | $ | 14,768,049 | | | $ | (14,630,874 | ) | | $ | 306,289 | | | $ | 507,566 | | | $ | 5,977,937 | | | $ | 6,485,503 | | | $ | (2,869,531 | ) |
See notes to consolidated financial statements.
China Broadband, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months Ended | | | Nine Months Ended | |
| | March 31, | | | March 31, | | | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2009 | | | 2008 | |
| | | | | (Restated) | | | (Restated) | | | | |
Cash flows from operating | | | | | | | | | | | | |
Net loss | | $ | (1,068,164 | ) | | $ | (1,587,937 | ) | | $ | (4,489,866 | ) | | $ | (856,236 | ) |
Adjustments to reconcile net loss to net cash | | | | | | | | | |
provided by operating activities | | | | | | | | | |
Stock compensation expense and shares issued as payment for interest | | 74,167 | | | 77,456 | | |
Adjustments to reconcile net loss to net cash provided by operating activities | | | | | | | | | |
Stock compensation expense | | | | 227,528 | | | | 218,137 | |
Depreciation and amortization | | 945,444 | | | 831,307 | | | | 2,451,400 | | | | 2,210,481 | |
Noncash interest expense - original issue discount | | 24,875 | | | 24,875 | | |
Noncash interest expense | | | | 75,452 | | | | 72,688 | |
Deferred income tax | | (13,728 | ) | | (14,680 | ) | | | (44,040 | ) | | | (19,299 | ) |
Loss on sale of marketable equity securities | | - | | | 20,353 | | |
Loss (gain) on sale of marketable equity securities | | | | 14,828 | | | | (17,498 | ) |
Change in fair value of warrant liabilities | | (41,814 | ) | | 613,809 | | | | 1,110,212 | | | | - | |
Change in assets and liabilities, | | | | | | | | | |
Settlement gain | | | | - | | | | (1,300,692 | ) |
Change in assets and liabilities, net of amounts assumed in AdNet acquisition: | | | | | | | | | |
Accounts receivable | | (18,913 | ) | | (55,771 | ) | | | (32,000 | ) | | | 105,992 | |
Inventory | | (37,963 | ) | | 40,482 | | | | 98,635 | | | | (239,660 | ) |
Prepaid expenses and other assets | | (3,582 | ) | | (46,052 | ) | | | (62,192 | ) | | | 33,763 | |
Accounts payable and accrued expenses | | 342,005 | | | 173,586 | | | | 834,550 | | | | 431,247 | |
Deferred revenue | | | (113,841 | ) | | | 28,760 | | | | 264,765 | | | | 98,824 | |
Other | | | | (9 | ) | | | (73,580 | ) |
Net cash provided by operating activities | | | 88,486 | | | | 106,188 | | | | 449,263 | | | | 664,167 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Cash acquired in AdNet acquisition | | | | 17,568 | | | | - | |
Proceeds from sale of marketable equity securities | | - | | | 54,858 | | | | 174,513 | | | | 339,998 | |
Acquisition of property and equipment | | (224,334 | ) | | (227,430 | ) | | | (554,727 | ) | | | (1,566,948 | ) |
Loan to Sinotop Group Ltd | | (580,000 | ) | | - | | |
Loans made to Shandong Media shareholders | | (585,111 | ) | | (584,654 | ) | |
Loan repayments received from Shandong Media shareholders | | | 17,203 | | | | - | | |
Loans to Shandong Media shareholders | | | | (553,004 | ) | | | (242,155 | ) |
Net cash used in investing activities | | | (1,372,242 | ) | | | (757,226 | ) | | | (915,650 | ) | | | (1,469,105 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Proceeds from sale of equity securities | | | | 300,000 | | | | - | |
Proceeds from issuance of convertible notes payable | | 600,000 | | | - | | | | 304,853 | | | | 4,850,000 | |
Payable to Jinan Parent | | | (18,992 | ) | | | 3,512 | | |
Net cash provided by financing activities | | | 581,008 | | | | 3,512 | | |
Legal fees associated with AdNet Acquisition and share issuance | | | | (7,643 | ) | | | - | |
Issuance costs associated with private placement and convertible notes | | | | - | | | | (104,500 | ) |
Receipts from (payments to) Jinan Parent | | | | (2,643,213 | ) | | | 240,489 | |
Net cash (used in) provided by financing activities | | | | (2,046,003 | ) | | | 4,985,989 | |
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 26,181 | | | | 20,795 | | | | 28,124 | | | | 478,094 | |
| | | | | | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | (676,567 | ) | | (626,731 | ) | |
Net increase (decrease) in cash and cash equivalents | | | | (2,484,263 | ) | | | 4,659,145 | |
Cash and cash equivalents at beginning of period | | | 2,190,494 | | | | 4,425,529 | | | | 4,425,529 | | | | 472,670 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 1,513,927 | | | $ | 3,798,798 | | | $ | 1,941,266 | | | $ | 5,131,815 | |
| | | | | | | | | | | | | | | | |
Supplemental Cash Flow Information: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cash paid for taxes | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Cash paid for interest | | $ | 413 | | | $ | 368 | | | $ | 792 | | | $ | 490 | |
Value assigned to shares as payment for interest expense | | $ | 65,951 | | | $ | 62,141 | | | $ | 193,873 | | | $ | 183,598 | |
Shandong Media valuation adjustment | | $ | - | | | $ | 275,448 | | | $ | 275,448 | | | $ | - | |
Convertible notes issued as payment for debt issuance costs | | | $ | - | | | $ | 121,250 | |
Value assigned to shares issued as penalty for non-registration of 7% convertible notes | | | $ | - | | | $ | 12,125 | |
| | | | | | | | | | | | | | | | |
Cumulative effect of change in accounting principle upon adoption of new | | | | | | | | | |
accounting pronouncement on January 1, 2009, reclassification of | | | | | | | | | |
warrants from equity to warrant liabilities | | $ | - | | | $ | 424,373 | | |
Cumulative effect of change in accounting principle upon adoption of new accounting pronouncement on January 1, 2009, reclassification of warrants from equity to warrant liabilities | | | $ | 424,373 | | | $ | - | |
See notes to consolidated financial statements.
CHINA BROADBAND, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
China Broadband, Inc., a Nevada corporation (“China Broadband”, “we”, “us”,“we,” “us,” or “the Company”) owns and operates in the media segment through its subsidiaries in the People’s Republic of China (“PRC” or “China”) (1)(i) a cable broadband business Beijing China Broadband Network Technology Co. Ltd (referred to as Jinan(Jinan Broadband) and (2), (ii) a print based media and television programming guide publication Shandong Lushi Media Co., Ltd. (referred to as Shandong Media). We have also recently acquired(Shandong Newspaper) and are developing to(iii) a limited extent, an internet café advertising and content provider business in China.
(1) We provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance through our Jinan Broadband subsidiary based in the Jinan region of China.
(2) We operate a print based media and television programming guide publication business through our Shandong Media joint venture based in the Shandong Province of China.
Our subsidiary AdNet Media Technologies (Beijing) Co. Ltd (“AdNet”) which was acquired during the first half of 2009, holds an Internet Content Provider (“ICP”), license with rights to provide delivery of multimedia advertising content to internet cafés in the PRC. AdNet is licensed to operate in 28 provinces in the PRC with servers in five data centers including Wuhan, Wenzhou, Yantai, Yunan and with a master distribution server in Tongshan. Due to the shift of our business model to the PPV / VOD business, as of December 31, 2009 we temporarily suspended day to day operations of AdNet. We have maintained our licenses, contracts, technology and other assets for future use in our new PPV business.(AdNet Media).
| (i) | The principal activities of the Company are to provide cable and wireless broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rental and sales, and fiber network construction and maintenance through its Jinan Broadband subsidiary based in the Jinan region of China. |
| (ii) | We operate a print based media and television programming guide publication business through our Shandong Newspaper joint venture based in the Shandong Province of China, effective as of July 1, 2008. The results of which are included in our financial statements as of July 2008. |
| (iii) | We operate a business whose primary focus is the delivery of multimedia advertising content to internet cafés in the PRC, effective as of April 7, 2009, the results of which are included in our financial statements as of April 2009. |
The accompanying unaudited interim consolidated financial statements include the accounts of China Broadband, Inc. and (a) its wholly-owned subsidiary, China Broadband Cayman, (b) a wholly-owned subsidiary of China Broadband Cayman, Beijing China Broadband Network Technology Co, Ltd. (WFOE), and (c) four entities located in the PRC: Jinan Zhong Kuan, Jinan Broadband, Shandong Media and AdNet, which are controlledhave been prepared by the Company through contractual arrangements, as if they are wholly-owned subsidiaries of the Company. All material intercompany transactions and balances are eliminated in consolidation.
In the opinion of management, our Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the periods presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and with the instructions to Form 10-Q in Article 10 of SEC Regulation S-X. The results of operations for the interim periods presented are not necessarily indicative of results for the full year.
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These unaudited condensedfor interim financial statements should be readreporting on a basis consistent with those reflected in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’sour fiscal 2008 Annual Report on Form 10-K for10-K/A, filed with the year ended December 31, 2009.
The information presented in the accompanying consolidated balance sheet as of December 31, 2009 has been derived from the Company’s audited consolidated financial statementsSecurities and Exchange Commission, but does not include all the disclosures required by U.S. GAAP. All other information has been derived from the Company’s unaudited consolidatedgenerally accepted accounting principles. These interim financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, which are necessary for a fair presentation of results for the three months ended March 31, 2010.respective interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or for any future period.
The financial statements of the Company were filed with the Securities and Exchange Commission on November 20, 2009. We have evaluated subsequent events up to the time of the filing.
The financial statements for the three months ended March 31, 2009 have been restated for the reasons described below and the accompanying financial statements for the three months and nine months ended March 31, 2010 include the following changes.September 30, 2009 have been restated as described below:
| 1) | Reclassified certain warrants from shareholders’ equity to liabilities in accordance with EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (FASB ASC 815-40-15-5) ("ASC 815”). ASC 815 became effective and should have been adopted by the Company as of January 1, 2009 by classifying certain warrants as liabilities measured at fair value with changes in fair value recognized in earnings each reporting period and recording a cumulative-effect adjustment to the opening balance of accumulated deficit. The cumulative-effect adjustment at January 1, 2009 was as follows: |
| | Additional | | | Accumulated | | | Warrant | |
| | Paid-in Capital | | | Deficit | | | Liabilities | |
Warrants | | $ | (731,000 | ) | | $ | 424,000 | | | $ | 307,000 | |
For the three months ended March 31,September 30, 2009, the adoption of ASC 815 had the effect of increasingdecreasing warrant liabilities and net loss by approximately $614,000.$131,000 and for the nine months ended September 30, 2009, the effect increased warrant liabilities and net loss by approximately $1,110,000.
| 2) | Corrected an error related to the valuation of our Shandong Media intangibles which includesinclude our publication rights, operating permits and customer relationships and minor changes to the valuation of property and equipment. The correction resulted in a decrease to the value of our intangible assets and property and equipment by reclassifying approximately $275,000 from non-controlling interest. |
| 3) | Adjusted the original purchase accounting for our AdNet acquisition. Our AdNet intangible asset was decreased by approximately $1,150,000 and approximately $1,239,000 was recorded to goodwill, $100,000 was recorded to amount due from former AdNet shareholders and approximately $189,000 was recorded to deferred tax liability. In addition, amortization expense of approximately $63,000 and $126,000 was recorded for the three months and nine months ended September 30, 2009. |
| 4) | Reclassified legal costs for approximately $8,000 related to stock issued for our AdNet acquisition and related to stock issued for cash to additional paid in capital. |
3. | Accounting Policy Changes |
The Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC 810. Weis an aggregation of previously issued authoritative U.S. generally accepted accounting principles (GAAP) in one comprehensive set of guidance organized by subject area. In accordance with the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).
On January 1, 2009, the Company adopted ASC 805, Business Combinations, and ASC 810, on January 1, 2010,Consolidation. ASC 805 requires an acquirer to measure the adoption did not have an impactidentifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the Company’s financial statements The amendments onacquisition date, with goodwill being the consolidation guidance for variable-interest entities include: (1)excess value over the eliminationnet identifiable assets acquired. Further, it requires transaction costs to be expensed. These costs were previously treated as costs of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity.acquisition.
ASU 2010-06. OnASC 810 requires us to classify noncontrolling interests in a subsidiary as part of consolidated net income and to include the accumulated amount of noncontrolling interests as part of total equity. The net loss amounts we have previously reported are now presented as “Net loss attributable to shareholders”. The calculation of earnings per share continues to be based on income amounts attributable only to shareholders. Similarly, in our presentation of total equity, we distinguish between equity amounts attributable to shareholders and amounts attributable to the noncontrolling interests (previously classified as minority interest outside of shareholders’ equity).
Effective January 1, 2010,2009, we adopted ASU No. 2010-06 which provides improvementsthe provisions of FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to disclosure requirements relatedan Entity’s Own Stock”). As a result of adopting ASC 815, warrants to purchase the Company’s common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value measurements. The adoption of these provisions did not have an effect onwarrants will be recognized currently in earnings until such time as the Company’s financial reporting. New disclosureswarrants are required for significant transfers in and out of Level 1 and Level 2 fair value measurements, disaggregation regarding classes of assets and liabilities, valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2exercised or Level 3. Additional new disclosures regarding the purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 beginning with the first interim period, the Company does not expect the adoption of these new Level 3 disclosures to have a material impact on the Company’s financial reporting.expire.
4. | Going Concern and Management’s Plans |
The Company has incurred significant continuing losses during 2010 and has a working capital deficit at March 31, 2010 and has relied on debt and equity financings to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. The Company has limited cash resources and management continues its efforts to raise additional funds through debt or equity offerings. The Company's independent registered public accounting firm's report ofon the financial statements as of and for the year ended December 31, 2009,2008, contained an explanatory paragraph regarding the Company's ability to continue as a going concern.
By July of 2009, the Company completed (i) a private financing of 5% Convertible Promissory Notes for gross proceeds of approximately $305,000 and (ii) a private financing of 2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the “Common Stock”), at a purchase price of $.15 per share, for aggregate gross proceeds of $300,000. See financial statement note 5 below for a description of these transactions. As part of the Convertible Note financing we were required to reduce the conversion price of existing notes held by the investors.
Management plans to continue its efforts to raise additional funds through andebt or equity offering orofferings. The Company continues to merge with or acquire other companies. Management has yet to decideevaluate what type of offering the Company will use, how much capital the Company will raise and which company it will merge with or acquire. There is no guarantee that the Company will be able to raise any capital through any type of offerings or merge with or acquire any other companies. See Note 21 “Subsequent Events” below.
5. | Shandong Media Joint Venture - Cooperation Agreement Additional PaymentAcquisition of AdNet |
In connection withEffective as of April 7, 2009, China Broadband, through its wholly owned subsidiary China Broadband, Ltd., a Cayman Islands company (“China Broadband Cayman”) completed the Shandong Newspaper Cooperationacquisition (the “AdNet Acquisition”) of Wanshi Wangjing Media Technologies (Beijing) Co., Ltd., a/k/a Adnet Media Technologies (Beijing) Co., Ltd., a recently organized development stage PRC based company (“AdNet”) pursuant to a Share Issuance Agreement (the “AdNet Agreement”) between the Company, China Broadband Cayman, AdNet and its 10 shareholders (inclusive of its two executives, Ms. Priscilla Lu and Mr. Wang Yingqinee Michael Wang).
Pursuant to the terms of the AdNet Agreement, among other provisions, China Broadband issued 11,254,898 shares of its common stock, par value, $.001 per share (the “Broadband Shares”) to the AdNet shareholders, in exchange for 100% of the equity ownership of AdNet (the “AdNet Shares”) and cash consideration of $100,000. The acquisition of AdNet resulted in the ownership by AdNet shareholders of 15% of China Broadband’s common stock on a fully diluted basis (exclusive of certain notes and warrants).
The fair value of the Broadband Shares issued in the AdNet Acquisition totaled $1,688,235. The fair value of these shares was determined to be $.15 per share based on certain financial performance we were requiredthe sale of shares sold at $.15 per share in the private equity transactions that occurred in the same period.
The purchase price was allocated to make an additional paymenteach major class of 5 million RMB (approximately US $730,000). In 2008 we recordedidentifiable assets acquired and liabilities assumed based upon their estimated fair values at the additional payment due as an increase to our Shandong Media noncontrolling interest account. The due date of the additional payment has been extendedacquisition. The following represents the allocation of the purchase price.
Adnet | | | |
Cash | | $ | 17,568 | |
Due from former AdNet shareholders | | | 100,000 | |
Property and equipment | | | 6,986 | |
Other assets | | | 18,935 | |
Software technology | | | 756,969 | |
Loan payable | | | (199,358 | ) |
Accounts payable | | | (5,478 | ) |
Accrued expenses | | | (53,229 | ) |
Other current liabilities | | | (4,207 | ) |
Deferred tax liability | | | (189,242 | ) |
Net identifiable assets and liabilities | | $ | 448,944 | |
Goodwill | | | 1,239,291 | |
Consideration paid | | $ | 1,688,235 | |
The purchase price allocation for acquisitions requires extensive use of accounting estimates and judgments to May 31, 2010.allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values.
AdNet holds an Internet Content Provider (“ICP”) license and is in the business of providing delivery of multimedia advertising content to internet cafés in China. AdNet currently services over 24,000 cafés and currently operates and is licensed to operate in 28 provinces in the PRC. AdNet maintains servers in five data centers located in the Chinese cities of Wuhan, Wenzhou, Yantai, Yunan, with a master distribution server in Tongshan. Partnering with a local advertisement agency, AdNet provides a network for tens of thousands of daily video advertisement insertions to entertainment content traffic (movies, music, video, and games).
6. | Variable Interest Entities |
Financial accounting standards require the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability company, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.
Our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary. Our VIEs at March 31, 2010September 30, 2009 include Jinan Broadband and Shandong Media.Newspaper.
7. | Fair Value Measurements |
Accounting standards require the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:
| · | Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access. |
| · | Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.liability |
| · | Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. |
Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The following tables presenttable presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at March 31, 2010as of September 30, 2009 and December 31, 2009:2008
| | March 31, 2010 | | | | | | September 30, 2009 | | | | |
| | Fair Value Measurements | | | | | | Fair Value Measurements | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | $ | 123,812 | | | $ | - | | | $ | - | | | $ | 123,812 | | | $ | 67,608 | | | $ | - | | | $ | - | | | $ | 67,608 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of warrants | | $ | - | | | $ | - | | | $ | 777,336 | | | $ | 777,336 | | | $ | - | | | $ | - | | | $ | 1,417,335 | | | $ | 1,417,335 | |
| | December 31, 2009 | | | | | | December 31, 2008 | | | | |
| | Fair Value Measurements | | | | | | Fair Value Measurements | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | $ | 47,244 | | | $ | - | | | $ | - | | | $ | 47,244 | | | $ | 254,496 | | | $ | - | | | $ | - | | | $ | 254,496 | |
Liabilities | | | | | | | | | | | | | | | | | |
Fair value of warrants | | $ | - | | | $ | - | | | $ | 819,150 | | | $ | 819,150 | | |
8. | Convertible Promissory Note Receivable and Letter of Intent |
On March 9, 2010, China Broadband Cayman entered into a Note Purchase Agreement and a non-binding Letter of Intent, or the LOI with Sinotop Group Ltd., a Hong Kong corporation, or Sinotop Hong Kong. Through a series of contractual arrangements referred to herein as “VIE Contracts”, Sinotop Hong Kong controls Beijing Sino Top Scope Technology Co., Ltd., or Sinotop Beijing. Sinotop Beijing, a corporation established in the PRC is, in turn, a party to a joint venture with two other PRC companies to provide integrated value-added service solutions for the delivery of pay-per-view (“PPV”), video-on-demand (“VOD”), and enhanced premium content for cable providers.
The LOI summarizes the proposed terms of the acquisition by CB Cayman of 100% of the outstanding capital stock of Sinotop Hong Kong from its sole stockholder in consideration for a percentage of China Broadband to be determined in the definitive agreement. Among other customary closing conditions, the acquisition is contingent upon (1) the drafting and negotiation of definitive agreements that cover the matters discussed in the LOI, (2) the funding of the Note (as defined below), which has already occurred, (3) the contribution by CB Cayman of at least US$5,000,000 to the capital of Sinotop Hong Kong (or the purchase by CB Cayman of newly issued shares of Sinotop Hong Kong in consideration for the same amount), and (4) the absence of any debts, obligations or encumbrances on the equity or assets of Sinotop Hong Kong and the WFOE other than the Note and the VIE Contracts. The LOI contains a binding exclusivity provision that prohibits Sinotop Hong Kong and Sinotop Hong Kong’s sole stockholder from soliciting, initiating, entertaining, participating in any discussions or negotiations concerning, or making or accepting any offer or proposed transaction with any third party with regard to, any of the transactions contemplated by the LOI or any similar transaction. This transaction has not been consummated yet and we are dependent on our ability to raise capital in order to complete this transaction.
Pursuant to the Note Purchase Agreement, on March 9, 2010, China Broadband Cayman acquired a Convertible Promissory Note, or Note from Sinotop Hong Kong in consideration of China Broadband Cayman’s US$580,000 loan to Sinotop Hong Kong.
The Note accrues interest at a simple annual rate of 5% and is due on the date, or the Maturity Date that is the earlier of the fifth anniversary of the date of issuance of the Note or the day following a change of control (as described in the Note). The outstanding principal amount of the Note along with all accrued interest is convertible into common shares of Sinotop Hong Kong upon the occurrence of (1) Sinotop Hong Kong consummating a financing transaction, or Financing, resulting in aggregate gross proceeds of at least $1 million, in which case the Note would automatically be converted into ordinary shares of Sinotop Hong Kong at a price equal to 70% of the price per share paid by investors in such Financing, or (2) a change of control of Sinotop Hong Kong (as described in the Note), in which case the Note would automatically be converted into ordinary shares that represent 50% of the issued and outstanding capital stock of Sinotop Hong Kong. The outstanding principal amount of the Note and all accrued interest thereon may also be converted, at the option of China Broadband Cayman at any time after the Maturity Date or an event of default, into ordinary shares of Sinotop Hong Kong representing 50% of the issued and outstanding voting capital stock of Sinotop Hong Kong. Accrued interest as of March 31, 2010 is $1,748 and interest income for the three months ended March 31, 2010 totaled $1,748.
9. | Related Party Transactions |
Loan Receivable
As of March 31, 2010,September 30, 2009, the Company advanced an aggregate ofhas loaned approximately $290,000 in the form of a loan$280,000 to Music Magazine to fund its operations. The loan is unsecured, interest free and is due on December 31, 2010.has no fixed repayment terms. Music Magazine is related through Modern Movie & TV Biweekly Press who is our partner in our Shandong Media joint venture company.Press.
Amounts due from Shareholders
As of March 31, 2010, amountsAmounts due from shareholders include approximately $92,000$91,000 advanced to Shandong Broadcast & TV Weekly Press and approximately $645,000$544,000 advanced to Modern Movie & TV Biweekly Press. Both companies are our partners in our Shandong Media joint venture company. The amount due from Shandong Broadcast & TV Weekly Press is unsecured, interest free and has no fixed repayment terms. The amount due from Modern Movie & TV Biweekly Press is unsecured, interest free and is due on December 31, 2010.2009 (previously June 30, 2009). During the 3 monthsperiod ended March 31, 2010, we received repayments of approximately $17,000 from Shandong Broadcast and TV Weekly Press andSeptember 30, 2009, the Company advanced approximately $585,000$553,000 to Modern Movie & TV Biweekly Press.the shareholders.
Payable to Jinan Parent
During the threenine months ended March 31, 2010, our payableSeptember 30, 2009, Jinan Broadband paid $2,643,000 to Jinan Parent decreased approximately $19,000.Parent. At March 31, 2010, approximately $133,000September 30, 2009, $152,000 remains due to Jinan Parent. The advance is unsecured, interest free and has no fixed repayment terms.
Loan Payable to Beneficial Owner
In the three months ended March 31, 2010, a significant beneficial owner of the Company’s securities, Oliviera Capital LLC, advanced the funds necessary for China Broadband Cayman to make the loan to Sinotop Hong Kong as described in Note 8 above. While the terms of the advance have not yet been documented, the terms are generally understood to be that the $600,000 loan will convert into our current fundraise at slightly favorable terms with no interest and will receive two additional common share purchase warrants, each for the purchase of one common share of the Company. See Note 21 “Subsequent Events” below.
10.9. | PropertyGoodwill and Equipment |
Property and equipment at March 31, 2010 and December 31, 2009 consisted of the following:
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Furniture and office equipment | | $ | 995,000 | | | $ | 984,000 | |
Headend facilities and machinery | | | 14,386,000 | | | | 14,172,000 | |
Vehicles | | | 30,000 | | | | 30,000 | |
Total property and equipment | | | 15,411,000 | | | | 15,186,000 | |
Less: accumulated depreciation | | | (8,627,000 | ) | | | (7,823,000 | ) |
Net carrying value | | $ | 6,784,000 | | | $ | 7,363,000 | |
| | | | | | | | |
Depreciation expense | | $ | 804,000 | | | $ | 3,068,000 | |
11. | Other Intangible Assets |
In the first quarter of 2009 the Company decreased the value of our intangible assets by reclassifying approximately $279,000 from noncontrolling interest. The reclassification was made to correct an error related to the valuation of our Shandong Media intangibles which includes our publication rights, operating permits and customer relationships. The Company assessed the impact of this adjustment on the current year and all prior periods and determined that the effect of this adjustment was not material to the 2009 results and did not result in a material misstatement to any previously issued annual or quarterly financial statements.
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, discount rates and future market conditions, among others. Long-livedGoodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, changes in product and service offerings, or other circumstances indicate that the carrying amount may not be recoverable.
The Company amortizes its service agreement, publication rights, operating permits, customer relationships and software technology that have finite lives. Our service agreement, publication rights and operating permits are amortized over 20 years. Customer relationships are amortized over 10 years and our software technology is amortized over 3 years.
We have intangible assets relating to the acquisition of our Jinan Broadband subsidiary, Shandong Media joint venture and AdNet Media acquisition.
| | Balance at | | | | | | | | | | | | Balance at | |
| | December 31, | | | | | | | | | Other | | | March 31, | |
| | 2009 | | | Additions | | | Amortization | | | Changes | | | 2010 | |
Amortized intangible assets: | | | | | | | | | | | | | | | |
Service agreement | | $ | 1,483,762 | | | $ | - | | | $ | (21,680 | ) | | $ | - | | | $ | 1,462,082 | |
Publication rights | | | 824,812 | | | | - | | | | (11,146 | ) | | | - | | | | 813,666 | |
Customer relationships | | | 183,730 | | | | - | | | | (5,404 | ) | | | - | | | | 178,326 | |
Operating permits | | | 1,234,583 | | | | - | | | | (16,684 | ) | | | - | | | | 1,217,899 | |
Software technology | | | 567,727 | | | | - | | | | (63,081 | ) | | | - | | | | 504,646 | |
Total amortized intangible assets | | $ | 4,294,614 | | | $ | - | | | $ | (117,995 | ) | | $ | - | | | $ | 4,176,619 | |
| | Balance at | | | | | | Amortization/ | | | | | | Balance at | |
| | December 31, | | | | | | Impairment | | | Other | | | December 31, | |
| | 2008 | | | Additions | | | Charge | | | Changes | | | 2009 | |
Amortized intangible assets: | | | | | | | | | | | | | | | |
Service agreement | | $ | 1,570,482 | | | $ | - | | | $ | (86,720 | ) | | $ | - | | | $ | 1,483,762 | |
Publication rights | | | 968,977 | | | | - | | | | (42,250 | ) | | | (101,915 | ) | | | 824,812 | |
Customer relationships | | | 228,933 | | | | - | | | | (20,491 | ) | | | (24,712 | ) | | | 183,730 | |
Operating permits | | | 1,450,366 | | | | - | | | | (63,236 | ) | | | (152,547 | ) | | | 1,234,583 | |
Software technology | | | - | | | | 756,969 | | | | (189,242 | ) | | | - | | | | 567,727 | |
Total amortized intangible assets | | $ | 4,218,758 | | | $ | 756,969 | | | $ | (401,939 | ) | | $ | (279,174 | ) | | $ | 4,294,614 | |
| | | | | | | | | | | | | | | | | | | | |
Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | - | | | $ | 1,239,291 | | | $ | (1,239,291 | ) | | $ | - | | | $ | - | |
| | Balance at | | | | | | | | | | | | Balance at | |
| | December 31, | | | | | | | | | Other | | | September 30, | |
| | 2008 | | | Additions | | | Amortization | | | Changes | | | 2009 | |
Amortized intangible assets: | | | | | | | | | | | | | | | |
Service agreement | | $ | 1,570,482 | | | $ | - | | | $ | (65,040 | ) | | $ | - | | | $ | 1,505,442 | |
Publication rights | | | 968,977 | | | | - | | | | (37,269 | ) | | | (101,915 | ) | | | 829,793 | |
Customer relationships | | | 228,933 | | | | - | | | | (18,075 | ) | | | (24,712 | ) | | | 186,146 | |
Operating permits | | | 1,450,366 | | | | - | | | | (55,782 | ) | | | (152,547 | ) | | | 1,242,037 | |
Software technology | | | - | | | | 756,969 | | | | (126,162 | ) | | | - | | | | 630,807 | |
Total amortized intangible assets | | $ | 4,218,758 | | | $ | 756,969 | | | $ | (302,328 | ) | | $ | (279,174 | ) | | $ | 4,394,225 | |
| | | | | | | | | | | | | | | | | | | | |
Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | - | | | $ | 1,239,291 | | | $ | - | | | $ | - | | | $ | 1,239,291 | |
In accordance with ASC 250, we recorded amortization expense related to our intangible assets of $117,995$302,328 and $58,722$77,193 for the threenine months ended March 31, 2010September 30, 2009 and 2009,2008, respectively.
The following table outlines the amortization expense for the next five years and thereafter:
| | Jinan | | | Shandong | | | AdNet | | | | | | Jinan | | | Shandong | | | AdNet | | | | |
Years ending December 31, | | Broadband | | | Media | | | Media | | | Total | | |
2010 (nine months) | | $ | 65,040 | | | $ | 99,700 | | | $ | 189,242 | | | $ | 353,982 | | |
| | | Broadband | | | Media | | | Media | | | Total | |
2009 (three months) | | | $ | 21,680 | | | $ | 33,234 | | | $ | 63,080 | | | $ | 117,994 | |
2010 | | | 86,720 | | | 132,934 | | | 252,323 | | | 471,977 | |
2011 | | | 86,720 | | | | 132,934 | | | | 252,323 | | | | 471,977 | | | 86,720 | | | 132,934 | | | 252,323 | | | 471,977 | |
2012 | | | 86,720 | | | | 132,934 | | | | 63,081 | | | | 282,735 | | | 86,720 | | | 132,934 | | | 63,081 | | | 282,735 | |
2013 | | | 86,720 | | | | 132,934 | | | | - | | | | 219,654 | | | 86,720 | | | 132,934 | | | - | | | 219,654 | |
2014 | | | 86,720 | | | | 132,934 | | | | - | | | | 219,654 | | |
Thereafter | | | 1,050,162 | | | | 1,578,455 | | | | - | | | | 2,628,617 | | | | 1,136,882 | | | | 1,693,006 | | | | - | | | | 2,829,888 | |
Total amortization to be recognized | | $ | 1,462,082 | | | $ | 2,209,891 | | | $ | 504,646 | | | $ | 4,176,619 | | | $ | 1,505,442 | | | $ | 2,257,976 | | | $ | 630,807 | | | $ | 4,394,225 | |
Accrued expenses at March 31, 2010 and December 31,Private Financings, June 2009 consist of the following:
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Accrued expenses | | $ | 1,028,000 | | | $ | 1,053,000 | |
Accrued payroll | | | 904,000 | | | | 786,000 | |
| | $ | 1,932,000 | | | $ | 1,839,000 | |
InIssuance of Convertible Notes, June 2009 we
During the nine months ended September 30, 2009, the Company completed a private placement transaction and soldfinancing of 5% Convertible Promissory Notes or the 2009 Notes,(the “Notes”) for gross proceeds of approximately $305,000 and an aggregate(the “Note Offering”). The Note Offering was pursuant to a Note Purchase Agreement (the “Note Purchase Agreement”) with nine persons who were existing holders (the “Note Investors”) of 2,000,000 sharesConvertible Promissory Notes issued in January of our common stock2008 (the “January 2008 Notes”), pursuant to which the Company issued approximately $305,000 principal amount of Notes to the Note Investors at a purchase price of $.15 per share, for aggregate proceeds of $300,000.face value. The Notes accrue interest at 5% per year payable quarterly in cash or stock, are initially convertible at $.20 per share, and become due and payable in full on May 27, 2010. The Company did not pay any placement agent or similar fees in connection with the Note Offering.
Equity Financing; Issuance of Common Stock
During the nine months ended September 30, 2009 and pursuant to a Securities Purchase Agreement with three investors, the Company completed a private financing of 2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the “Common Stock”), at a purchase price of $.15 per share, for aggregate gross proceeds of $300,000 (the “Equity Financing”). The company did not pay any placement agent or similar fees in connection with such financing.
Waiver Letters
In connection with the 2009 private placement, weNote Offering and the Equity Financing, the Company entered into a waiver letter (the “Waiver Letter”) with all the holders of January 2008 Notes (“Existing Note Holders”), pursuant to which, among other things, the conversion price of the January 2008 Notes were reduced from $.75 per share to (i) $.20 per share (i.e. the same conversion price as the Notes in the Note Offering) for existing note holdersthe Existing Note Holders that invested in the 2009 private placementNotes (i.e. the Note Investors), and (ii) $.25 per share for those Existing Note Holders that did not participate.reinvest in the new notes. All of the existing note holdersExisting Note Holders waived certain anti dilution adjustments contained in respect of the contemplated Equity Financing or in respect of their Warrants which were issued to them in connection with the January 2008 Notes, which warrants remain exercisable at $.60 per share.
The Company also agreed, pursuant to the Waiver Letter, that if it raises capital in excess of $10,000,000 and up to $20,000,000 it will repay the Class A WarrantsJanuary 2008 Notes, on a pari pasu basis based on principal amount outstanding, a minimum of 12.5% of the net proceeds raised and, that if it is successful in exchange forraising over $20,000,000, it will repay the above changes.January 2008 Notes, on a pari pasu basis based on principal, a minimum aggregate of 15.0% of the net proceeds raised, until repaid in full.
Exemption from registration of the Notes issued to the Note Investors is claimed under Section 4(2) of the Act and Rule 506 promulgated thereunder, based on, among other things, the representations made by each of the investors in the Note Purchase Agreement that include, among other things, a representation from each such purchaser that it or he is an “accredited investor” within the meaning of Regulation D promulgated under the Act and that such purchases were not made as part of a general or public solicitation or with a view towards distribution or resale of securities acquired in the financing.
11. | Convertible Notes, January 2008 |
On January 11, 2008 we completed a private placement transactionthe Company entered into and soldconsummated the Subscription Agreement with ten accredited investors with respect to the issuance of an aggregate of $4,971,250 principal amount of notesConvertible Notes due January 11, 2013, or the January 2008 Notes, and Class A Warrants to purchase an aggregate of 6,628,333 shares of our common stock of the Company at $.60 per share and expiring on June 11, 2013. The conversion price of these January 2008 Notes was originally $.75 per share and, in June of 2009 in connection with a subsequent financingfiling with these investors, reduced to $.20 per share (see waiver letters under “Private Financings,Financings; June 2009”2009 – Waiver Letters” above). One investor had his conversion price reduced to $.25 per share. We recorded
On January 11, 2008, simultaneously with the closing of the Convertible Notes described above in Note 6, the Company entered into a $504,661 original issue discount relatedSettlement Agreement (“Settlement Agreement”) which was negotiated by the Company, its advisors and management and certain shareholders, for purposes of facilitating the Company’s business plan and expediting and facilitating the Company’s financing activities and avoiding disputes between management and certain investors and consultants concerning possible claims that such investors suggested might be brought against these principals for their activities in forming and operating China Cablecom and its entry into a merger agreement as being violative of their employment agreements with the Company. The Settlement Agreement provided, subject to the Notes. We calculateterms thereof, for general mutual releases of all executives and management and their affiliated entities and also provided for the interest at 5% annuallymodification of employment agreements of both, Mr. Clive Ng, our Chairman and issueMr. Yue Pu, our Vice Chairman and former Chief Financial Officer. The Settlement Agreement also required the transfer of 390,000 Cablecom Holding shares for interest payments on a quarterly basis. We recorded amortization of original issue discount as interest expense of $24,875 for eachheld by Mr. Ng to the Company and to certain of the three months ended March 31, 2010Company’s shareholders and 2009.consultants in exchange for releases in favor of the Company and management and their affiliates.
The convertible notes due arefollowing represents the details of the net gain the Company recognized as follows:a result of the Settlement Agreement during the nine month period ending September 30, 2008 which is classified within “Interest and other income (expense)” in the accompaning Statement of Operations:
Fair value of Cablecom Holding Shares received | | $ | 2,515,500 | |
Waiver of accrued compensation | | | 212,054 | |
Warrant extensions | | | (1,426,862 | ) |
| | | | |
Net gain | | $ | 1,300,692 | |
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
Convertible notes , noncurrent | | $ | 4,971,250 | | | $ | 4,971,250 | |
Less: Original issue discount | | | (281,069 | ) | | | (305,944 | ) |
| | $ | 4,690,181 | | | $ | 4,665,306 | |
| | | | | | | | |
Convertible notes, current | | $ | 304,853 | | | $ | 304,853 | |
14.13. | Warrant Liabilities |
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. Certain warrants issued by the Company, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders from potential dilution associated with future financings. The warrants have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
The warrant liabilities were valued using The Black-Scholes Merton model which incorporates the following assumptions:
| March 31, | | December 31, |
| 2010 | | 2009 |
Risk-free interest rate | 1.51% | | 1.50% |
Expected volatility | 298.82% | | 309.62% |
Expected life (in years) | 3.2 years | | 3.4 years |
Expected dividend yield | 0 | | 0 |
| | September 30, | | | January 1, | |
| | 2009 | | | 2009 | |
Risk-free interest rate | | | 1.93 | % | | | 1.30 | % |
Expected volatility | | | 302.02 | % | | | 311.69 | % |
Expected life (in years) | | 3.7 years | | | 4.4 years | |
Expected dividend yield | | | 0 | | | | 0 | |
The FASB authoritative guidance was adopted as of January 2009 and is reported as a cumulative change in accounting principle.principles. The cumulative effect on the accounting for the warrants at January 1, 2009 was as follows:
| | Additional | | | Accumulated | | | Warrant | |
| | Paid-in Capital | | | Deficit | | | Liabilities | |
Warrants | | $ | (731,496 | ) | | $ | 424,373 | | | $ | 307,123 | |
| | Additional | | | Accumulated | | | Warrant | |
| | Paid-in Capital | | | Deficit | | | Liabilities | |
Warrants | | $ | (731,000 | ) | | $ | 424,000 | | | $ | 307,000 | |
The warrants were originally recorded at their relative fair value as an increase in additional paid-in capital. The decrease in the accumulated deficit includes gains resulting from decreases in the fair value of the warrant liabilities through December 31, 2008. The warrant liability amount reflects the fair value of the derivative instrument from issuance date as of the January 1, 2009 date of implementation.
15.14. | Net Loss Per Common Share |
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of outstanding common shares during the period. Diluted net loss per common share includes the weighted average dilutive effect of stock options and warrants.
Potential common shares outstanding as of March 31, 2010for the three and 2009:nine months ended September 30, 2009 and 2008:
| | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | March 31, | | | September 30, | | | September 30, | |
| | 2010 | | | 2009 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Warrants | | | 16,874,800 | | | | 16,874,800 | | | | 16,874,800 | | | | 16,874,800 | | | | 16,874,800 | | | | 16,874,800 | |
Options | | | 317,500 | | | | 317,500 | | | | 317,500 | | | | 317,500 | | | | 317,500 | | | | 317,500 | |
For each of the three month and nine month periods ended March 31, 2010September 30, 2009 and 2009,2008, the number of securities not included in the diluted EPS because the effect would have been anti-dilutive was 17,192,300.
16.15. | Comprehensive Loss |
Comprehensive loss forconsists of the periods ended March 31, 2010 and 2009 is as follows:following:
| | Three Months Ended | | |
| | March 31, | | | Three Months Ended | | | Nine Months Ended | |
| | 2010 | | | 2009 | | | September 30, | | | September 30, | |
| | | | | | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Net loss attributable to shareholders | | $ | (804,509 | ) | | $ | (1,342,348 | ) | | $ | (915,596 | ) | | $ | (546,831 | ) | | $ | (3,770,554 | ) | | $ | (487,964 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustment | | | 19,617 | | | | 20,798 | | |
Other comprehensive income: | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 6,407 | | | 29,831 | | | | 28,124 | | | 478,096 | |
Unrealized gain (loss) on marketable equity securities | | | 76,568 | | | | (85,160 | ) | | | 38,735 | | | | (1,564,000 | ) | | | 2,442 | | | | (1,394,000 | ) |
Comprehensive loss | | $ | (708,324 | ) | | $ | (1,406,710 | ) | | $ | (870,454 | ) | | $ | (2,081,000 | ) | | $ | (3,739,988 | ) | | $ | (1,403,868 | ) |
17. | Interest Expense and Share Issuance |
In connection with the Convertible Notes issued in January 2008 and June 2009, during the three months ended March 31, 2010 and 2009 the Company incurred $91,000 and $87,000, respectively, for interest expense related to these Notes.
As set forth in the related documents and with the consent of the Note holders, we issued 324,756 and 82,855 shares to the Note holders as payment for convertible note interest of approximately $66,000 and $62,000 for the three months ended March 31, 2010 and 2009, respectively.
18.16. | Stock Based Compensation |
In March 2008, the board of directors of the company approved the China Broadband, Inc. 2008 Stock Incentive Plan (the “Plan”), pursuant to which options or other similar securities may be granted. Qualified or Non-qualified Options to purchase up to 2,500,000 shares of the Company’s common stock may be issued under the Plan. The Plan may also be administered by an independent committee of the board of directors. Through March 31, 2010,September 30, 2009, 317,500 options have been issued under the plan and 2,182,500 shares remain available to be issued.plan.
The following table provides the details of the total stock based compensation duringfor the three month periodsand nine months ended March 31, 2010September 30, 2009 and 2009:2008:
| | Three Months Ended | |
| | March 31, | |
| | 2010 | | | 2009 | |
Stock option amortization | | $ | 8,000 | | | $ | 8,000 | |
Warrant amortization | | | - | | | | 7,000 | |
Stock issued as payment for interest | | | 66,000 | | | | 62,000 | |
| | $ | 74,000 | | | $ | 77,000 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
Stock option amortization | | $ | - | | | $ | - | | | $ | 33,656 | | | $ | 22,414 | |
Stock issued as non registration penalty | | | - | | | | - | | | | - | | | | 12,000 | |
| | $ | - | | | $ | - | | | $ | 33,656 | | | $ | 34,414 | |
The Company accounts for its stock option awards pursuant to the provisions of ASC 718, Stock Compensation and recorded a charge. The fair value of $8,000 during both three month periods ended March 31, 2010 and 2009each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period. The Black-Scholes model incorporates the following assumptions:
| · | Expected volatility - the Company estimates the volatility of common stock at the date of grant using historical volatility. |
| · | Expected term - the Company estimates the expected term of options granted based on a combination of vesting schedules, term of the option and historical experience. |
| · | Risk-free interest rate - the Company estimates the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. |
| · | Dividends - the Company uses an expected dividend yield of zero. The Company intends to retain any earnings to fund future operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future. |
The following table outlines the variables used in connection with the issuance of stock options.Black-Scholes option-pricing model for options issued in 2008.
| | 2008 | |
| | | |
Risk free interest rate | | | 3.53 | % |
Volatility | | | 188.76 | % |
Dividend yield | | | — | |
Expected option life | | 4 years | |
There were no stock options issued during the threenine month periods ended March 31, 2010 andperiod ending September 30, 2009. As of March 31, 2010,September 30, 2009, there were 317,500 options outstanding with 255,000162,500 options exercisable at a weighted average exercise price of $0.65$0.62 with a weighted average remaining life of 4.756.1 years.
As of March 31, 2010September 30, 2009 the Company had total unrecognized compensation expense related to options granted of $27,000$35,000 which will be recognized over a remaining service period of 1.752 years.
| | Number of | | | | | |
| | Warrants | | | Exercise | | Expiration |
Name | | Issued | | | Price | | Date |
Share Exchange Consulting Warrants | | | 4,474,800 | | | $ | 0.60 | | 1/11/2013 |
2007 Private Placement Broker Warrants | | | 640,000 | | | $ | 0.60 | | 1/11/2013 |
2007 Private Placement Investor Warrants | | | 4,000,000 | | | $ | 2.00 | | 1/11/2013 |
January 2008 Financing Class A Warrants | | | 6,628,333 | | | $ | 0.60 | | 6/11/2013 |
January 2008 Financing Broker Warrants | | | 1,131,667 | | | $ | 0.50 | | 6/11/2013 |
| | | 16,874,800 | | | | | | |
In connection with the Company’s Share Exchange, capital raising efforts in 2007 and the Company’s January 2008 Financing of Convertible Notes and Class A Warrants, the Company issued warrants to investors and service providers to purchase common stock of the Company . As of March 31, 2010, the weighted averageat a fixed exercise price was $.93 and the weighted average remaining life was 3.0 years.for a specified period of time. The following table outlines the warrants outstanding as of March 31, 2010 and December 31,September 30, 2009:
| | Number of | | | | | | |
| | Warrants | | | Exercise | | Expiration | |
Name | | Issued | | | Price | | Date | |
Share Exchange Consulting Warrants | | | 4,474,800 | | | $ | 0.60 | | 1/11/2013 | |
2007 Private Placement Broker Warrants | | | 640,000 | | | $ | 0.60 | | 1/11/2013 | |
2007 Private Placement Investor Warrants | | | 4,000,000 | | | $ | 2.00 | | 1/11/2013 | |
January 2008 Financing Class A Warrants | | | 6,628,333 | | | $ | 0.60 | | 6/11/2013 | |
January 2008 Financing Broker Warrants | | | 1,131,667 | | | $ | 0.50 | | 6/11/2013 | |
| | | 16,874,800 | | | | | | | |
20.18. | Interest Expense and Share Issuance |
In connection with the Convertible Notes issued in January 2008 and June 2009 as described above in Notes 10 and 11, during the three months ended September 30, 2009 and 2008 the Company incurred $93,000 and $89,000 in interest expense related to these Notes and Warrants, respectively. During the nine months ended September 30, 2009 and 2008 the Company incurred $269,000 and $256,000 in interest expense related to these Notes and Warrants, respectively.
As set forth in the related documents and with the consent of the Note holders, the Company issued 592,677 and 244,799 shares to the Note holders in lieu of cash of approximately $194,000 and $184,000 for interest in the nine month periods ended September 30, 2009 and 2008, respectively.
In June 2006, the FASB issued ASC 740, Income Taxes. ASC 740 is intended to clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Under ASC 740, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
At September 30, 2009, Company’s management considered that the Company had no uncertain tax positions that affected its consolidated financial position and results of operations or cash flow, and will continue to evaluate for the uncertain position in future. There are no estimated interest costs and penalties provided in the Company’s financial statements for the nine months ended September 30, 2009.
The Company is subject to a 5% business tax on the business income of our operating companies located in China.
Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The income tax benefit for the three month and nine month periods ended March 31, 2010September 30, 2009 and 20092008 results primarily from changes in calculated deferred taxes, particularlyparticular liabilities associated with intangible assets. Deferred tax assets associated with net operating losses have a full valuation allowance recorded against them.
The Company’s current management does not believe that China Broadband, Inc. has filed United States corporate income tax returns for several years prior to the January 23, 2007 merger transaction and accompanying change in management. Management believes that because of the lack of taxable income there will be no material penalties resulting from any previous non-compliance.
The estimation of the income tax effect of any future repatriation of the Company’s share of any profits generated by its interests in Jinan Broadband, Shandong Media and AdNet is not practicable. This is because it may involve additional Chinese taxation on the distributions, or sale proceeds, to the extent that they are in excess of the investments made, but with credits for some or all of the Chinese taxes against U.S. taxes, plus the utilization of operating losses of the WFOE. All of the foregoing would be subject to various tax-planning strategies.
The Company has not recognized deferred tax assets relating to the excess of its income tax bases in its non-U.S. subsidiaries over their financial statement carrying value because the Company expects to hold the investments and reinvest future earnings indefinitely.
The Company’s income tax benefit for the three months ended March 31, 2010 and 2009 each consisted entirely of foreign deferred taxes arising from net operating loss carryforwards.
The Company’s United States income tax returns are subject to examination by the Internal Revenue Service (“IRS”) for at least 2006 and later years. Because of the uncertainty regarding the filing of tax returns for earlier years it is possible that the Company is subject to examination by the IRS for earlier years. All of the Chinese tax returns for the Chinese operating companies are subject to examination by the Chinese tax authorities for all periods from the companies’ inceptions in 2007, 2008 and 2009 as applicable.
On May 20, 2010, the Company entered into separate securities purchase agreements with several accredited investors, including one strategic investor who was an early promoter of pay-per-view programming in the United States. The securities purchase agreements (the “Financing Agreements”) contemplate three separate, but simultaneous, financing transactions (collectively, the “Financings”). The first financing will involve the sale of up to $4,629,000 of units (“Common Units”) at a price per Common Unit of $0.05, with each Common Unit consisting of one share of the Company’s common stock and a five year warrant for the purchase of one share of common stock at an exercise price of $0.05. The second financing, involving the strategic investor, relates to the sale of up to $3,500,000 of units (“Preferred A Units”) at a price of $0.50 per Preferred A Unit, with each Preferred A Unit consisting of one share of the Company’s Series A Preferred Stock and a five year warrant for the purchase of 34.2857 shares of common stock at an exercise price of $0.05 per share of Common Stock. Each share of Series A Preferred Stock will be convertible into ten shares of common stock (subject to adjustment) and will have super voting rights that allow the strategic investor to have ten votes for each underlying share of common stock that the Series A Preferred Stock is convertible into. The third financing involves an accredited investor who is an existing holder of the Company’s securities and relates to the sale of up to $3,000,000 of units (the “Preferred B Units”) at a price of $0.50 per Preferred B Unit, with each Preferred B Unit consisting of one share of the Company’s Series B Preferred Stock and a five year warrant for the purchase of ten shares of common stock at an exercise price of $0.05 per share. Each share of Series B Preferred Stock will be convertible into ten shares of common stock (subject to adjustment). The Series B Preferred Stock does not have any voting rights.
In connection with the proposed sale of the Preferred B Units, the Company has agreed, in exchange for the forgiveness of a $600,000 advance to the Company as discussed in Note 9 “Related Party Transactions” above, to allocate such amount towards [Mr. Oliviera’s] investment in the Company’s Financings. Upon consummation of the Financings, the $600,000 will go towards the purchase of units consisting of one share of the Company’s Series B Preferred Stock and warrants to purchase ten shares of the Company’s common stock, at a per unit price of $0.50. In addition, the Company will issue to [Mr. Oliviera] two additional warrants, each for the purchase of one share of the Company’s common stock, for each share of common stock underlying the Preferred B Units purchased in connection with the forgiveness of the advance. The Company anticipates that the financings will close on or before July 15, 2010. The $600,000 applied towards the purchase of the Preferred B Units is included in the aggregate $3,000,000 of Preferred B Units sold in the Financing.
The consummation of the Financings is subject to several closing conditions, including without limitation the satisfactory conclusion of the strategic investor’s due diligence investigation of the Company and its subsidiaries and variable interest entities, an amendment to the Company’s articles of incorporation that increases the number of authorized shares of common stock from 95,000,000 to 1,500,000,000 and the number of authorized shares of blank check preferred stock from 5,000,000 to 50,000,000, and the amendment and restatement or other modification as necessary to all of the Company’s agreements with its variable interest entities in China to the satisfaction of the strategic investor. In addition, at any time prior to the closing, the strategic investor has the complete and unconditional right to terminate its obligations under the Financing Agreements for any reason, for no reason and for convenience in his sole discretion. Proceeds from all investors except the strategic investor are currently held in escrow subject to the closing conditions being satisfied.
Upon closing of the Financings, which the Company’s anticipates will occur on or before July 15, 2010, the strategic investor will hold a majority of the outstanding voting securities of the Company. The net proceeds will be used to acquire Sinotop Hong Kong as discussed in Note 8 above, to fund the value added service platform and for working capital purposes.
In connection with the Financings, on May 20, 2010, the Company entered into (i) a Waiver and Agreement to Convert with the holders of an aggregate of $4,971,250 in principal amount of notes of the Company, dated January 11, 2008, and (ii) a Waiver and Agreement to Convert with the holders of an aggregate of $304,902 in principal amount of notes of the Company, dated June 30, 2009 (collectively, the “Waivers”), whereby the holders of the notes, except for an existing minority investor of the Company, agreed to convert, upon the consummation of the Financings, 100% of the outstanding principal and interest owing on the notes into shares of the Company’s Common Stock at a conversion price of $0.05 per share (the “Debt Conversion”). In addition, the holders of the notes, except for the minority investor, will receive warrants identical to those issued in connection with the sale of the Common Units, to purchase such number of shares of the Company’s Common Stock equal to the number of shares of Common Stock issued upon conversion of the notes. Pursuant to the Waivers, the minority investor, who currently holds notes of the Company in aggregate principal amount of $2,133,400, will (i) convert 100% of the outstanding principal and interest owing on such notes into shares of Series B Preferred Stock at a conversion price of $0.50 per share and (ii) receive warrants identical to those issued in connection with the purchase of Series B Units, to purchase such number of shares of the Company’s Common Stock equal to the number of shares of Common Stock underlying the Series B Preferred Stock issued upon conversion of such notes.
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q contains “forward-looking” statements that involve risksCertain prior year information has been reclassified to be comparable with the current year presentation, principally due to the adoption of ASC 810, Consolidation.
21. | Recent Accounting Pronouncements |
In July 2009, the FASB issued the Accounting Standards Codification (“Codification”), which became the single source of authoritative generally accepted accounting principles (GAAP) in the United States, other than rules and uncertainties. You can identify these statementsinterpretive releases issued by the useSecurities and Exchange Commission (SEC). The Codification is a reorganization of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should readcurrent GAAP into a topical format that eliminates the current GAAP hierarchy and instead establishes two levels of guidance – authoritative and non-authoritative. All non-grandfathered, non-SEC accounting literature that is not included in the Codification will become non-authoritative. All references to authoritative accounting literature in our financial statements that contain these words carefully because they discuss our future expectations, contain projectionsare referenced in accordance with the Codification. There were no changes to the content of our future results of operationsfinancial statements or financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whetherdisclosures as a result of new information, future events or otherwise. However, readers should carefully reviewimplementing the reportsCodification.
In October 2009, the FASB issued amendments to the criteria for separating consideration in multiple-deliverable arrangements. These amendments will establish a selling price hierarchy for determining the selling price of a deliverable. The amendments will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. These amendments will eliminate the residual method of allocation and documentsrequire that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. These amendments will expand disclosures related to vendor’s multiple-deliverable revenue arrangements. These amendments will be effective for arrangements entered into after January 1, 2011. We are currently evaluating the impact these amendments will have on our consolidated financial statements and disclosures.
China Broadband, Inc., through its wholly owned subsidiary, China Broadband, Ltd., entered into a non binding memorandum of understanding to acquire 51% of Laketune Technologies, a joint venture partnership company with the State Administration of Radio Film & Television (SARFT) entity WASU (Hangzhou Digital) in the People’s Republic of China (the “PRC”). The completion of this joint venture is subject to a number of conditions. In connection therewith, the Company files from timedistributed an information research sheet relating to time with the SEC, particularly its Quarterly Reports on Form 10-Q, AnnualCompany’s businesses and the broadband business in the PRC which generally contains certain research and information relating to the broadband business in the PRC (the “Information Sheet”). A copy of this Information Sheet can be found in the Company’s Current Report on Form 10-K , Current Reports8-K filed on Form 8-K and all amendments to those reports.June 26, 2009.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’sis a discussion and analysis of our results of operations and should be read in conjunction with our consolidated financial statements and related notes for the notes thereto and the other financial information appearing elsewherenine months ended September 30, 2009 contained in this report. In additionForm 10-Q/A. The following is also necessarily subject to, historical information,and we incorporate herein, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.statements disclosure provided in the forepart to this Form 10-Q/A as well as Risk Factors discussed therein as can be found in our Form 10-K/A for the year ended December 31, 2008, all of which should be considered. These forward looking statements are afforded the safe harbor protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Overview
We operate in the media segment, through our Chinese VIE operating subsidiaries (1)in the PRC, a cable broadband business based in the Jinan region of China (“Jinan Broadband”) and (2) a television programprogramming guide newspaper and magazine publishingpublication business basedjoint venture (“Shandong Media”) in the Shandong regionProvince of China. Accordingly, our principal activities are providing cable and wireless broadband and print based media and television programming guide services in the PRC. In addition,April 2009 we acquired an internet café content provider and advertising business in the PRC (AdNet Media) (See “Recent Developments” below).
Recent Developments
As described below, during the nine months ended September 30, 2009 we completed (i) a private financing of 5% Convertible Promissory Notes (the “Notes”) for gross proceeds of $304,902 (the “Note Offering”) and (ii) a private financing of 2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the “Common Stock”), at a purchase price of $.15 per share, for aggregate proceeds of $300,000 (the “Equity Financing”) and simultaneously entered into a waiver letter agreement with certain note-holders as more fully described below. See “Private Financings” in this section below. In April of 2007, we also completed our acquisition, through our wholly owned subsidiary, of AdNet holdsMedeia Technologies(Beijing) Co., Ltd., a business licensePRC based company providing advertising marketing to operate in 28 provinces and provide internet content advertising in cafés users in the PRC.
Through ourLaketune
China Broadband, Inc., through its wholly owned subsidiary, JinanChina Broadband, we provide cableLtd., entered into a non binding memorandum of understanding to acquire 51% of Laketune Technologies, a joint venture partnership company with the State Administration of Radio Film & Television (SARFT) entity WASU (Hangzhou Digital) in the People’s Republic of China (the “PRC”). The completion of this joint venture is subject to a number of conditions. In connection therewith, the Company distributed an information research sheet relating to the Company’s businesses and wirelessthe broadband services, principally internet services, Internet Protocol Point wholesale services, related network equipment rentalbusiness in the PRC which generally contains certain research and sales, and fiber network construction and maintenance. Jinan Broadband’s revenue consists primarilyinformation relating to the broadband business in the PRC (the “Information Sheet”). A copy of sales to ourthis Information Sheet can be found in the Company’s Current Report on Form 8-K filed on June 26, 2009.
Completion of Acquisition of AdNet
Effective as of April 7, 2009, China Broadband, through its wholly owned subsidiary China Broadband, Ltd., a Cayman Islands company (“China Broadband Cayman”) completed the acquisition (the “AdNet Acquisition”) of Wanshi Wangjing Media Technologies (Beijing) Co., Ltd., a/k/a AdNet Media Technologies (Beijing) Co., Ltd., a recently organized PRC based internet consumers, cable modem consumers, business customerscompany (“AdNet”) pursuant to a Share Issuance Agreement (the “AdNet Agreement”) between the Company, China Broadband Cayman, AdNet and its 10 shareholders (inclusive of its two executives, Ms. Priscilla Lu and Mr. Wang Yingqi nee Michael Wang). As part of the acquisition, and, among other internet and cable services.provisions, Ms. Priscilla Lu was appointed to the China Broadband board of directors.
We operate our publishing business, which includes the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, and the provision of audio value added communication services, through Shandong Publishing, our joint venture company. Shandong Media’s revenue consists primarily of sales of publications and advertising revenues.
Our subsidiary AdNet which was acquired during the first half of 2009, holds an Internet Content Provider (“ICP”) license with rights to provideand is in the business of providing delivery of multimedia advertising content to internet cafés in the PRC.China. AdNet currently services over 39,000 cafés and is licensed to operate in 28 provinces in the PRC withPRC. AdNet maintains servers in five data centers includinglocated in the Chinese cities of Wuhan, Wenzhou, Yantai, Yunan, and with a master distribution server in Tongshan. Partnering with a local advertisement agency, AdNet provides a network for tens of thousands of daily video advertisement insertions to entertainment content traffic (movies, music, video, and games).
During late 2009, management opted to limit its expensesResults of Operations
China Broadband’s operating results reflect the operating results of our VIE subsidiary, Jinan Broadband, our Shandong Media joint venture and our recently acquired business of AdNet Media. Through WFOE, we acquired a 51% interest in respect of AdNet’s business and has reduced AdNet’s full and part time staff, all of which were basedJinan Broadband effective April 1, 2007, a 50% interest in the PRC, from 20 persons to 2 full time employees. Nonetheless, we are maintaining AdNet’s ICPShandong Media joint venture effective July 1, 2008 and other licenses, servers and infrastructure, as well as all of its intellectual property, all of which we intend on using both for100% interest in AdNet and, in connection with other businesses that we contemplate acquiring or entering into, which would require similar technology and infrastructure.Media effective April 7, 2009.
On March 9, 2010, China Broadband Cayman entered into a Note Purchase Agreement and a non-binding Letter of Intent, or the LOI with Sinotop Group Ltd., a Hong Kong corporation, or Sinotop Hong Kong. Through a series of contractual arrangements referred to herein as “VIE Contracts”, Sinotop Hong Kong controls Beijing Sino Top Scope Technology Co., Ltd., or Sinotop Beijing. Sinotop Beijing, a corporation established in the PRC is, in turn, a party to a joint venture with two other PRC companies to provide integrated value-added service solutionsThe following table presents for the delivery of pay-per-view (“PPV”), video-on-demand (“VOD”), and enhanced premium content for cable providers.
The LOI summarizesperiods indicated the proposed terms of the acquisition by CB Cayman of 100% of the outstanding capital stock of Sinotop Hong Kong from its sole stockholder in consideration for a percentage of China Broadband to be determined in the definitive agreement. Among other customary closing conditions, the acquisition is contingent upon (1) the drafting and negotiation of definitive agreements that cover the matters discussed in the LOI, (2) the funding of the Note (as defined below), which has already occurred, (3) the contribution by CB Cayman of at least US$5,000,000 to the capital of Sinotop Hong Kong (or the purchase by CB Cayman of newly issued shares of Sinotop Hong Kong in consideration for the same amount), and (4) the absence of any debts, obligations or encumbrances on the equity or assets of Sinotop Hong Kong and the WFOE other than the Note and the VIE Contracts. The LOI contains a binding exclusivity provision that prohibits Sinotop Hong Kong and Sinotop Hong Kong’s sole stockholder from soliciting, initiating, entertaining, participating in any discussions or negotiations concerning, or making or accepting any offer or proposed transaction with any third party with regard to, any of the transactions contemplated by the LOI or any similar transaction. This transaction has not been consummated yet and we are dependent, among other conditions, on our ability to raise capital in order to complete this transaction.
Pursuant to the Note Purchase Agreement, on March 9, 2010, CB Cayman acquired a Convertible Promissory Note, or Note from Sinotop Hong Kong in consideration of CB Cayman’s loan to Sinotop Hong Kong of US$580,000 as contemplated by the LOI.
The Note accrues interest at a simple annual rate of 5% and is due on the date, or the Maturity Date that is the earlier of the fifth anniversary of the date of issuance of the Note or the day following a change of control (as described in the Note). The outstanding principal amount of the Note along with all accrued interest is convertible into common shares of Sinotop Hong Kong upon the occurrence of (1) Sinotop Hong Kong consummating a financing transaction, or Financing, resulting in aggregate gross proceeds of at least $1 million, in which case the Note would automatically be converted into ordinary shares of Sinotop Hong Kong at a price equal to 70% of the price per share paid by investors in such Financing, or (2) a change of control of Sinotop Hong Kong (as described in the Note), in which case the Note would automatically be converted into ordinary shares that represent 50% of the issued and outstanding capital stock of Sinotop Hong Kong. The outstanding principal amount of the Note and all accrued interest thereon may also be converted at the option of CB Cayman at any time after the Maturity Date or an event of default into ordinary shares of Sinotop Hong Kong representing 50% of the issued and outstanding voting capital stock of Sinotop Hong Kong. The Note may not be prepaid prior to the Maturity Date without the consent of the holder of the Note. The Note contains customary events of default.
Recent Developments
On May 20, 2010, we entered into separate securities purchase agreements with several accredited investors, including one strategic investor who was an early promoter of pay-per-view programming in the United States. The securities purchase agreements (the “Financing Agreements”) contemplate three separate, but simultaneous, financing transactions (collectively, the “Financings”). The first financing will involve the sale of up to $4,629,000 of units (“Common Units”) at a price per Common Unit of $0.05, with each Common Unit consisting of one share of our common stock and a five year warrant for the purchase of one share of our common stock at an exercise price of $0.05. The second financing, involving the strategic investor, relates to the sale of up to $3,500,000 of units (“Preferred A Units”) at a price of $0.50 per Preferred A Unit, with each Preferred A Unit consisting of one share of our Series A Preferred Stock and a five year warrant for the purchase of 34.2857 shares of our common stock at an exercise price of $0.05 per share of Common Stock. Each share of Series A Preferred Stock will be convertible into ten shares of our Common Stock (subject to adjustment) and will have super voting rights that allow the strategic investor to have ten votes for each underlying share of Common Stock that the Series A Preferred Stock is convertible into. The third financing involves an accredited investor who is an existing holder of our securities and relates to the sale of up to $3,000,000 of units (the “Preferred B Units”) at a price of $0.50 per Preferred B Unit, with each Preferred B Unit consisting of one share of our Series B Preferred Stock and a five year warrant for the purchase of ten shares of our common stock at an exercise price of $0.05 per share of Common Stock. Each share of Series B Preferred Stock will be convertible into ten shares of our Common Stock (subject to adjustment). The Series B Preferred Stock does not have any voting rights.
In connection with the proposed sale of the Preferred B Units, the Company has agreed, in exchange for the forgiveness of a $600,000 advance to the Company as discussed in Note 9 “Related Party Transactions” above, to allocate such amount towards [Mr. Oliviera’s] investment in the Company’s Financings. Upon consummation of the Financings, the $600,000 will go towards the purchase of units consisting of one shareresults of the Company’s Series B Preferred Stock and warrants to purchase ten shares of the Company’s common stock, at a per unit price of $0.50. In addition, the Company will issue to [Mr. Oliviera] two additional warrants, each for the purchase of one share of the Company’s common stock, for each share of common stock underlying the Preferred B Units purchased in connection with the forgiveness of the advance. The Company anticipates that the financings will close on or before July 15, 2010. The $600,000 applied towards the purchase of the Preferred B Units is included in the aggregate $3,000,000 of Preferred B Units sold in the Financing.
The consummation of the Financings is subject to several closing conditions and uncertainties, including without limitation the satisfactory conclusion of the strategic investor’s due diligence investigation of us and our subsidiaries and variable interest entities, an amendment to our articles of incorporation that increases the number of authorized shares of our common stock from 95,000,000 to 1,500,000,000 and the number of authorized shares of our blank check preferred stock from 5,000,000 to 50,000,000, and the amendment and restatement or other modification as necessary to all of our agreements with our variable interest entities in China to the satisfaction of the strategic investor. In addition, at any time prior to the closing, the strategic investor has the complete and unconditional right to terminate its obligations under the Financing Agreements for any reason, for no reason and for convenience in his sole discretion. Proceeds from all investors except the strategic investor are currently held in escrow subject to the closing conditions being satisfied.operations.
Upon closing of the Financings, which we anticipate will occur on or before July 15, 2010, the strategic investor will hold a majority of the outstanding voting securities of the Company. The net proceeds will be used to acquire Sinotop Hong Kong as discussed above, to fund the value added service platform and for working capital purposes. | | 3 Months Ended | | | Amount | | | % | |
| | September 30, | | | September 30, | | | Increase / | | | Increase / | |
| | 2009 | | | 2008 | | | (Decrease) | | | (Decrease) | |
| | | | | | | | | | | | |
Revenue | | $ | 2,106,000 | | | $ | 1,881,000 | | | $ | 225,000 | | | | 12 | % |
Cost of revenue | | | 1,541,000 | | | | 949,000 | | | | 592,000 | | | | 62 | % |
Gross profit | | | 565,000 | | | | 932,000 | | | | (367,000 | ) | | | -39 | % |
| | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | | 800,000 | | | | 582,000 | | | | 218,000 | | | | 37 | % |
Professional fees | | | 155,000 | | | | 142,000 | | | | 13,000 | | | | 9 | % |
Depreciation and amortization | | | 917,000 | | | | 769,000 | | | | 148,000 | | | | 19 | % |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (1,307,000 | ) | | | (561,000 | ) | | | (746,000 | ) | | | 133 | % |
| | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | |
Interest income | | | 1,000 | | | | 16,000 | | | | (15,000 | ) | | | -94 | % |
Interest expense | | | (93,000 | ) | | | (89,000 | ) | | | (4,000 | ) | | | 4 | % |
Change in fair value of warrant liabilities | | | 131,000 | | | | - | | | | 131,000 | | | | - | |
Gain on sale of securities | | | 16,000 | | | | - | | | | 16,000 | | | | - | |
Other | | | (13,000 | ) | | | - | | | | (13,000 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Net loss before income taxes and noncontrolling interest | | | (1,265,000 | ) | | | (634,000 | ) | | | (631,000 | ) | | | 100 | % |
| | | | | | | | | | | | | | | | |
Income tax benefit | | | 15,000 | | | | 6,000 | | | | 9,000 | | | | 150 | % |
| | | | | | | | | | | | | | | | |
Net loss, net of tax | | | (1,250,000 | ) | | | (628,000 | ) | | | (622,000 | ) | | | 99 | % |
| | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interests | | | 335,000 | | | | 81,000 | | | | 254,000 | | | | 314 | % |
| | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband shareholders | | $ | (915,000 | ) | | $ | (547,000 | ) | | $ | (368,000 | ) | | | 67 | % |
In connection with the Financings, on May 20, 2010, we entered into (i) a Waiver and Agreement to Convert with the holders of an aggregate of $4,971,250 in principal amount of notes of the Company, dated January 11, 2008, and (ii) a Waiver and Agreement to Convert with the holders of an aggregate of $304,902 in principal amount of notes of the Company, dated June 30, 2009 (collectively, the “Waivers”), whereby the holders of the notes, except for an existing minority investor of the Company, agreed to convert, upon the consummation of the Financings, 100% of the outstanding principal and interest owing on the notes into shares of our Common Stock at a conversion price of $0.05 per share (the “Debt Conversion”). In addition, the holders of the notes, except for the minority investor, will receive warrants identical to those issued in connection with the sale of the Common Units, to purchase such number of shares of our Common Stock equal to the number of shares of Common Stock issued upon conversion of the notes. Pursuant to the Waivers, the minority investor, who currently holds notes of the Company in aggregate principal amount of $2,133,400, will (i) convert 100% of the outstanding principal and interest owing on such notes into shares of Series B Preferred Stock at a conversion price of $0.50 per share and (ii) receive warrants identical to those issued in connection with the purchase of Series B Units, to purchase such number of shares of our Common Stock equal to the number of shares of Common Stock underlying the Series B Preferred Stock issued upon conversion of such notes.
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated.
| | 3 Months Ended | | | Amount | | | % | |
| | March 31, | | | March 31, | | | Increase / | | | Increase / | |
| | 2010 | | | 2009 | | | (Decrease) | | | (Decrease) | |
| | | | | (as restated) | | | | | | | |
| | | | | | | | | | | | |
Revenue | | $ | 1,876,000 | | | $ | 1,949,000 | | | $ | (73,000 | ) | | | -4 | % |
Cost of revenue | | | 1,074,000 | | | | 1,174,000 | | | | (100,000 | ) | | | -9 | % |
Gross profit | | | 802,000 | | | | 775,000 | | | | 27,000 | | | | 3 | % |
| | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | | 723,000 | | | | 718,000 | | | | 5,000 | | | | 1 | % |
Professional fees | | | 169,000 | | | | 110,000 | | | | 59,000 | | | | 54 | % |
Depreciation and amortization | | | 946,000 | | | | 831,000 | | | | 115,000 | | | | 14 | % |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (1,036,000 | ) | | | (884,000 | ) | | | (152,000 | ) | | | 17 | % |
| | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | |
Interest income | | | 3,000 | | | | 3,000 | | | | - | | | | 0 | % |
Interest expense | | | (91,000 | ) | | | (88,000 | ) | | | (3,000 | ) | | | 3 | % |
Change in fair value of warrant liabilities | | | 42,000 | | | | (614,000 | ) | | | 656,000 | | | | -107 | % |
Loss on sale of marketable equity securities | | | - | | | | (20,000 | ) | | | 20,000 | | | | -100 | % |
| | | | | | | | | | | | | | | | |
Loss before income taxes and noncontrolling interests | | | (1,082,000 | ) | | | (1,603,000 | ) | | | 521,000 | | | | -33 | % |
| | | | | | | | | | | | | | | | |
Income tax benefit | | | 14,000 | | | | 15,000 | | | | (1,000 | ) | | | -7 | % |
| | | | | | | | | | | | | | | | |
Net loss, net of tax | | | (1,068,000 | ) | | | (1,588,000 | ) | | | 520,000 | | | | -33 | % |
| | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interests | | | 264,000 | | | | 246,000 | | | | 18,000 | | | | 7 | % |
| | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband shareholders | | $ | (804,000 | ) | | $ | (1,342,000 | ) | | $ | 538,000 | | | | -40 | % |
Comparison of Three Months Ended March 31, 2010September 30, 2009 and 20092008
Revenues
Our revenues are generated by our operating companies in the PRC.
Revenues for the three months ended March 31, 2010September 30, 2009 totaled $1,876,000,$2,106,000, as compared to $1,949,000$1,881,000 for the three months ended March 31, 2009, a decreaseSeptember 30, 2008, an increase in revenue of approximately $73,000,$225,000, or 4%12%.
Jinan Broadband’s revenue consists primarily of sales to our PRC based internetInternet consumers, cable modem consumers, business customers and other internet and cable services. For the three months ended March 31, 2010, revenues totaled $1,230,000,services of $1,170,000, an increase of $145,000,$9,000, or 13%,1% as compared to revenues of $1,085,000$1,161,000 for the first quarter of 2009. The increase is attributable to increases in our value added services.three months ended 2008.
Shandong Media’s revenue consists primarily of sales of publications and advertising revenues of $934,000, an increase of $214,000 or 30% as compared to revenues of $720,000 for the three months ended 2008. The increase is primarily attributable to increases in advertising revenues. (For a description of the Shandong Media joint venture, see “Shandong Media Joint Venture and Shandong Newspaper Cooperation Agreement”, below).
AdNet Media is an early stage company that started operations during the first quarter of 2009. AdNet Media’s revenue is expected to consist primarily of advertising revenue and video service fees. Advertising revenues will be generated from advertisers who participate in an ad platform developed by AdNet which is accessed through internet cafés. Video service fees are expected to be generated from the internet café or agent who uses our online video services which includes movies, music, videos and games. For the three months ended March 31, 2010,September 30, 2009, revenues totaled $646,000, a decrease of $218,000, or 25%, as compared to$2,000. AdNet Media’s revenues of $864,000 forwere not included in our operating results during the firstthird quarter of 2009. Although we had decreases in both our publication and advertising revenues, the decrease is mainly attributable to decreases in advertising revenue which can be directly correlated to the decline2008 (For a description of the advertising market as a whole in China. We believe this decrease to be temporary. We will continue to look to increase our advertising sales for the publishing sideAdNet Media acquisition, see “Completion of the business. We also anticipate launching an electronic programming guide in the second partAcquisition of 2010. This will be another significant source of revenue for the company.AdNet”, above).
Gross Profit
Our gross profit for the three months ended March 31, 2010September 30, 2009 was $802,000,$565,000, as compared to $775,000$932,000 for the three months ended March 31, 2009September 30, 2008,. an increaseThe decrease in gross profit of approximately $27,000,$367,000 or 3%.39% is primarily comprised of $415,000 decrease from our Jinan Broadband’sBroadband operations offset by $52,000 increase from our Shandong Media operations. The decrease in gross profit increased $120,000, or 25%, mainly dueattributable to increased revenue. Shandong Media’s gross profit decreased $93,000, or 31%,Jinan Broadband was primarily due to decreased revenues.increases in cable network connection costs, telecom bandwith costs and charges associated with the write down of switches and other consumer related parts held in inventory.
Gross profit as a percentage of revenue was 43%27% for the three months ended March 31, 2010,September 30, 2009, as compared to 40%50% for the three months ended March 31, 2009September 30, 2008.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three months ended March 31, 2010September 30, 2009 increased approximately $5,000$218,000 to $723,000,$800,000, as compared to $718,000$582,000 for the three months ended March 31, 2009.September 30, 2008. The increase is primarily attributable to the inclusion of our AdNet Media acquisition in April 2009 along with increased personnel and marketing expenses at our Shandong Media company.
Salaries and personnel costs are the major component of selling, general and administrative expenses. DuringFor the first quarter of 2010,three months ended September 30, 2009, salaries and personnel costs accounted for 64%60% of our selling, general and administrative expenses. ForDuring the three months ended March 31, 2010,2009 period, salaries and personnel costs totaled $461,000,$459,000, an increase of $31,000$148,000 or 7%57% as compared to $430,000$311,000 for the first quarter2008 period. The increase in salaries and personnel costs is primarily attributable to the inclusion of 2009.our AdNet Media acquisition in April 2009 along with increased personnel costs at our Shandong Media company.
We expect our selling, general and administrative expenses will increase as we continue to grow our business.
Professional Fees
Our professionalProfessional fees are generally related to public company reporting and governance expenses as well as costs related to our acquisitions. Our costs for professional fees increased $59,000, or 54%, to $169,000 during the three months ended March 31, 2010 from $110,000 in 2009. We expect our costs for professional services for public company reporting and corporate governance expenses to remain significant, but to decrease as a percentage of our overall revenues if we continue to acquire new entities and enter into strategic partnerships.
Depreciation and Amortization
Our depreciation expense increased $55,000, or 7%, to $804,000 for the three months ended March 31, 2010 from $749,000 in 2009. The increase is mainly due to the acquisition of new equipment by our Jinan Broadband subsidiary.
Our amortization expense increased $60,000, or 72%, to $142,000 for the three months ended March 31, 2010 from $82,000 in 2009. The increase is mainly due to the amortization expense related to our software technology acquired from our AdNet Media acquisition.
Depreciation and Amortization
| | 2009 | | | 2008 | |
Depreciation | | $ | 772,000 | | | $ | 720,000 | |
Amortization | | | 145,000 | | | | 49,000 | |
Total | | $ | 917,000 | | | $ | 769,000 | |
Depreciation expense during 2009 relates to the depreciation on the approximately $14.7 million of property, plant and equipment, at our Jinan Broadband subsidiary. The increase in amortization of $96,000 is primarily attributable to the amortization related to our Shandong Media intangible assets acquired in 2008 and our software technology acquired in the acquisition of AdNet.
Under new authoritative guidance, effective January 1, 2009, the Company was required to reclassify warrants from equity to warrant liabilities. Warrants are fair valued quarterly using the Black-Scholes Merton Model and changes in fair value are recorded to the statement of operations. We recorded a charge of $131,000 classified as a change in fair value of warrants on our statement of operations for the 3 months ended September 30, 2009.
Interest and Other Income (Expense), net
Interest and other income (expense), net, of approximately $42,000 during the three months ended September 30, 2009 consisted primarily of:
Interest income was $3,000 for both three month periods ended March 31, 2010 and 2009. | · | interest expense related to the 5% Convertible Notes and Warrants issued in January 2008 and June 2009 in the amount of approximately $93,000 |
| · | the gain on the sale of marketable equity securities in the amount of $16,000 |
| · | the decrease in fair value of warrant liabilities in the amount of $131,000 |
Interest expense
Interest expense is related of $93,000 for the three months ended September 30, 2009 relates to ourthe 5% Convertible Notes and Warrants issued in January 2008 and June 2009. InterestFor the 2008 period, interest expense increased $3,000, or 3%, to $91,000 for the three months ended March 31, 2010 from $88,000 in 2009, primarily due to additional convertible notes issued in 2009 in the amount of approximately $305,000.was $89,000. Interest expense includes amortization of the original issueissued discount on the notes resulting from the allocation of fair valueallocated to the warrants issued in the financing.
We expect our interest expense to increase due to the convertible notes issued in 2009. Interest on the Notes compounds monthly at the annual rate of five percent (5%). The January 2008 Notes mature on January 11, 2013. The outstanding principal amount of the January 2008 Notes as of March 31, 2010 was $4,971,250, net of original issue discount of $504,661. The June 2009 Notes mature on May 27, 2010. The outstanding principal amount on the June 2009 Notes as of December 31, 2009 was approximately $305,000.
Change in fair value of warrant liabilities
Under new authoritative guidance, effective January 1, 2009, the Company was required to reclassify warrants from equity to warrant liabilities. Warrants are fair valued quarterly using the Black-Scholes Merton Model and changes in fair value are recorded to the statement of operations. We recorded a gain of $42,000$131,000 classified as a change in fair value of warrants on our statement of operations for the 3 months ended March 31, 2010 and we recorded a chargeSeptember 30, 2009.
We expect our interest expense to increase due to additional convertible notes issued in June 2009 for approximately $305,000. Interest on the Notes compounds monthly at the annual rate of $614,000 in 2009.
Lossfive percent (5%). The June 2009 Notes mature on saleMay 27, 2010. The outstanding principal amount on the June 2009 Notes as of marketable equity securities
There were no salesSeptember 30, 2009 approximates $305,000. The January 2008 Notes mature on January 11, 2013. The outstanding principal amount of our marketable equity securities during the three months ended March 31, 2010. We recorded a lossJanuary 2008 Notes as of $20,000 during the first quarter of 2009.September 30, 2009 was $4,971,250.
Net Loss Attributable to Noncontrolling Interest
49% of the operating loss of our Jinan Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this business. During the three months ended March 31, 2010, $204,000September 30, 2009, $304,000 of our operating lossesloss from Jinan Broadband was allocated to Jinan Parent, as compared to $224,000$69,000 during the firstthird quarter of 2009.2008.
50% of the operating profit and loss of our Shandong Media joint venture is allocated to our 50% Shandong Newspaper joint venture partner. During the three months ended March 31, 2010, $60,000September 30, 2009, $31,000 of our operating lossprofit from Shandong Media was allocated to Shandong Newspaper, as compared to $22,000$12,000 of our operating loss during the firstthird quarter of 2009.2008.
Net Loss Attributable to Shareholders
Net loss attributable to shareholders for the three months ended March 31, 2010September 30, 2009 was $804,000, a decrease of $538,000, or 40%,$915,000 as compared to $1,342,000$547,000 for the three months ended March 31, 2009. The decrease is primarily due to the recognition2008 period, an increase of a $614,000 charge due to the increase in the fair value of warrant liabilities in 2009.$369,000, or 67%.
The following table breaks down the results of operations for the three months ended March 31, 2010September 30, 2009 and 20092008 between our operating companies and our non-operating companies. Our operating companies include Jinan Broadband and Shandong Media..
| Ø | The operating companies include Jinan Broadband, Shandong Media and AdNet Media. |
| Ø | 2009 includes operations of our AdNet Media company as compared to no inclusion in 2008. |
| | 3 Months Ended | | | 3 Months Ended | |
| | September 30, 2009 | | | September 30, 2008 | |
| | | | | % of | | | | | | | | | | | | % of | | | | | | | |
| | | | | Total | | | Non- | | | | | | | | | Total | | | Non- | | | | |
| | Operating | | | Revenue | | | Operating | | | Total | | | Operating | | | Revenue | | | Operating | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 2,106,000 | | | | | | $ | - | | | $ | 2,106,000 | | | $ | 1,881,000 | | | | | | $ | - | | | $ | 1,881,000 | |
Cost of revenue | | | 1,541,000 | | | | | | | - | | | | 1,541,000 | | | | 949,000 | | | | | | | - | | | | 949,000 | |
Gross profit | | | 565,000 | | | | 27 | % | | | - | | | | 565,000 | | | | 932,000 | | | | 50 | % | | | - | | | | 932,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | | 579,000 | | | | 27 | % | | | 221,000 | | | | 800,000 | | | | 381,000 | | | | 20 | % | | | 201,000 | | | | 582,000 | |
Professional fees | | | 23,000 | | | | 1 | % | | | 132,000 | | | | 155,000 | | | | 9,000 | | | | 0 | % | | | 133,000 | | | | 142,000 | |
Depreciation and amortization | | | 772,000 | | | | 37 | % | | | 145,000 | | | | 917,000 | | | | 720,000 | | | | 38 | % | | | 49,000 | | | | 769,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (809,000 | ) | | | -38 | % | | | (498,000 | ) | | | (1,307,000 | ) | | | (178,000 | ) | | | -9 | % | | | (383,000 | ) | | | (561,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1,000 | | | | | | | | - | | | | 1,000 | | | | 15,000 | | | | | | | | 1,000 | | | | 16,000 | |
Interest expense | | | - | | | | | | | | (93,000 | ) | | | (93,000 | ) | | | - | | | | | | | | (89,000 | ) | | | (89,000 | ) |
Change in fair value of warrant liabilities | | | - | | | | | | | | 131,000 | | | | 131,000 | | | | - | | | | | | | | - | | | | - | |
Gain on sale of securities | | | - | | | | | | | | 16,000 | | | | 16,000 | | | | - | | | | | | | | - | | | | - | |
Other | | | (13,000 | ) | | | | | | | - | | | | (13,000 | ) | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes and noncontrolling interest | | | (821,000 | ) | | | | | | | (444,000 | ) | | | (1,265,000 | ) | | | (163,000 | ) | | | | | | | (471,000 | ) | | | (634,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax benefit | | | - | | | | | | | | 15,000 | | | | 15,000 | | | | - | | | | | | | | 6,000 | | | | 6,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss, net of tax | | | (821,000 | ) | | | | | | | (429,000 | ) | | | (1,250,000 | ) | | | (163,000 | ) | | | | | | | (465,000 | ) | | | (628,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interest | | | (335,000 | ) | | | | | | | - | | | | (335,000 | ) | | | (81,000 | ) | | | | | | | - | | | | (81,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband shareholders | | $ | (486,000 | ) | | | | | | $ | (429,000 | ) | | $ | (915,000 | ) | | $ | (82,000 | ) | | | | | | $ | (465,000 | ) | | $ | (547,000 | ) |
Comparison of Nine Months Ended September 30, 2009 and 2008
The following table presents for the periods indicated the results of the Company's operations
| | 9 Months Ended | | | Amount | | | % | |
| | September 30, | | | September 30, | | | Increase / | | | Increase / | |
| | 2009 | | | 2008 | | | (Decrease) | | | (Decrease) | |
| | | | | | | | | | | | |
Revenue | | $ | 6,045,000 | | | $ | 3,937,000 | | | $ | 2,108,000 | | | | 54 | % |
Cost of revenue | | | 3,818,000 | | | | 1,845,000 | | | | 1,973,000 | | | | 107 | % |
Gross profit | | | 2,227,000 | | | | 2,092,000 | | | | 135,000 | | | | 6 | % |
| | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | | 2,259,000 | | | | 1,394,000 | | | | 865,000 | | | | 62 | % |
Professional fees | | | 447,000 | | | | 447,000 | | | | - | | | | 0 | % |
Depreciation and amortization | | | 2,653,000 | | | | 2,210,000 | | | | 443,000 | | | | 20 | % |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (3,132,000 | ) | | | (1,959,000 | ) | | | (1,173,000 | ) | | | 60 | % |
| | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | |
Settlement gain | | | - | | | | 1,301,000 | | | | (1,301,000 | ) | | | -100 | % |
Interest income | | | 6,000 | | | | 35,000 | | | | (29,000 | ) | | | -83 | % |
Interest expense | | | (270,000 | ) | | | (257,000 | ) | | | (13,000 | ) | | | 5 | % |
Change in fair value of warrant liabilities | | | (1,110,000 | ) | | | - | | | | (1,110,000 | ) | | | - | |
(Loss) gain on sale of securities | | | (15,000 | ) | | | 17,000 | | | | (32,000 | ) | | | -188 | % |
Other | | | (13,000 | ) | | | (13,000 | ) | | | - | | | | 0 | % |
| | | | | | | | | | | | | | | | |
Net loss before income taxes and noncontrolling interest | | | (4,534,000 | ) | | | (876,000 | ) | | | (3,658,000 | ) | | | 418 | % |
| | | | | | | | | | | | | | | | |
Income tax benefit | | | 44,000 | | | | 19,000 | | | | 25,000 | | | | 132 | % |
| | | | | | | | | | | | | | | | |
Net loss, net of tax | | | (4,490,000 | ) | | | (857,000 | ) | | | (3,633,000 | ) | | | 424 | % |
| | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interests | | | 719,000 | | | | 368,000 | | | | 351,000 | | | | 95 | % |
| | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband shareholders | | $ | (3,771,000 | ) | | $ | (489,000 | ) | | $ | (3,282,000 | ) | | | 671 | % |
Revenues
Our revenues are generated by our operating companies in the PRC. Our revenues for the nine months ended September 30, 2009 include revenues primarily from our Jinan Broadband and Shandong Media companies while the revenues for the nine months ended September 30, 2008 includes revenues from Jinan Broadband and from Shandong Media from July 1, 2008.
Revenues for the nine months ended September 30, 2009 totaled $6,045,000, as compared to $3,937,000 for the nine months ended September 30, 2008. The increase in revenue of approximately $2,108,000, or 54% is primarily attributable to including a full nine months of revenues from our Shandong Media joint venture while the 2008 period includes only three months of operating results.
Jinan Broadband’s revenue consists primarily of sales to our PRC based Internet consumers, cable modem consumers, business customers and other internet and cable services of $3,393,000, an increase of $175,000, or 6% as compared to revenues of $3,218,000 for the nine months ended 2008. The increase is attributable to increases in our network leasing sales and value-added services.
Shandong Media’s revenue consists primarily of sales of publications and advertising revenues. For the nine months ended September 30, 2009, revenues from the Shandong Media joint venture totaled $2,648,000. By comparison, Shandong Media’s revenues of $719,000 for the nine months ended 2008 only include three months operating results. (For a description of the Shandong Media joint venture, see “Shandong Media Joint Venture and Shandong Newspaper Cooperation Agreement”, below).
AdNet Media is an early stage company that started operations during the first quarter of 2009. AdNet Media’s revenue is expected to consist primarily of advertising revenue and video service fees. Advertising revenues will be generated from advertisers who participate in an ad platform developed by AdNet which is accessed through internet cafés. Video service fees are expected to be generated from the internet café or agent who uses our online video services which includes movies, music, videos and games. For the nine months ended September 30, 2009, revenues totaled $5,000. AdNet Media’s revenues were not included in our operating results for the 2008 period. (For a description of the AdNet Media acquisition, see “Completion of Acquisition of AdNet”, above).
Gross Profit
Our gross profit for the nine months ended September 30, 2009 was $2,227,000, as compared to $2,092,000 for the nine months ended September 30, 2008. The increase in gross profit of approximately $135,000, or 6%, is primarily comprised of $513,000 decrease from our Jinan Broadband operations offset by $664,000 increase from a 9 month inclusion for 2009 compared to a 3 month inclusion for 2008 of our Shandong Media joint venture. The decrease in gross profit attributable to Jinan Broadband was primarily due to increased costs of revenue, particularly costs of cable network connections costs, telecom bandwidth costs and charges associated with the write down of switches and other consumer related parts held in inventory.
Gross profit as a percentage of revenue was 37% for the nine months ended September 30, 2009, as compared to 53% for the nine months ended September 30, 2008.
.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the nine months ended September 30, 2009 increased approximately $867,000 to $2,259,000, as compared to $1,392,000 for the nine months ended September 30, 2008. The increase is primarily attributable to the inclusion of nine months for 2009 compared to three months for 2008 of our Shandong Media joint venture entered into in mid 2008 and the inclusion of our AdNet Media acquisition in April 2009.
Salaries and personnel costs are the major component of selling, general and administrative expenses. For the nine months ended September 30, 2009, salaries and personnel costs accounted for 58% of our selling, general and administrative expenses. During the 2009 period, salaries and personnel costs totaled $1,311,000, an increase of $507,000 or 63% as compared to $803,000 for 2008 period. The increase in salaries and personnel costs is primarily attributable to the inclusion of our Shandong Media joint venture entered into in mid 2008 and the inclusion of our AdNet Media acquisition in April 2009.
We expect our selling, general and administrative expenses will increase as we continue to grow our business.
Professional Fees
Professional fees are generally related to public company reporting and governance expenses as well as costs related to our acquisitions. We expect our costs for professional services for public company reporting and corporate governance expenses to remain significant, but to decrease as a percentage of our overall revenues if we continue to acquire new entities and enter into strategic partnerships.
Depreciation and Amortization
| | 2009 | | | 2008 | |
Depreciation | | $ | 2,281,000 | | | $ | 2,067,000 | |
Amortization | | | 372,000 | | | | 143,000 | |
Total | | $ | 2,653,000 | | | $ | 2,210,000 | |
Depreciation expense during 2009 relates to the depreciation on the approximately $14.7 million of property, plant and equipment, at our Jinan Broadband subsidiary. The increase in amortization of $229,000 is primarily attributable to the amortization related to our Shandong Media intangible assets acquired in 2008 and our software technology acquired in the acquisition of AdNet.
Interest and Other Income (Expense), net
Interest and other income (expense), net, of approximately $(1,402,000) during the nine months ended September 30, 2009 consisted primarily of:
| · | interest expense related to the 5% Convertible Notes and Warrants issued in January 2008 and June 2009 in the amount of approximately $270,000 |
| · | the loss on the sale of marketable equity securities in the amount of $15,000 |
| · | the increase in fair value of warrant liabilities in the amount of $1,110,000 |
Interest expense of $270,000 for the nine months ending September 30, 2009 relates to the 5% Convertible Notes and Warrants issued in January 2008 and June 2009. For the 2008 period, interest expense was $257,000. Interest expense includes amortization of the original issued discount on the notes allocated to the warrants issued in the financing.
Under new authoritative guidance, effective January 1, 2009, the Company was required to reclassify warrants from equity to warrant liabilities. Warrants are fair valued quarterly using the Black-Scholes Merton Model and changes in fair value are recorded to the statement of operations. We recorded a charge of $1,110,000 classified as a change in fair value of warrants on our statement of operations for the 9 months ended September 30, 2009.
We expect our interest expense to increase due to additional convertible notes issued in June 2009 in the amount of approximately $305,000. Interest on the Notes compounds monthly at the annual rate of five percent (5%). The January 2008 Notes mature on January 11, 2013. The outstanding principal amount of the January 2008 Notes as of September 30, 2009 was $4,971,250. The June 2009 Notes mature on May 27, 2010. The outstanding principal amount on the June 2009 Notes as of September 30, 2009 is approximately $305,000.
Net Loss Attributable to Noncontrolling Interest
49% of the operating loss of our Jinan Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this business. During the nine months ended September 30, 2009, $670,000 of our operating loss from Jinan Broadband was allocated to Jinan Parent, as compared to $356,000 during the 2008 period.
50% of the operating loss of our Shandong Media joint venture is allocated to our 50% Shandong Newspaper joint venture partner. During the nine months ended September 30, 2009, $49,000 of our operating loss from Shandong Media was allocated to Shandong Newspaper as compared to $12,000 during the 2008 period which only included three months. We consolidated the results of Shandong Media effective July 1, 2008.
Net Income (Loss) Attributable to Shareholders
Net loss attributable to shareholders for the nine months ended September 30, 2009 was $3,771,000, an increase of $3,283,000 as compared to the net loss attributable to shareholders of $489,000 for the 2008 period. Operating results for 2008 included a one-time net gain recognition of $1,301,000 from a settlement agreement.
The following table breaks down the results of operations for the nine months ended September 30, 2009 and 2008 between our operating companies and our non-operating companies.
| Ø | The operating companies include Jinan Broadband, Shandong Media and AdNet Media. |
| Ø | 2009 includes nine months of operations from our Shandong Media company and six months of operations from our AdNet Media company as compared to 3 months of operations and no operations, respectively in 2008. |
| | 3 Months Ended | | | 3 Months Ended | | |
| | March 31, 2010 | | | March 31, 2009 | | | 9 Months Ended | | | 9 Months Ended | |
| | | | | (as restated) | | | September 30, 2009 | | | September 30, 2008 | |
| | | | | % of | | | | | | | | | | | | % of | | | | | | | | | | | | % of | | | | | | | | | | | | % of | | | | | | | |
| | | | | Total | | | Non- | | | | | | | | | Total | | | Non- | | | | | | | | | Total | | | Non- | | | | | | | | | Total | | | Non- | | | | |
| | Operating | | | Revenue | | | Operating | | | Total | | | Operating | | | Revenue | | | Operating | | | Total | | | Operating | | | Revenue | | | Operating | | | Total | | | Operating | | | Revenue | | | Operating | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 1,876,000 | | | | | | $ | - | | | $ | 1,876,000 | | | $ | 1,949,000 | | | | | | $ | - | | | $ | 1,949,000 | | | $ | 6,045,000 | | | | | | $ | - | | | $ | 6,045,000 | | | $ | 3,937,000 | | | | | | $ | - | | | $ | 3,937,000 | |
Cost of revenue | | | 1,074,000 | | | | | | | - | | | | 1,074,000 | | | | 1,174,000 | | | | | | | - | | | | 1,174,000 | | | | 3,818,000 | | | | | | | - | | | | 3,818,000 | | | | 1,845,000 | | | | | | | - | | | | 1,845,000 | |
Gross profit | | | 802,000 | | | | 43 | % | | | - | | | | 802,000 | | | | 775,000 | | | | 40 | % | | | - | | | | 775,000 | | | | 2,227,000 | | | | 37 | % | | | - | | | | 2,227,000 | | | | 2,092,000 | | | | 53 | % | | | - | | | | 2,092,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and adminstrative expenses | | | 532,000 | | | | 28 | % | | | 191,000 | | | | 723,000 | | | | 525,000 | | | | 27 | % | | | 193,000 | | | | 718,000 | | | | 1,635,000 | | | | 27 | % | | | 624,000 | | | | 2,259,000 | | | | 779,000 | | | | 20 | % | | | 615,000 | | | | 1,394,000 | |
Professional fees | | | 1,000 | | | | 0 | % | | | 168,000 | | | | 169,000 | | | | 4,000 | | | | 0 | % | | | 106,000 | | | | 110,000 | | | | 38,000 | | | | 1 | % | | | 408,000 | | | | 446,000 | | | | 12,000 | | | | 0 | % | | | 435,000 | | | | 447,000 | |
Depreciation and amortization | | | 805,000 | | | | 43 | % | | | 141,000 | | | | 946,000 | | | | 750,000 | | | | 38 | % | | | 81,000 | | | | 831,000 | | | | 2,283,000 | | | | 38 | % | | | 371,000 | | | | 2,654,000 | | | | 2,067,000 | | | | 53 | % | | | 143,000 | | | | 2,210,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (536,000 | ) | | | -29 | % | | | (500,000 | ) | | | (1,036,000 | ) | | | (504,000 | ) | | | -26 | % | | | (380,000 | ) | | | (884,000 | ) | | | (1,729,000 | ) | | | -29 | % | | | (1,403,000 | ) | | | (3,132,000 | ) | | | (766,000 | ) | | | -19 | % | | | (1,193,000 | ) | | | (1,959,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest & other income / (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Settlement gain | | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | | 1,301,000 | | | | 1,301,000 | |
Interest income | | | 1,000 | | | | | | | | 2,000 | | | | 3,000 | | | | 3,000 | | | | | | | | - | | | | 3,000 | | | | 6,000 | | | | | | | | - | | | | 6,000 | | | | 18,000 | | | | | | | | 17,000 | | | | 35,000 | |
Interest expense | | | - | | | | | | | | (91,000 | ) | | | (91,000 | ) | | | - | | | | | | | | (88,000 | ) | | | (88,000 | ) | | | (1,000 | ) | | | | | | | (269,000 | ) | | | (270,000 | ) | | | - | | | | | | | | (257,000 | ) | | | (257,000 | ) |
Change in fair value of warrant liabilities | | | - | | | | | | | | 42,000 | | | | 42,000 | | | | - | | | | | | | | (614,000 | ) | | | (614,000 | ) | | | - | | | | | | | | (1,110,000 | ) | | | (1,110,000 | ) | | | - | | | | | | | | - | | | | - | |
Loss on sale of marketable equity securities | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | | (20,000 | ) | | | (20,000 | ) | |
(Loss) gain on sale of securities | | | | - | | | | | | | | (15,000 | ) | | | (15,000 | ) | | | - | | | | | | | | 17,000 | | | | 17,000 | |
Other | | | | (13,000 | ) | | | | | | | - | | | | (13,000 | ) | | | (3,000 | ) | | | | | | | (10,000 | ) | | | (13,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes and noncontrolling interests | | | (535,000 | ) | | | | | | | (547,000 | ) | | | (1,082,000 | ) | | | (501,000 | ) | | | | | | | (1,102,000 | ) | | | (1,603,000 | ) | |
Loss before income taxes and noncontrolling interest | | | | (1,737,000 | ) | | | | | | | (2,797,000 | ) | | | (4,534,000 | ) | | | (751,000 | ) | | | | | | | (125,000 | ) | | | (876,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax benefit | | | - | | | | | | | | 14,000 | | | | 14,000 | | | | - | | | | | | | | 15,000 | | | | 15,000 | | | | - | | | | | | | | 44,000 | | | | 44,000 | | | | - | | | | | | | | 19,000 | | | | 19,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss, net of tax | | | (535,000 | ) | | | | | | | (533,000 | ) | | | (1,068,000 | ) | | | (501,000 | ) | | | | | | | (1,087,000 | ) | | | (1,588,000 | ) | | | (1,737,000 | ) | | | | | | | (2,753,000 | ) | | | (4,490,000 | ) | | | (751,000 | ) | | | | | | | (106,000 | ) | | | (857,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plus: Net loss attributable to noncontrolling interest | | | 264,000 | | | | | | | | - | | | | 264,000 | | | | 246,000 | | | | | | | | - | | | | 246,000 | | | | 719,000 | | | | | | | | - | | | | 719,000 | | | | 368,000 | | | | | | | | - | | | | 368,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss attributable to China Broadband shareholders | | $ | (271,000 | ) | | | | | | $ | (533,000 | ) | | $ | (804,000 | ) | | $ | (255,000 | ) | | | | | | $ | (1,087,000 | ) | | $ | (1,342,000 | ) | | $ | (1,018,000 | ) | | | | | | $ | (2,753,000 | ) | | $ | (3,771,000 | ) | | $ | (383,000 | ) | | | | | | $ | (106,000 | ) | | $ | (489,000 | ) |
Liquidity and Capital Resources
As of March 31, 2010September 30, 2009 we had $1,941,000 of cash on hand and cash equivalentsa working capital deficit of approximately $1,514,000.$2,952,000. As of September 30, 2009, we had total current liabilities of $7,009,000. Given our current commitments and working capital, we cannot support our operations for the next 12 months without additional capital.capital (See “Need for Additional Capital”, below).
Private Financings, June 2009
During the nine months ended September 30, 2009 we completed (i) a private financing of 5% Convertible Promissory Notes (the “Notes”) for gross proceeds of approximately $305,000 (the “Note Offering”) and (ii) a private financing of 2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the “Common Stock”), at a purchase price of $.15 per share, for aggregate proceeds of $300,000 (the “Equity Financing”).
Issuance of Convertible Notes, June 2009
During the nine months ended September 30, 2009, the Company completed a private financing of 5% Convertible Promissory Notes (the “Notes”) for gross proceeds of approximately $305,000 (the “Note Offering”). The Note Offering was pursuant to a Note Purchase Agreement (the “Note Purchase Agreement”) with nine persons who were existing holders (the “Note Investors”) of Convertible Promissory Notes issued in January of 2008 (the “January 2008 Notes”), pursuant to which the Company issued approximately $305,000 principal amount of Notes to the Note Investors at face value. The Notes accrue interest at 5% per year payable quarterly in cash or stock, are initially convertible at $.20 per share, and become due and payable in full on May 27, 2010. The Company did not pay any placement agent or similar fees in connection with the Note Offering.
Equity Financing; Issuance of Common Stock
During the nine months ended September 30, 2009 and pursuant to a Securities Purchase Agreement with three investors, the Company completed a private financing of 2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the “Common Stock”), at a purchase price of $.15 per share, for aggregate gross proceeds of $300,000 (the “Equity Financing”).
Waiver Letters
In connection with the Note Offering and the Equity Financing, the Company entered into a waiver letter (the “Waiver Letter”) with all the holders of January 2008 Notes (“Existing Note Holders”), pursuant to which, among other things, the conversion price of the January 2008 Notes were reduced from $.75 per share to (i) $.20 per share (i.e. the same conversion price as the Notes in the Note Offering) for the Existing Note Holders that invested in the Notes (i.e. the Note Investors), and (ii) $.25 per share for those Existing Note Holders that did not reinvest in the new notes. All of the Existing Note Holders waived certain anti dilution adjustments in respect of the contemplated Equity Financing or in respect of their Warrants which were issued to them in connection with the January 2008 Notes, which warrants remain exercisable at $.60 per share.
The foregoing are summaries only of the Note Offering, Waiver Letters and Equity Financing which are filed as exhibits to our Current Report on Form 8-K,dated June 30, 2009, the provisions of which are incorporated herein.
Loan Receivable
The Company has a loan receivable for $280,000 as of September 30, 2009 from a related party, Music Magazine. The loan is unsecured, interest free and has no fixed repayment terms.
Amounts due from Shareholders
Amounts due from shareholders include $91,000 from Shandong Broadcast & TV Weekly Press and $543,000 from Modern Movie & TV Biweekly Press as of September 30, 2009. Both companies are our partners in our Shandong Media joint venture company. The amount due from Shandong Broadcast & TV Weekly Press is unsecured, interest free and has no fixed repayment terms. The amount due from Modern Movie & TV Biweekly Press is unsecured, interest free and the due date for repayment has been extended from June 30, 2009 to December 31, 2009. During the period ended September 30, 2009 the company advanced approximately $553,000 to the shareholders.
Payable to Jinan Parent
During the nine months ended September 30, 2009, Jinan Broadband paid $2,643,000 to Jinan Parent. The current balance due is $152,000. The advance is unsecured, interest free and has no fixed repayment terms.
2008 Convertible Note Financing
On January 11, 2008 we entered into a subscription agreement with ten accredited investors with respect to the issuance of an aggregate of $4,971,250 principal amount of Notes due January 11, 2013, and Class A Warrants to purchase an aggregate of 6,628,333 shares of common stock of the Company at $.60 per share expiring on June 11, 2013.
Convertible Notes Interest
During the nine months ended September 30, 2009 the Company incurred $269,000 in interest expense related to the January 2008 and June 2009 financings. Based on conversion values the Company issued 592,577 shares to the Note holders in lieu of cash of approximately $194,000 for interest accrued.
Cablecom Holding Shares
In April 2008, we received 390,000 shares of Cablecom Holdings, Ltd. (the “Cablecom Holdings Shares”) from Mr. Clive Ng, the Chairman of our board of directors, pursuant to a settlement agreement by and among the Company and its subsidiaries, Stephen P. Cherner, Maxim Financial Corporation, Mark L. Baum, BCGU, LLC, Mark I. Lev, Wellfleet Partners, Inc., Pu Yue, Clive Ng, Chardan Capital Markets, LLC, Jaguar Acquisition Corporation, and China Cablecom Holdings, Ltd (“Cablecom Holdings”). The value of the Cablecom Holdings shares has since declined substantially, and may continue to fluctuate and decline further. During the nine months ended September 30, 2009, we sold 236,665 of the Cablecom Holdings shares for total net proceeds of $175,000 and recorded a net loss on the sales of approximately $15,000. As of September 30, 2009, we hold 81,455 shares of Cablecom Holdings. The fair value of the remaining 81,455 Cablecom shares at September 30, 2009 approximates $68,000.
Cash Flows
The following sets forth a summary of the Company’s cash flows for the threenine months ended March 31, 2010September 30, 2009 and 2009:2008:
| | Three Months Ended | |
| | March 31, | | | March 31, | |
| | 2010 | | | 2009 | |
Net cash provided by operating activities | | $ | 89,000 | | | $ | 106,000 | |
Net cash used in investing activities | | | (1,372,000 | ) | | | (757,000 | ) |
Net cash provided by financing activities | | | 581,000 | | | | 4,000 | |
Effect of exchange rate changes on cash | | | 26,000 | | | | 21,000 | |
Net decrease in cash and cash equivalents | | | (676,000 | ) | | | (627,000 | ) |
Cash and cash equivalents at beginning of period | | | 2,190,000 | | | | 4,426,000 | |
Cash and cash equivalents at end of period | | | 1,514,000 | | | | 3,799,000 | |
�� | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2009 | | | 2008 | |
Net cash provided by operating activities | | $ | 449,000 | | | $ | 664,000 | |
Net cash used in investing activities | | $ | (916,000 | ) | | $ | (1,469,000 | ) |
Net cash (used in) provided by financing activities | | $ | (2,046,000 | ) | | $ | 4,986,000 | |
Effect of exchange rate changes on cash | | $ | 28,000 | | | $ | 478,000 | |
Operating activities
Cash provided by operating activities for the threenine months ended March 31, 20102009 and 2009 was $88,0002008 approximate $449,000 and $106,000,$664,000, respectively.
Investing activities
Investing activities for the threenine months ended March 31, 2010September 30, 2009 and 20092008 used cash of $1,372,000$916,000 and $757,000,$1,469,000, respectively. For 2010, this amount consisted of (i) $224,000 for additions to property and equipment, (ii) $580,000 loan to Sinotop Group Ltd for our potential acquisition and (iii) $568,000 loan to our Shandong Media shareholders. For 2009, this amount consisted of (i) $227,000cash acquired in our AdNet acquisition of $18,000 and (ii) proceeds of $174,000 from the sale of our Cablecom Holding Shares, offset by (i) $555,000 for additions to property and equipment and (ii) $585,000$553,000 loan to our Shandong Media shareholder. For 2008 this amount consisted of additions to property and equipment in the amount of $1,567,000 and $242,000 loan to our Shandong Media shareholder partially offset by the proceeds from the sale of Cablecom Holding Shares in the amount of $55,000.$340,000.
Financing activities
Financing activities for the threenine months ended 2010September 30, 2009 and 20092008 (used) provided cash of $581,000$(2,046,000) and $4,000,$4,986,000, respectively. For 2010,2009, the amount consisted of $600,000proceeds from the sale of equity securities of $300,000 and proceeds from the issuance of a convertible note payablenotes of $305,000 offset by a $19,000 decrease in the payablepayment to Jinan Parent.Parent of $2,643,000. For 2009,2008, this amount consisted of proceeds from the amount was dueissuance of convertible notes of $4,850,000, offset by $105,000 of payments related to issuance costs associated with the convertible notes and an increase in the payable to Jinan Parent in the amount of $4,000.$241,000.
Obligations Under Material ContractsForeign Currency Translation
Our WOFE, Jinan Broadband subsidiary, Shandong Media joint venture and our AdNet Media acquisition are located in China. All of their operations are conducted in the local currency of the Chinese Yuan, also known as Renminbi or RMB. The favorable effect of exchange rates on cash between the Chinese Yuan and the United States dollar, provided cash of $28,000 and $478,000 during the nine months ended September 30, 2009 and 2008, respectively.
Shandong Media Joint Venture and Shandong Newspaper Cooperation Agreement
On March 7, 2008, through our WFOE in the PRC, we entered into the Shandong Publishinga Cooperation Agreement with(the “Shandong Newspaper Cooperation Agreement”) by and among our WFOE subsidiary, Shandong Broadcast & TV Weekly Press and Modern Movie & TV Biweekly Press, each PRC companies (collectively “Shandong Newspaper”). The Shandong Newspaper Cooperation Agreement provided for, among other terms, the creation of a joint venture entity in the PRC, Shandong Lushi Media Co., Ltd. ("Shandong Media") that would own and operate Shandong Newspaper's television program guide, newspaper and magazine publishing business in the Shandong region of the PRC (the "Shandong Newspaper Business") which businesses were previously owned and operated by the Shandong Newspaper entities pursuant to whichexclusive licenses.
Under the terms of the Shandong Broadcast & TV Weekly PressNewspaper Cooperation Agreement and Modern Movie & TV Biweekly Pressrelated pledge and trust documents, the Shandong Newspaper entities mentioned above contributed their entire businessesShandong Newspaper Business and transferred certain employees, to Shandong PublishingMedia in exchange for a 50% stake in Shandong Publishing,Media, with the other 50% of Shandong PublishingMedia to be owned by our WFOE in the PRC.PRC in the second quarter of 2008 with the joint venture becoming operational in July of 2008. In exchange we were required to paytherefore, the Cooperation Agreement provided for total initial consideration from us of approximately $1.5 million (approximately 10 million RMB), which was contributed to Shandong PublishingMedia as working and acquisition capital. As part of the transaction, and to facilitate our subsidiary’s ownership and control over Shandong Newspaper under PRC law, through our WFOE in the PRC, we loaned Shandong Media said funds pursuant to a loan agreement and equity option agreement, and a majority of the shares of Shandong Newspaper are held by Pu Yue, our CFO, as trustee on behalf of the Company pursuant to a pledge agreement and trustee agreement. The results of the Shandong Newspaper Business have been consolidated with the Company’s consolidated financial statements as of July 1, 2008.
Based on certain financial performance we wereWe are required to make an additional payment pursuant to the Shandong Newspaper Cooperation Agreement. In addition to the initial purchase price of $1.5 million (10 million RMB), the Shandong Newspaper Cooperation Agreement provides for additional consideration of approximately US $730,000 and US $2,900,000 (between 5 million RMB and 20 million RMB, respectively) to be paid as a capital contribution to Shandong Media in the event that certain performance thresholds are met during the first 12 months of operations after closing the transaction.
Specifically, in the event that audited annual net profits during the first year after closing of the transaction relating to the Shandong Newspaper Cooperation Agreement:
| · | equals or exceeds 16 million RMB, then we will be required to contribute an additional 20 million RMB (or, approximately $3,000,000 presuming current exchange rates are in effect at such time) to the Shandong Media joint venture; |
| · | equals or exceeds 4 million RMB but less than 16 million RMB, then we will be required to contribute 125% of such net profits to the Shandong Media joint venture, and |
| · | is less then 4 million RMB, then we will be required to contribute only an additional 5 million RMB (approximately US $730,000 presuming current exchange rates are in effect at such time). |
Based on financial performance we will be required to make the additional minimum payment of 5 million RMB (approximately US $730,000). In 2008 we recorded the additional payment due as an increase to our Shandong noncontrolling interest account. The due date of the additional payment has been extended to MayDecember 31, 2010.2009.
On June 30, 2009, we consummatedThe Shandong Newspaper Cooperation Agreement resulted in the creation of a note offering pursuantVariable Interest Entity (“VIE”) as defined under Financial Accounting Standards Board (“FASB”) ASC 810, Consolidation. The intended result of the contractual arrangements is that, as of July 1, 2008 the economic risks and benefits of the Shandong Newspaper Business operations are being primarily borne by the Company. The Company has contributed more capital to which we issued $304,902 principal amount of notesdate and is required to nine investors.make further capital contributions based upon performance targets. The notes accrue interest at 5% per year payable quarterlycontractual arrangements in cash or stock, were initially convertible at $.20 per share, and become due and payable in full on May 27, 2010. In connectionaddition to the service agreements the Company has with the Financings discussed above, on May 20, 2010, we entered into a Waiver and Agreement to Convert (the “Waiver”Shandong Newspaper parent companies, provide under the relevant principles of United States Generally Accepted Accounting Principles (“US GAAP”) withfor the note holders whereby the holders $171,502 in aggregate principal amountconsolidation of the notes agreed to convert, upon the consummationresults of operations of Shandong Newspaper, with 50% of the Financings, 100%Shandong Newspaper net income included in the accompanying financial statements of the outstanding principal and interest owing on the notes into shares of our common stock at a conversion price of $0.05 per share. In addition, the holders of such notes will receive warrants identical to those issued in connection with the sale of the Common Units, to purchase such number of shares of our common stock equal to the number of shares of common stock issued upon conversion of such notes. Pursuant to the Waiver, the holder of the remaining $133,400 in aggregate principal amount of the notes will (i) convert 100% of the outstanding principal and interest owing on such notes into shares of Series B Preferred Stock at a conversion price of $0.50 per share and (ii) receive warrants identical to those issued in connection with the purchase of Preferred B Units, to purchase such number of shares of our Common Stock equal to the number of shares of Common Stock underlying the Series B Preferred Stock issued upon conversion of such notes. In addition, the Waiver amends the maturity date of the Notes from May 27, 2010 to December 31, 2012.Company.
Need for Additional Capital
As indicated above, management does not believe that the Company has sufficient capital to sustain its operations beyond 12 months nor fund the required contribution to Shandong Publishing or the $305,000 convertible notes maturing May 27, 2010Newspaper without raising additional capital. We presently do not have any available credit, bank financing or other external sources of liquidity. Accordingly, we expect that we will require additional funding through additional equity and/or debt financings. However, there can be no assurance that any additional financing will become available to us, and if available, on terms acceptable to us.
The conversion of our outstanding notes and exercise of our outstanding warrants into shares of common stock would have a dilutive effect on our common stock, which would in turn reduce our ability to raise additional funds on favorable terms. In addition, the subsequent sale on the open market of any shares of common stock issued upon conversion of our outstanding notes and exercise of our outstanding warrants could impact our stock price which would in turn reduce our ability to raise additional funds on favorable terms.
Any financing, if available, may involve restrictive covenants that may impact our ability to conduct our business or raise additional funds on acceptable terms. If we are unable to raise additional capital when required or on acceptable terms, we may have to delay, scale back or discontinue our expansion plans.
In the event we are unable to raise additional capital we will not be able to sustain any growth or continue to operate.
Critical Accounting Policies and Significant Judgments and EstimatesAssumptions
The discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2009 includes a summary of our most significant accounting policies.
There have been no material changes to the critical accounting policies previously disclosedCompany’s Critical Accounting Policies filed in our 2009the Company’s 2008 Annual Report on Form 10-K. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, securities available for sale, income taxes, stock-based compensation and warrant liabilities. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Periodically, we review our critical accounting estimates with the Audit Committee of our Board of Directors.10-K/A.
Recent Accounting Pronouncements
Refer to Note 3 for21 to the financial statements for updates on recent accounting pronouncements since the filing of our 20092008 annual report on Form 10-K.10-K/A.
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.
Item 3. 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 4. Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures
We maintainBased on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures (asas defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) that are designedAct of 1934, as amended ("Exchange Act") were ineffective as of September 30, 2009 to ensure that information that would be required to be disclosed by the Company in reports that it files or submits under the Exchange Act reports is (i) recorded, processed, summarized and reported within the time periodperiods specified in the SEC’sSecurities and Exchange Commission rules and forms and that such information is(ii) accumulated and communicated to ourthe Company's management, including to our Chief Executive Officerits principal executive officer and Chief Financial Officer,principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As requiredA material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by Rule 13a-15 under the Exchange Act,those responsible for oversight of our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectivenessfinancial reporting.
Our internal control over financial reporting was not effective as a result of the designfollowing identified material weaknesses:
1) In connection with the preparation and operationaudit of our disclosure2009 financial statements and notes, we were informed by our auditor, UHY LLP (“UHY”) of certain deficiencies in our internal controls that UHY considered to be material weaknesses. These deficiencies related to our financial closing procedures and procedureserrors in classification of warrants. After discussions between management, our audit committee and UHY, we concluded that the Company had not properly adopted FASB ASC Topic 815-40 “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC 815”) and as a result had not reclassified warrants from equity to liabilities as of March 31, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2010, and asJanuary 1, 2009. As a result of the date thatchange in accounting, the evaluationCompany recognized a gain of $131,000 and a charge of $1,111,000 during the effectivenessthree months and nine months ended September 30, 2009, respectively.
2) The Company does not maintain personnel with a sufficient level of ouraccounting knowledge, experience and training in the selection and application of US GAAP and related SEC disclosure controls and procedures was completed, our disclosure controls and procedures wererequirements.
3) The Company does not effective to satisfy the objectives for which they are intended. Although we still have material weaknesses, we have hired outside consultants to help improve our internal controls.an accounting policy manual based on US GAAP.
b. Changes in Internal Control over Financial Reporting
There have beenwere no changes in ourthe Company’s internal controlcontrols over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the first quarter of 2010period ended September 30, 2009 that have materially affected or are reasonably likely to materially affect ourthe Company’s internal controlcontrols over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which we are a party or to which any of our property is subject. To the best of our knowledge, no such actions against us are contemplated or threatened.
Item 1A. Risk Factors
The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K10-K/A for the year ended December 31, 2009,2008, which describes the various risks and uncertainties to which we are or may become subject to.
As set forth in the section titled “Recent Developments” above, the Company entered into various financing agreements all of which are subject to a number of pre and post conditions and satisfactory due diligence of the strategic investor, which may also terminate the transaction for any reason or no reason. If we do not complete this financing we will likely not be able to complete our acquisition of Sinotop and will continue to have liquidity problems as we have limited capital to operate our operations without such financing. We do not have alternate financing commitments at this time. If a financing is not completed, the Company will be adversely affected.
Other than as relates to the above risks, thereThere have been no material changes to the risk factors set forth in our Annual Report on Form 10-K10-K/A for the year ended December 31, 2009.2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Removed and ReservedSubmission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Item 6. Exhibits.
EXHIBIT INDEX
| | Description |
31.1 | | Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302. |
31.2 | | Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302. |
32.1 | | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
32.2 | | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 24,August 23, 2010.
| CHINA BROADBAND, INC |
| | |
| By: | /s/ Marc Urbach |
| | Name: Marc Urbach |
| | Title: President (Principal Executive Officer) |
| | |
| By: | /s/ Yue Pu |
| | Name: Yue Pu |
| | Title: Vice Chairman (PrincipalOfficer, Principal Accounting Officer, Principal |
| | Financial Officer) |