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[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from April 1, 2009 to December 31, 2009
Registrant’s telephone number, including area code (852) 2546-1808
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Shares, par value $0.001
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
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by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein,
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
aggregate market value of the voting and non-voting common equity
held by non-affiliates (affiliates being, for these
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date:
Documents incorporated by reference: none.
TABLE OF CONTENTS
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Forward Looking Statements
This transition report on Form 10-K contains forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the United States Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Use of Certain Defined Terms
In this transition report on Form 10-K and unless otherwise specified, all dollar amounts are expressed in United States dollars, all references to “common shares” refer to the common shares in our capital stock and the terms “we”, “us” and “our” refer to Lightscape Technologies Inc. and our subsidiaries.
ITEM 1. BUSINESS.
Change in Fiscal Year
In December 2009, our board of directors approved a change in our fiscal year end from March 31 to December 31. The fiscal year end change was effective December 31, 2009 and resulted in a nine month reporting period from April 1, 2009 to December 31, 2009. As a result, this Form 10-K is a transition report and includes financial information for the transition period from April 1, 2009 through December 31, 2009 (the “Transition Period”). Subsequent to this report, our reports on Form 10-K will cover the calendar year January 1 to December 31.
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We were incorporated under the laws of the State of Nevada under the name “Legacy Bodysentials Inc.” on September 14, 1995. On September 25, 1996, we changed our name to “Legacy Minerals Inc.” and on May 18, 1998, we changed our name to “Global Commonwealth Inc.” On November 12, 1999, we changed our name to “Global Innovative Systems Inc.” and on April 23, 2007, we changed our name to “Lightscape Technologies Inc.” The name change became effective with the OTC Bulletin Board at the opening for trading on April 23, 2007 under the new stock symbol “LTSC”.
We are a holding company for subsidiaries engaged in two main continuing business activities: (i) digital out-of-home advertising and (ii) light-emitting diode (“LED”) solutions. During the nine months ended December 31, 2009, approximately 20% of our revenue was derived from our digital out-of-home advertising business and 80% from our LED solutions business.
Digital Out-of-Home Advertising Business
We design, install and operate digital out-of-home advertising screens. We are building and expanding our digital out-of-home advertising network (i) through digital billboard installations which we complete and operate independently, and (ii) through digital display installations which we complete and operate through partnerships and/or joint ventures with major property owners and developers in Asia. We generate revenue by selling advertising space on our digital out-of-home media network to advertisers. We have established and are continuing to establish advertising sales channels for our digital out-of-home advertising network by forming strategic partnerships with advertising agencies and other media industry partners.
We signed a joint venture agreement on February 12, 2008 as part of our efforts to build a digital out-of-home advertising network in the People’s Republic of China (the “PRC” or “China”). We entered this joint venture agreement with Beijing Xintong Media & Cultural Development Co. Ltd. (“BX”). Pursuant to the terms of the joint venture agreement, (i) the joint venture company was to be named Beijing Xintong New Vision Media Advertising Co. Ltd. (the “Intended JV ”), (ii) our company agreed to contribute to the Intended JV cash and an LED billboard for the joint venture’s initial installation within ninety business days of signing the agreement, and (iii) in exchange for these contributions, our company would obtain 50.1% ownership of the Intended JV, with the remaining 49.9% to be held by BX. The operations of the Intended JV were anticipated to include the sourcing, design installation, servicing and maintenance of large-sized digital billboards at locations in China, and the securing of advertising contracts for advertising and media content to be displayed on the screens. The joint venture planned to target niche applications which are currently underserved by existing competition. Target applications included the installation of LED billboards located primarily on outdoor façade walls of shopping centers, hotels, offices and other commercial buildings. The prime locations for the joint venture’s screens were to be major property developments owned by BX’s parent the New World Group. Due primarily to structural complexities related to the formation of a joint venture company to operate in the PRC, this joint venture agreement has not closed and our company did not contribute the cash and an LED billboard to the Intended JV.
Subsequent to the signing of the joint venture agreement, our company has explored alternative plans for more rapidly and effectively building a digital out-of-home advertising network in the PRC in cooperation with the New World Group. Upon our further discussion with senior management of New World Group, both parties determined that it would be more effective to partner directly with New World Group companies, including but not limited to New World China Land Limited (“NWCL”), a Hong Kong listed company, and New World Department Stores China Ltd. (“NWDSC”), also a Hong Kong listed company and a 72%-owned subsidiary of the New World Group, to install and operate digital out-of-home advertising screens at properties owned by NWCL and operated by NWDSC throughout mainland China. NWDSC is a department store operator in the PRC with a network of 28 stores in 16 major cities in China.
On October 1, 2009, our company signed an outdoor digital billboard cooperation agreement with Beijing Chongwen –New World Properties Development Co. Ltd., a New World subsidiary. Under the 10-year agreement, our company agreed to build two large-scale outdoor LED displays at the Beijing New World Centre mixed-use complex, with screen areas of 150 square meters and 50 square meters, respectively. Our company will source, design, install and service the two LED displays, and secure advertising contracts for advertising and media content to be displayed on the screens. The first LED display began operating and generating advertising revenue on February 10, 2010, while the second LED display is expected to be completed and become operational by June 2010.
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We plan to install additional large-sized LED displays in second half of 2010, including but not limited to NWDSC department stores in Wuhan and Changsha, China.
As of April 15, 2010, we have set up and operate 5 out-of-home LED screens in Hong Kong and 30 out-of-home LED screens across various major cities in China, including 2 screens in Beijing, 1 screen in Shenzhen, 1 screen in Jinan and 26 screens in Zhejiang province. 7 new screens are expected to be in operation before end of 2010. Additionally, we have launched and operate approximately 300 indoor LCD displays within 28 NWDSC department stores across 16 cities in China. Both the LED and LCD advertising networks became operational and began generating advertising revenue in February 2010 from various well-known international brand-name customers.
Our company believes that our original objectives under the Intended JV are being achieved through the alternative relationship structure and agreements formed with the New World Group. As such, the formation of the Intended JV and the closing of the joint venture agreement dated February 12, 2008 will not be pursued in the future.
The primary end-user markets of our digital out-of-home advertising network are major advertising agencies in China and Hong Kong, and individual advertisers, such as major corporations and government entities, based in China and Hong Kong. Demand for digital out-of-home advertising is primarily based on clients’ desire to cost-effectively distribute advertisements to as large a target market of viewers as possible. Our out-of-home advertising network meets these demands through the large average size of our out-of-home advertising screens and the location of the screens in high-traffic commercial and residential areas.
Our company has formed strategic partnerships with Ogilvy & Mather Group, a major advertising agency in Hong Kong, and LIME, a diversified media conglomerate, to sell advertising space on our digital out-of-home advertising network. Both of these partnerships are actively promoting out-of-home advertising on our network. We are also in the process of negotiating strategic partnership agreements and contracts with other advertising agencies and advertisers for the sales of advertising space on the network.
LED Solutions Business
During 2006, we entered the LED solutions business by forming a joint venture company, Lightscape Technologies (Macau) Limited (“Lightscape Macau”), and subsequently acquiring all of the outstanding shares of Lightscape Macau. During 2007, we also incorporated a wholly-owned subsidiary, Lightscape Technologies (Greater China) Limited in Hong Kong to engage in the LED solutions business in Hong Kong and China.
We operate in three principal lines of the LED products and services industry: (i) LED Systems, (ii) original equipment manufacturing (“OEM”) and Licensing, and (iii) LED Screen Rental Service.
Our operations in the LED products and services industry focus on the use of semiconductor devices, known as LED’s, as the primary light source. Compared to conventional incandescent and fluorescent lamps, LED’s are designed to offer superior efficiency, reliability and creative design versatility with the additional benefits of lower energy consumption, prolonged operational life and the non-use of mercury.
We provide creative design, installation and digital control of high-specification LED systems. Our system designs typically consist of various LED hardware components sourced from third parties, including LED video panels, individual LED modules and lighting fixtures of various sizes, intensities and color capabilities, LED flood lights, spotlights, string lights, cove lights, light tubes and light tiles, submersible LED lights, audio-visual equipment, and related support hardware, cabling and accessories.
These LED-based hardware components are integrated by our design team, installed and then driven by our proprietary digital controller software system, the Multimedia and Video Show Control System. This product is a user-friendly, PC-based software system for the authoring, control and playback of intricate, large-scale video, lighting and audio effects. This product has the ability to simultaneously control up to four high-resolution LED video walls, an unlimited number of multiplex channels, DMX universes, 0-10v analog channels, and RS-232
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devices. The software’s graphical user interface and digital control capabilities simplifies the process of creating and playing elaborate video, lighting and multimedia effects through LED systems which may contain thousands of individual addresses.
Our LED systems are designed for both interior and exterior applications, and our sales and marketing strategy targets clients demanding high-performance video and color lighting systems. Demand for our LED systems is primarily based on our end-user clients’ desire to add programmable video and/or dynamic lighting effects to their properties in order to attract and retain customers, and/or to differentiate and accentuate architectural elements. Demand is also driven by clients’ desire for reliable, low-maintenance and energy-efficient video and lighting design solutions.
The primary end-user markets for our LED systems include hospitality (casinos, hotels, nightclubs), entertainment (concert halls, theaters, television studios), retail (shopping centers, digital signage), high-end residential (condominiums), architectural (public landmarks, fountains, office buildings), and special exhibits (conventions, trade show booths). The geographical target markets for our LED systems include Macau, Hong Kong and China.
Our LED systems are typically specified within a design plan developed by architects or lighting designers engaged by the owner of an end-user project. Our sales personnel work with the architects and lighting designers on the design process to incorporate our LED systems. Our LED systems are then typically purchased by general contractors or electrical contractors engaged by the owner of an end-user project, or by the project owner directly. During installation of the LED system, we provide on-site supervision to ensure that the LED hardware is properly installed and operational. We also typically provide client training services in the use of our digital controller software, and collaborate with clients in using our software system to create customized video, lighting and multimedia effects for playback on the installed LED system.
Our LED systems are sold primarily by our internal sales team through established relationships with architects, lighting designers and real estate development owners. A core component of our sales team’s approach is a focus on design creativity, including the professional production of videos for each potential client with animated renderings of the artistic vision for the client’s installed systems and the types of creative multimedia and lighting effects that may be achieved.
OEM and Licensing
We offer OEM and licensing of our proprietary digital controller software product, the Multimedia and Video Show Control System. Our OEM business primarily targets LED manufacturers and LED system designers which use our software system to create and control video, lighting and multimedia effects for their own LED systems, which are typically sold under their own brand name. We also license our software system, primarily to owners of end-user projects which have installed or rented our LED systems. Our OEM and licensing sales are primarily made by our internal sales team and our geographical target markets include Macau, Hong Kong and China.
We provide rentals of LED-based hardware. The main products we rent include LED video panels and LED video walls. Complementary products we rent include individual LED fixtures of various sizes, intensities and color capabilities, LED flood lights and spotlights. Demand for LED hardware rentals is primarily based on clients’ desire to cost-effectively meet their short-term need for dynamic video and lighting effects in order to deliver advertising, messaging and/or dramatic lighting effects.
The primary markets for LED rentals include corporate events (conventions, conferences, trade shows, special exhibits), advertising companies (indoor and outdoor digital signage), television and film productions, government (special events), and live performances (theatre productions, music concerts). Our LED rental sales are primarily made by our internal sales team and our geographical target markets currently include Macau and Hong Kong.
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Reclassification of Disposed Subsidiary and Subsidiary Held for Sale as Discontinued Operations
A subsidiary which has been disposed of or classified as held for sale during the nine months ended December 31, 2009 is to be included in discontinued operations if it meets any of the quantitative thresholds in accordance with ASC 280 “Segment Reporting” paragraph 18-24, and ASC 205-20 “Presentation of Financial Statements – Discontinued Operations”. Our disposal of Golden Cypress Limited and our pending sale of Beijing Aihua New Enterprise Lighting Appliance Co. Limited (“Beijing Aihua”) during the nine months ended December 31, 2009 each met certain of the quantitative tests and other criteria of ASC 280 and ASC 205-20. As a result, the operating results, assets and liabilities of Golden Cypress and Beijing Aihua have been reclassified as discontinued operations, with corresponding reclassification of 2008 comparative figures.
Through our prior 76.8% ownership of Beijing Illumination (Hong Kong) Limited (“Beijing Illumination”) and its wholly-owned subsidiary Beijing Aihua, we researched, developed, manufactured and sold lighting source products. Beijing Aihua manufactures and sells high-intensity discharge (“HID”) lighting products including metal halide lamps and high-pressure sodium lamps.
Compared to conventional incandescent and fluorescent lamps, HID lamps produce a much larger quantity of light in a relatively small package. Customer demand for Beijing Aihua’s products is primarily driven by the ability of HID lamps to generally offer superior efficiency, luminosity, reliability and versatility with the additional benefit of low energy consumption in comparison with conventional incandescent or fluorescent lamps.
Beijing Aihua’s HID lamps are used within a wide variety of industrial, governmental, commercial and residential applications. Metal halide lamps are used primarily for indoor and outdoor lighting of factories, warehouses, industrial plants, airports, sports stadiums, supermarkets, shopping centers, underground parkades and residential buildings. Main applications for high-pressure sodium lamps include street lighting, subway systems, courtyard lighting and general outdoor lighting. Xenon lamps are used within the manufacturing of automobile headlights. Special application HID lamps consist primarily of multi-color lamps which are used in specialized applications such as aquariums, hydroponics, outdoor decorative lighting of buildings, bridges and other large architectural structures, and indoor decorative lighting for theatres and other entertainment venues. The primary applications for ultra high-pressure mercury lamps are as key components within light-weight digital crystal projectors and rear projection televisions.
Beijing Aihua’s internal sales team and sales agents sell its lighting products through a variety of sales channels including manufacturers, wholesalers, distributors, contractors, and directly to end-users. The primary geographical markets for Beijing Aihua’s products are China, Hong Kong, Macau, Singapore, India and the United States.
In September 2009, our board of directors authorized management to begin the process to sell all the rights and assets of our lighting source products business, namely Beijing Aihua. Our company’s decision to discontinue operations in the lighting source products business was intended to more effectively utilize our financial and human resources by focusing on our digital out-of-home advertising and LED solutions businesses which we consider to have more promising potential for revenue and margin growth. As of September 30, 2009, we classified these assets as assets held for sale and included the results of the lighting source products business in discontinued operations. On November 20, 2009, Beijing Illumination entered into a Sale and Purchase Agreement with Zhejiang Zhong Jun Investment Management Co. Limited (“Zhejiang Zhong Jun”). Pursuant to the terms and conditions of the Sale and Purchase Agreement, Beijing Illumination agreed to sell its 100% ownership of the registered share capital of Beijing Aihua to Zhejiang Zhong Jun in consideration for payments totaling RMB7,800,000 (approximately US$1,141,352). Of this amount, a cash deposit of RMB1,500,000 (approximately US$219,491) was paid by Zhejiang Zhong Jun to Beijing Illumination on November 20, 2009. The remaining RMB6,300,000 (approximately US$921,861) was paid in full by Zhejiang Zhong Jun to Beijing Illumination in cash in March 2010. The Sale and Purchase Agreement closed on April 12, 2010.
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Each of our operating businesses faces intense competitive pressures within its respective markets. Such competition may come from domestic and international operators. While our businesses are managed with the objective of achieving sustainable growth over the long-term through developing and strengthening competitive advantages, many factors, including market and technology changes, may erode competitive advantages or prevent their strengthening. Accordingly, future operating results will depend to some degree on whether our operating subsidiaries are successful in protecting or enhancing their competitive advantages.
Digital Out-of-Home Advertising Business
Our digital out-of-home advertising business competes with other China-based out-of-home audiovisual media network providers, including Focus Media Holding Ltd., Clear Media Limited and TOM Group Limited. These companies have large, established out-of-home advertising networks and sales channels, and substantially greater resources to devote to building and maintaining out-of-home advertising networks and securing advertising contracts than we do.
Our competitive advantages include: our relationship with the New World Group, which enhances our ability to locate digital billboards on high-traffic buildings in prime locations owned by the New World Group, and enhances our ability to navigate and comply with applicable government regulations; the relatively large average size of our digital billboard installations; and our experience in the sourcing, installation and digital control of large-size LED video walls gained through the operation of our LED Solutions business.
LED Solutions Business
Our LED systems, OEM software and LED rental service compete with video and lighting products utilizing traditional lighting technology provided by many vendors. In the high-performance video and color lighting markets in which we have primarily competed to date, competition has largely been fragmented among a number of small manufacturers of LED systems and designers of LED-based lighting solutions. However, we are increasingly experiencing competition from larger, more established companies, including those in the general lighting industry such as Koninklijke Philips Electronics NV which have established and expanded business units competing in the LED systems market. These companies have global marketing capabilities and substantially greater resources to devote to research and development and other aspects of the development, manufacture, marketing, design and installation of LED systems and rentals of LED hardware than we do. Our competitive advantages include: our focus on providing artistic, creative and customized LED solutions which meet clients’ demands for both architectural enhancements and energy-efficiency; our established supply chain to OEM manufacturers of low-cost, high-quality LED hardware; and our proprietary digital controller software system capable of creating customized video, lighting and multimedia effects for playback on installed LED systems.
There are currently about 6 to 8 manufacturers of electric arc tubes of metal halide lamps and approximately 30 manufacturers of electric arc tubes of high-pressure sodium lamps in the PRC. We competed in this business as a low-cost manufacturer.
Raw Materials and Principal Suppliers
The primary hardware required for the operation of our digital out-of-home advertising and LED solutions businesses consists of LED billboards and video panels, LCD video screens, plasma screens, individual LED modules and fixtures of various sizes, intensities and color capabilities, LED flood lights, spotlights, string lights, cove lights, light tubes and light tiles, submersible LED lights, audio-visual equipment, and related support hardware, cabling and accessories. We purchase our hardware primarily from third party manufacturers who build these components according to our design and technical specifications. We select component suppliers based on price and quality. Maintaining a steady supply of our LED-based hardware is important to our operations and the growth of our digital out-of-home advertising network and LED solutions business. We also develop and integrate proprietary software to drive the authoring, control and playback of content on our digital billboards and our other LED-based systems.
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Three OEMs in China were the major suppliers of LED-based hardware for our LED-based business during the Transition Period. There are many qualified alternative suppliers for our equipment, and our obligation to our current suppliers is not exclusive. We have never experienced any material delay or interruption in the supply of our LED hardware.
The primary hardware used in the manufacture of our lighting source products included lighting ballasts, capacitors, arc tubes and glass bulbs. We purchased component parts from third party wholesale distributors. We selected component suppliers based on price and quality. Our company was not materially dependent upon any one supplier for component parts used in the manufacture of our lighting source products, and raw materials and components were in adequate supply.
Approximately 26.5%, 16.3% and 16.0%, respectively, of our total revenue was derived from the supply and installation of LED displays and systems to three significant customers during the Transition Period.
Patents and Trademarks
Our material patents granted, patents pending and registered trademarks are as follows:
We own and operate the duly registered internet domain name www.lightscape-tech.com . The information contained in our website does not form part of this transition report on Form 10-K. Our company makes available, on or through our website, our transition and/or annual reports on Form 10-K, quarterly reports on Form 10-Q,
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current reports on Form 8-K, and amendments to those reports after they are electronically filed or furnished to the Securities and Exchange Commission.
Additionally, any document filed by us, including this transition report on Form 10-K, may be viewed at the Securities and Exchange Commission’s public reference room, 100 F Street NE, Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-732-0330 for further information about its public reference room. These Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission’s website at “www.sec.gov”.
Our digital out-of-home advertising business is subject to compliance with certain government regulations in the PRC. We operate our digital out-of-home advertising business in the PRC under a regulatory regime consisting of the State Council, which is the highest authority of the executive branch of the PRC central government, and ministries and agencies under its authority including the State Administration for Industry and Commerce, or SAIC.
The principal regulations governing out-of-home advertising businesses in the PRC include:
· The Advertising Law (1994);
· The Advertising Administrative Regulations (1987);
· The Implementing Rules for the Advertising Administrative Regulations (2004); and
· The Outdoor Advertising Registration Administrative Regulations (1995).
Regulation of Business Licenses for Advertising Operations
Companies engaged in advertising activities must obtain from the SAIC or its local branches a business license which specifically includes operating an advertising business within its business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. Our company, our subsidiaries and/or our joint venture company have obtained or are in the process of obtaining such business licenses from the local branches of the SAIC as required by the existing PRC regulations. We do not expect to encounter any material difficulties in obtaining or maintaining our required business licenses for the operation of our digital out-of-home advertising business in the PRC.
Regulation of Out-of-Home Advertising
The Advertising Law stipulates that the exhibition and display of out-of-home advertisements must not:
· utilize traffic safety facilities and traffic signs;
· impede the use of public facilities, traffic safety facilities and traffic signs;
· obstruct commercial and public activities or create an eyesore in urban areas;
· be placed in restrictive areas near government offices, cultural landmarks or historical or scenic sites; and
· be placed in areas prohibited by the local governments from having out-of-home advertisements.
In addition, The Outdoor Advertising Registration Administrative Regulations stipulate that outdoor advertisements in China must be registered with the local SAIC before dissemination. Advertising distributors are
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required to submit a registration application form and other supporting documents for registration, including the content of the proposed outdoor advertisement. After review and examination, if an application complies with the requirements, the local SAIC will issue an Outdoor Advertising Registration Certificate for such advertisement. Our company, our subsidiaries and/or our joint venture company have obtained or are in the process of obtaining such Outdoor Advertising Registration Certificates for the advertisements displayed and intended to be displayed on our digital out-of-home advertising screens. We do not expect to encounter any material difficulties in obtaining or maintaining our required certificates for the dissemination of out-of-home advertisements in the PRC.
The placement and installation of digital billboards is subject to municipal zoning laws and governmental approvals. Our company, our subsidiaries and/or our joint venture company have obtained or are in the process of obtaining such municipal government approvals for each of our digital out-of-home advertising billboards currently installed or planned to be installed in the PRC. We do not expect to encounter any material difficulties in obtaining or maintaining our required government approvals for the installation or operation of our digital out-of-home advertising billboards in the PRC
Regulation of Advertising Content
PRC advertising regulations stipulate certain content requirements for advertisements in the PRC, which include prohibitions on misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisements for anaesthetic, psychotropic, toxic or radioactive drugs are prohibited. It is prohibited to disseminate tobacco advertisements via broadcast media. It is also prohibited to display tobacco advertisements in any public area. There are also specific restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals advertised through out-of-home forms of media, together with any other advertisements which are subject to censorship by administrative authorities according to relevant laws and administrative regulations, must be submitted to the relevant administrative authorities for content approval prior to dissemination. We do not believe that advertisements containing content subject to restriction or censorship comprise or will comprise a material portion of the advertisements expected to be shown on our digital out-of-home advertising billboard network.
Advertising operators and distributors are required by PRC advertising regulations to ensure that the content of the advertisements they distribute are in full compliance with applicable law. In providing advertising services, advertising operators and distributors must review the prescribed supporting documents provided by advertisers for advertisements and verify that the content of the advertisements comply with applicable PRC laws and regulations. In addition, prior to distributing advertisements for certain commodities which are subject to government censorship and approval, advertising distributors are obligated to ensure that such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke violators’ licenses or permits for advertising business operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties in the course of their advertising business.
We employ (or access through our joint venture relationships) qualified inspectors specifically trained to review advertising content for compliance with relevant PRC laws and regulations.
Research and Development
Our company spent $Nil on research and development activities among all of our subsidiaries during the Transition Period, as compared to $6,792 spent during the fiscal year ended March 31, 2009.
Within our LED solutions business, from time to time our software engineers may develop and improve upon high-end digital software controllers which integrate the control of video, lighting, electrical and mechanical devices within our LED systems. Our product engineers may also develop customized, innovative LED lighting
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products such as LED lighting tubes to enhance lighting distances and customized LED lighting fixtures for use in our LED lighting systems.
Compliance with Environmental Laws
To our knowledge, neither the production nor the sale of our products constitute activities or generate materials, in a material manner, that requires compliance with federal, state or local environmental laws in any jurisdictions of our operation.
On a consolidated basis among all of our subsidiaries, our company had a total of 36 employees as of December 31, 2009, 34 of which were full-time employees. Of these employees, none are covered by collective bargaining agreements.
ITEM 1A. RISK FACTORS
Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements. Such forward-looking statements include projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.
Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements. Prospective investors should consider carefully the risk factors set out below.
Risks Related to Our Business
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
We have a limited operating history. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the growing market for digital out-of-home advertising and LED systems in the PRC. Some of these risks and uncertainties relate to our ability to:
· attract new customers and increase spending per customer;
· increase awareness of our brand and continue to develop customer loyalty;
· respond to competitive market conditions;
· respond to changes in our regulatory environment;
· manage risks associated with intellectual property rights;
· maintain effective control of our costs and expenses;
· raise sufficient capital to sustain and expand our business; and
· attract, retain and motivate qualified personnel.
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If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
We may require additional financing, the availability of which cannot be assured, and if our company is unable to obtain such financing, our business may not be able to achieve our corporate goals, and in the worst case may fail.
Our business plan calls for expenses, working capital and capital expenditures necessary to continue the build-up of our digital out-of-home advertising network and to complete supply and build contracts for LED systems. However, there is no assurance that actual cash requirements will not exceed our estimates. We may need to raise additional funds to:
· support our planned rapid growth;
· develop new or enhanced services and technologies;
· increase our marketing efforts;
· acquire complementary businesses or technologies; and/or
· respond to competitive pressures or unanticipated requirements.
We depend to a large extent on outside capital over the near-term to fund our capital needs. Such outside capital may be obtained from additional debt or equity financing. We are exploring possible bank financing opportunities, mainly in the form of accounts payable financing. There is no assurance that capital will be available to meet our continuing development costs or, if the capital is available, that it will be on terms acceptable to us. Disruptions in financial markets and challenging economic conditions have affected and may continue to affect our ability to raise capital. The issuance of additional equity securities by us would result in a dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. Though the management believes the chance is remote, if we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to implement our business and growth strategies, respond to changing business or economic conditions, withstand adverse operating results, consummate desired acquisitions or compete effectively.
Our operations are cash intensive and our business could be adversely affected if we fail to maintain sufficient levels of working capital.
We expend a significant amount of cash in our operations, principally to fund our procurement of LED-based hardware. We generally fund most of our working capital requirements out of cash flow generated from operations. Accordingly, if we fail to generate sufficient revenues from our sales, or if we experience difficulties collecting our accounts receivable, we may not have sufficient cash flow to fund our operating costs and our profitability and results of operations could be adversely affected.
During the nine months ended December 31, 2009, we improved our operational cash flow by synchronizing our payment of costs and receipt of revenue by collecting project deposits before paying related project costs. Key to this was negotiating with our major suppliers to accept payments in line with the timing of our receipt of revenue. In turn, we typically bill our customers in accordance with the percentage-of-completion method, although we offer some of our long-standing customers more favorable credit terms.
Our operating results may fluctuate from period to period and if we fail to meet market expectations for a particular period, our share price may decline.
Our operating results have fluctuated from period to period and are likely to continue to fluctuate as a result of a wide range of factors, including a historical reliance on non-recurring revenue streams. For example, our provision of LED systems generally consists of large-scale, one-off supply and build contracts completed for large property developments. Interim reports may not be indicative of our performance for the year or our future performance, and period-to-period comparisons may not be meaningful due to a number of reasons beyond our
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control. We cannot assure you that our operating results will meet the expectations of market analysts or our investors. If we fail to meet their expectations, there may be a decline in our share price.
If there are any interruptions to or a decline in the quality of our LED hardware supply channels, our sales could be materially and adversely affected.
LED video screens, modules and lighting hardware are the principal component parts used in our sales. We procure all of our LED hardware from a number of third-party manufacturers. Our third-party suppliers may not continue to be able to provide an adequate supply of LED hardware to satisfy our present and future sales needs. The supply of LED video screens, modules and lighting hardware is dependent on the output of OEM LED manufacturers. Our current suppliers may not be able to provide LED video screens, modules and lighting hardware of sufficient quality to meet our quality control requirements. Any interruptions to or decline in the amount or quality of our LED hardware supply could materially disrupt our sales and adversely affect our business. We are vulnerable to increases in the price of raw materials (particularly of LED modules and video screens) and other operating costs. If the costs of raw materials or other costs of sales and distribution of our products and services increase, and we are unable to entirely offset these increases by raising prices of our products and services, our profit margins and financial condition could be adversely affected.
We operate in a highly-competitive industry and our failure to compete effectively may adversely affect our ability to generate revenue.
Management is aware of similar products and services which compete directly with our digital out-of-home advertising and LED systems, and some of the companies developing and offering these similar products and services have greater financial, technical and marketing resources, larger digital out-of-home advertising and LED system distribution networks, and greater brand name recognition than we do. These companies may develop products and services superior to those of our company. Such competition will potentially affect our chances of achieving profitability in the future.
This may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances, marketing campaigns, alliances and other initiatives. Some of our competitors conduct more extensive promotional activities and offer lower prices to customers than we do, which could allow them to gain greater market share or prevent us from increasing our market share. In the future, we may need to decrease our prices if our competitors continue to lower their prices. Our competitors may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Further, to the extent our competitors are able to attract and retain customers based on product and/or price advantages, our business and ability to grow could be adversely affected in a material manner. To be successful, we must establish and strengthen our brand awareness, effectively differentiate our product and service lines from those of our competitors and build our strategic partnerships. To achieve this we may have to substantially increase marketing activities and expenses in order to compete effectively.
Our failure to maintain existing relationships or to obtain new relationships with companies that allow us to access desirable locations where we plan to operate our digital out-of-home advertising displays could harm our growth potential and our ability to increase our revenues.
Our ability to generate future revenues from digital out-of-home advertising sales depends largely upon our ability to secure desirable locations for the installation and operation of our large-scale out-of-home digital billboards. This, in turn, requires that we develop and maintain joint venture, strategic and/or other business relationships with property owners and developers which own the targeted locations suitable to place our digital billboards. If we are unable to maintain our existing relationships or to form new relationships with property owners and developers, our ability to install and operate digital out-of-home billboards would be negatively impacted. In turn, advertisers may not find advertising on our digital out-of-home billboards attractive and may not wish to purchase advertising time slots on our network, which would have a material negative impact on our ability to grow future revenues.
If we are unable to attract advertisers to advertise on the digital out-of-home advertising network we are building, we will be unable to generate advertising fees, which could negatively affect our ability to grow revenues.
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The fees we can charge advertisers for time slots on our digital advertising network depends on the size and quality of our digital out-of-home network and the demand by advertisers for advertising time on our network. Advertisers will choose to advertise on our digital network in part based on the size of our network and the desirability of the locations where we operate our digital out-of-home displays. If we fail to maintain or to increase the number of locations and digital displays in our network, advertisers may be unwilling to purchase time on our network which could negatively affect our ability to grow our revenues in the future.
We may be subject to government actions based on the content displayed on and the locations of the digital displays in the digital out-of-home advertising network we are building in China.
In China, The Outdoor Advertising Registration Administrative Regulations stipulate that out-of-home advertisements in China must be registered with the local State Administration for Industry and Commerce before dissemination. Advertising distributors are required to submit a registration application form and other supporting documents for registration, including the content of the proposed out-of-home advertisement. Our company, our subsidiaries and/or our joint venture company have obtained or are in the process of obtaining such Outdoor Advertising Registration Certificates for the advertisements displayed and intended to be displayed on our digital out-of-home advertising displays. However, we may be subject to government action if advertisements shown on our out-of-home network are in violation of relevant PRC advertising laws and regulations or that the advertisements broadcast on our network have not received required approval from the relevant local supervisory bodies.
In addition, the placement and installation of digital billboards in China is subject to municipal zoning laws and governmental approvals. Our company, our subsidiaries and/or our joint venture company have obtained or are in the process of obtaining such municipal government approvals for each of our digital out-of-home advertising billboards currently installed or planned to be installed in the PRC. If our existing or future digital billboards are installed in violation of municipal zoning laws or without the required government approvals and are required to be removed, it would diminish the attractiveness of our digital out-of-home advertising network for advertisers and adversely affect our ability to sell advertising space on our network which would in turn adversely affect our ability to grow future revenues.
Rapid technological changes in our industry could render our products non-competitive or obsolete and consequently affect our ability to generate revenues.
Currently, we derive a majority of our revenues from the sale of LED solutions. We expect to derive a greater proportion of future revenues from our digital out-of-home advertising business. Each of these industries in which we are active are characterized by rapid technological change, new products and services, new sales channels, evolving industry standards and changing client preferences. Our success will depend, in part, upon our ability to make timely and cost-effective enhancements and additions to our technology and to introduce new products and services that meet customer demands. We expect new products and services to be developed and introduced by other companies that compete with our products and services. The proliferation of new LED products and services in our markets may reduce demand for our LED products and services. There can be no assurance that we will be successful in responding to these or other technological changes, to evolving industry standards or to new products and services offered by our current and future competitors. In addition, we may not have access to sufficient capital for our research and development needs in order to develop new products and services.
We could lose our competitive advantages if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation could be time-consuming and costly.
Our success and ability to compete depends in part on our proprietary technology incorporated in our products and solutions, such as our Multimedia and Video Show Control System used for the authoring, control and playback of content on our digital advertising billboards and LED systems. If any of our competitors copy or otherwise gain access to our proprietary technology or develop similar technologies independently, we would not be able to compete as effectively. We consider our patents and trademarks invaluable to our ability to continue to develop and maintain the goodwill and recognition associated with our brands. The measures we take to protect the proprietary technology, and other intellectual property rights, which presently are based upon a combination of
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patent, trademark and trade secret laws, may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and a diversion of corporate resources. In addition, notwithstanding any rights we have secured to our intellectual property, other persons may bring claims against us claiming that we have infringed on their intellectual property rights, including claims that our intellectual property rights are not valid. Any claims against us, with or without merit, could be time-consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our trademarks or require us to make changes to our technologies.
We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to improve our products and implement our business objectives could be adversely effected.
To continue our growth, we will need to recruit additional senior management personnel, including persons with financial and sales experience. In addition, we must hire, train and retain a number of other skilled personnel, including persons with experience in LED system design, creative lighting design, development of intelligent LED control software, electrical engineering and operations. Although the recent economic downturn has put our company in a more favorable recruitment position for these personnel, competition may increase as economic conditions improve, which could cause our compensation costs to increase which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
We are highly dependent on our senior management to manage our business and operations. In particular, we rely substantially on our chief executive officer, Mr. Bondy Tan, to manage our operations. In addition, we also rely on design, engineering, sales and marketing personnel with technical and industry knowledge to market, sell and install our products and services. We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them, in particular Mr. Tan, would have a material adverse effect on our business and operations. Competition for senior management personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management personnel that we lose. In addition, if any member of our senior management joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company.
Our company is subject to sales channel risk due to a concentration of sales to a limited number of customers and any significant interruption from these customers may have a material adverse effect on our company.
Approximately 58.8% of our revenue was contributed from three customers for the nine months ended December 31, 2009. If these three or any of our customers ceased doing business with our company, we would require time to find other customers. If we lose these customers or are unable to generate recurring revenues from these customers, there would be a negative impact on our overall performance. We have not entered into long-term supply contracts with any of these major customers. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. If we cannot maintain long-term relationships with our major customers, the loss of a significant portion of our sales to them could have an adverse effect on our business, financial condition and results of operations.
Our company is subject to the credit risk of our customers, which could have a material adverse effect on our financial condition, results of operations and liquidity.
We are subject to the credit risk of our customers. Businesses that are good credit risks at the time of sale may become bad credit risks over time. In times of economic recession, the number of our customers who default on payments owed to us tends to increase. If we fail to adequately assess and monitor our credit risks, we could experience longer payment cycles, increased collection costs and higher bad debt expenses. Additionally, to the degree that the ongoing turmoil in the credit markets makes it more difficult for some customers to obtain financing,
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those customers’ ability to pay could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.
Our growth could be impaired if we do not successfully handle certain risks associated with international business.
There are risks inherent in doing business in international markets, including:
· difficulties in staffing and managing foreign operations;
· changes in regulatory requirements, tariffs and other trade barriers;
· potential adverse tax consequences; and
· inadequate protection for intellectual property rights.
One or more of these factors may make it difficult for us to fully implement our international business strategies and may have a material adverse effect on our current or future international operations.
The current economic environment has adversely affected business spending patterns, which may have an adverse effect on our business.
The disruptions in the financial markets and challenging economic conditions have adversely affected the world economy, and in particular, reduced spending by businesses. Our operating results in one or more segments may be affected by these uncertain or changing economic conditions and spending patterns. If our customers delay or cancel spending on digital out-of-home advertising or LED solutions, that decision could result in reductions in sales of our products and services, longer sales cycles and increased price competition. There can be no assurances that government responses to the disruptions in the financial and economic markets will restore spending to previous levels. If global economic and market conditions remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.
We derive a substantial portion of our revenues from sales in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.
A substantial portion of our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products and services in the PRC will continue to represent a substantial proportion of our total revenues in the near future. Any significant decline in the condition of the PRC economy could, among other things, adversely affect consumer buying power and discourage the purchase of our products and services, which in turn would have a material adverse effect on our revenues and profitability.
Any changes in the political and economic policies of, or any new regulations implemented by, the Chinese government could affect, or even restrict, the operation of our business and our ability to generate revenues.
Our business is currently focused on the sale of digital out-of-home advertising and LED products and services in China. Accordingly, our business, results of operations and financial condition are affected to a significant degree by any economic, political and legal developments in China.
Since the late 1970s, the Chinese government has been reforming its economic system. Although we believe that economic reform and the macroeconomic measures adopted by the Chinese government has had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised. Some modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and the development of specialty lighting products and services in China. Any such changes would have a material adverse effect on our business. Furthermore, there is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business. Any changes in the political, economic and social conditions in China, adjustments in policies by the Chinese government or changes in laws and regulations on the sale of digital out-of-home advertising or LED products and services could affect the manner in which we
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operate our business and restrict or prohibit transactions initiated or conducted by our company. Any such changes or new regulations could affect our ability to develop and sell our products and therefore affect our ability to generate revenues.
Our company is subject to foreign exchange rate risk, particularly fluctuations in the exchange rate between Chinese Renminbi and United States dollars.
Our company may enter sales transactions denominated in Chinese Renminbi. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under the Rules, once various procedural requirements are met, Renminbi is convertible for current account transactions, including trade and services, but not for capital account transactions, including direct investment, loan or investment in securities outside China, unless the prior approval of the State Administration of Foreign Exchange of the PRC is obtained. Although the Chinese government regulations now allow greater convertibility of Renminbi for current account transactions, significant restrictions still remain.
The value of the Renminbi is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The Renminbi is moved to a managed floating exchange rate based on market supply and demand with reference to a basket of foreign currencies. The recent global financial crisis may lead to drastic and unanticipated fluctuations in the exchange rates of Renminbi, which may affect our company through either foreign exchange gains or losses to be accounted for in the statement of operations, and which may materially affect our operating results and financial position.
New or changing government policies or regulations related to the digital out-of-home advertising or LED products and services industries in our markets may have an adverse effect on our operations and may require our company to modify our business plan.
Our management oversees trends in our market industries by accessing available market information, including updated governmental policies and regulations related to such industries from time to time, particularly the digital out-of-home advertising industry in China. Both short and long-term changes in governmental policies or regulations affecting the digital out-of-home advertising or LED products and services industries may trigger our company to take appropriate measures to re-position our company to achieve our business plan or alter the business plan as a whole. We cannot assure that our company will be able to adapt to changing policies and regulations efficiently in order to maintain the currently anticipated level of business, results of operations or financial condition.
If LED-based hardware does not achieve greater market acceptance, prospects for our growth and profitability may be l